Posted on | October 30, 2011
Losing Trust in Our Financial Systems
A recent article by Catherine New in Daily Finance shows that Americans are losing trust in the country’s financial system.
The results of the magazine’s quarterly survey indicate that trust in our financial institutions is slipping.
The article points out:
“The latest figures from the quarterly Chicago Booth/Kellogg School Financial Trust Index showed that only 23% of those surveyed said they trust the country’s financial systems, down from 25% in June. The index measures trust in four areas: banks, the stock market, mutual funds and large corporations.
“The findings in this issue reflect what’s been reported in the news and demonstrate the fragility of trust many Americans still have in the institutions where they invest their money,” said Luigi Zingales, a finance professor at the University of Chicago Booth School of Business and co-author of the Index.
Trust in banks has experienced an even steeper decline, falling from 39% in June to 33% in October. Notably, people were much more inclined to trust local banks and credit unions: More than half of those surveyed said they still had faith in those institutions.
The survey also revealed that nearly 60% of respondents were either angry or very angry about the current economic situation — the highest level of anger measured since the earliest months of the financial crisis.”
These findings back up an earlier survey by CNN that revealed that nearly 90% of Americans say the economy stinks.
3 years after the financial crisis pushed this country into a deep recession, financial conditions are as poor as they’ve ever been.
Ask yourself: would you want to stay on board a sinking vessel that has been foundering for the past decade? Those Americans who’ve had their retirement money in the stock market have made little, if any, gains in the past 10 years.
If you had $100,000 socked away in an IRA or 401(k) you saw it take a 30 or 40% hit following 9/11. Then after growing back to its high-water mark it took another huge 39-40% decline in 2008. Even today few people have managed to break even thanks to the market volatility of the “lost decade.”
The situation becomes all the more uncertain when considering that Congress and the president are still spending with abandon. In just three years the national debt has soared from $9 trillion to nearly $15 trillion.
If you remain on board a sinking vessel by keeping your money in IRAs and 401(k)s thinking that future taxes will be lower, you’re not seeing the writing on the wall. Taxes are only one of the threats to your retirement money; the other two components of the upcoming triple whammy are inflation and market volatility.
You need a strategy that moves your money to safety.
The Triple Threat of the Next 10 Years
Taxes will be going up. The Congressional Budget Office estimates that tax rates could go as high as 62.5% for couples making over $200,000 or single filers making over $100,000. Even if the Bush tax cuts are allowed to expire at the end of 2012, it will be the largest tax increase in history.
Inflation is the second big danger. Over the past two decades inflation has averaged around 2-3%, but those days are over. The days ahead will likely see inflation inching up to 5% on the low end and perhaps as high as 7-10% on the high end.
It’s essential that you protect yourself from the effects of inflation as it robs every dollar you have of purchasing power.
The third big danger is continued market uncertainty. This type of economic uncertainty is what prevents employers from hiring and contributes to the growing unemployment rate.
These three dangers combine to form an economic triple whammy that requires different action than simply following the crowd.
You must understand the tax and inflation power curve.
Let’s say you socked away $10,000 a year for 30 consecutive years and earned 7.2% interest. You’d have a nest egg of about $1 million. Now if you were to withdraw only 7.2%, in order to maintain your principal, you’d be taking out $72,000 a year.
But if that money is in an IRA or 401(k), you’ll be paying a nice chunk of any money you withdraw to the IRS. Your tax situation will be complicated because most people, by this time, will have no dependents to claim, their home will be paid off, and they’ll no longer be contributing to their retirement fund.
This means their tax liabilities will be higher rather than lower. It’s a safe bet that of that $72,000 you’re withdrawing each year, about 1/3 of it–$24,000 will be gobbled up by state and federal income taxes.
Now consider what inflation will do to the remaining $48,000 a year you’re expecting to live on. Even at just 5% inflation, the purchasing power of your dollars will be cut in half twice over that 30-year period. This means that you’ll only be able to purchase with $4,000 per month what $1,000 per month today would buy.
Now you start to see why the effect of the tax and inflation power curve is so important to understand and even more important to counter.
You need strategies that reposition your serious money for the future with a strategic rollout before the end of 2012. This will allow your money to accumulate tax free from that day forward as it’s grandfathered under the Internal Revenue code.
The strategies you choose must allow you to access your money tax-free and transfer it tax-free when you die. They must tie your money to those things that inflate so when inflation comes, your rate of return is outpacing the rate of inflation.
Your strategies must allow you to index your money to the markets without putting it at risk to the volatility of the market. It should grow when the economy grows and protect your principal when the economy declines.
These are the Missed Fortune strategies that have been working for decades for those willing to break away from the crowd and move their money to safety.