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Missed Fortune – He Who Hesitates Pays Higher Taxes

Posted on | March 25, 2012

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Taking Action Before The Bush Tax Cuts Expire

When the Congressional Budget Office issues a report, it’s worth taking notes.

A recent report titled “Deficit Estimate for 2012 Hiked to $1.2 Trillion” is the latest confirmation of the government’s severe fiscal problems.

While the official CBO forecast predicts the deficit decreasing to just 1 percent of the size of the economy in a few year, that estimate is counting on increased revenue due to the expiration of the Bush tax cuts. When those cuts go away, the tax increase will affect income, investments, large estates and families with children.

If you don’t take action before the end of this year to protect your money against the impact of higher taxes, you’ll likely regret it. This is especially true if you still have your money in tax-deferred accounts like IRAs and 401(k)s.

The CBO has also extended its estimates for the costs of President Obama’s health care law out to 2022. That law is now expected to cost 2 to 3 times more than the original $900 billion it was supposed to cost.

These findings further punctuate the likelihood of higher taxes being close at hand. When those higher tax rates combine with higher inflation and continuing market uncertainty, you need solid strategies to protect your retirement nest egg.

One of the Missed Fortune strategies that has worked exceptionally well through volatility of the Lost Decade is known as Indexing. The indexing strategy allows you to indirectly participate in any market upside during years when the economy grows, but also protects you from any losses during down years.

This is a critical advantage when considering that the so-called lost decade saw 5 years where the market grew, but also 5 years where it declined. Two of those years saw the economy fall more than 40%. With indexing you eliminate the loss years. To illustrate how important that is, consider that if you eliminated all of the loss years in the history of the stock market and only captured 25% of the gain years, you’d still outperform the market.

How Banks Make Money

It’s no secret that real estate markets have their cycles with ups and downs. Anyone one who has seen the equity in their home decline may wonder how exactly a person could continue to make money under such circumstances. The answer is that they must keep their equity separated and liquid where it can safely earn a predictable rate of return.

To understand how this works, you first must understand how banks make their money. When banks borrow money from the Federal Reserve or from us, we put money in a bank where they pay us 1 or 2 percent interest. The bank, in turn, loans that money out at 4 percent interest. You’d think they’re only making a 2% return, but if they loan out a million dollars, they’re making $40,000 per year in interest which is a 100% return on the money they borrowed at a rate of $20,000 per year.

This translates into an infinite rate of return because they are making that return on money that doesn’t even belong to the bank. If you can understand this concept, then you’ll understand how it translates into becoming your own banker.

If you have a $1 million or a $100,000 in real estate equity and you’re borrowing that money at 4% but getting a predictable 8% rate of return, you’re getting that infinite rate of return. By keeping the equity separate and liquid, it’s unaffected by fluctuating property values and can continue to earn interest at a higher rate than the cost of the interest you’re paying to borrow it.

Many financial advisors don’t know teach this strategy, because they simply don’t know about it.  But now you do and you can put it to work along with the other Missed Fortune strategies that will allow you to sleep soundly at night with no fear of higher taxes, inflation or market volatility.

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

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