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Missed Fortune – Prosper Tomorrow By Heeding the Warning Signs Now

Posted on | September 30, 2012

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The Warning Signs

The economic skies continue are darkening. While the warning signs are plain to those who are watching, many don’t yet recognize what those storm clouds mean.

When the Congressional Budget Office says most middle income Americans will be paying roughly 29.6% more in income tax in the next two to three years, you’d be wise to pay attention. The Bush tax cuts are set to expire at the end of this year and if that happens, it won’t just be the rich who feel the sting of higher taxes.

In addition to rising taxes, inflation will be higher than it has been for the past 20 years. And market volatility and uncertainty will be coming along for the ride as well.

The good news is that there are proven solutions for weathering tough economic times, but first, there are a few key principles that you must understand if you are to put them to work for you.

One is the marvel of compound interest. If we were out playing golf and were to bet 25 cents on the first hole and then double that bet for each of the next holes, the bet on the final 18th hole would be $32,768. This is the power of compounding at work.

To truly realize the miracle of compound interest, there is another aspect to this marvel that must be understood; the compounding must take place in a tax-favored environment.

This means tax-free accumulation and not simply tax-deferred such as in an IRA or 401(k). Tax-free will mean 50 to 100% more money than if you defer those taxes to a later time, especially with tax rates on the rise.

Remember than a single dollar, doubling every period for 20 consecutive periods, will increase to $1,048,000 but only if it’s tax-free. That same dollar doubling for 20 consecutive periods in a taxed-as-earned environment like a CD, a savings account or mutual fund will only grow to $27,000. That’s a big enough distinction to justify learning how to get your money accumulating in a tax-free environment.

Even with a million dollar nest, if you’ve deferred taxes such as in an IRA or 401(k), the IRS will be appropriating at least a third of your money in taxes. That leaves you with just $660,000 that you can actually spend. And that’s not even taking the effects of inflation into account.

Too many Americans mistakenly assume they’ll be in a lower tax bracket after they retire, but later find out that they’re actually paying a higher tax rate than during their peak earning years. This is because most no longer have the deductions they enjoyed.

The bottom line is that you can have more net spendable income by using a tax-free vehicle than if you use a tax-deferred one

The Nest Egg You Won’t Outlive

There are two general categories in which most people tend to accumulate their money, either in their retirement savings like IRAs or 401(k)s or in real estate. But few of them manage these methods as well as they could. They’re not foolish; they simply don’t know what they don’t know.

What if, for every $500,000 that you could accumulate for your retirement, you could have a million instead? Who’d rather have twice as much without having to come up with a dime more?

Most Americans tend to follow the crowd and save for their retirement in vehicles like 401(k)s and IRAs. They send extra principal payments to the mortgage company like their financial advisors tell them to do. When they do this, they are missing out on a fortune.

They could be enjoying double or even triple the amount if they’ve saved by redirecting otherwise payable taxes into more productive causes. They don’t have to be super rich to benefit from this. The truth is that most Americans are wasting anywhere from $6,000-$10,000 each year this way. That’s money that’s going to waste.

When you learn to identify this money that’s being wasted and you put it to work with compound interest in a tax-free environment, it could mean an extra one to two million dollars in your nest egg. And every million dollars that you add to your retirement savings vehicle could provide you with an extra $60,000-$100,000 a year in tax-free retirement income.

That’s big news for those who don’t wish to outlive their retirement savings. They would be wise to learn these Missed Fortune strategies.

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*Life insurance policies are not investments and, accordingly, should not be purchased as an investment

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