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Missed Fortune – When Opportunity Knocks Will You Hear It?

Posted on | March 10, 2013

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Recognizing Our 3 Biggest Financial Dangers

There’s a brilliant illustration that depicts a king busily making preparations with his knights for a big battle. Standing outside the king’s tent is an individual with a machine-gun mounted on a tripod and ammunition. But the impatient king says, “I can’t be bothered by some crazy salesman, we’ve got a battle to fight!”

The great lesson taught by this illustration is that too often we’re so focused on solving a particular problem that we fail to recognize the better solution that may be standing on our doorstep. This is particularly true regarding how people fight the financial battle for their brighter future.

In this battle, the dangers are fairly easy to pinpoint; they include market volatility, rising inflation, and higher taxes. Let’s take a look at each of these dangers.

It’s not just the wealthy that are feeling the tax pinch since the beginning of the year. Wage earners have seen their withholding go up from 4.2% to 6.2% since the payroll tax cuts of the Bush era were allowed to expire. But the real tax danger stems from the fact that every dime of the roughly $2.5 trillion in revenue collected by the IRS each year is already spent.

This money is already promised for interest on the national debt and entitlements like Medicaid, Social Security, and Medicare. But there’s another $1.3 trillion in expenses that must be borrowed every year to keep the government running. Taxpayers will be the ones to pay that borrowed money back. That can only mean higher taxes for all income earners.

Inflation is the second danger and the prospect of inflation rising continues to increase as the government printing presses continue to crank out currency to cover deficit spending. The most noticeable effect of rising inflation is that every dollar you’ve saved is losing purchasing power. Just in the month of January this year, the cost of living rose by at least 3% and the effect only gets worse when this is annualized.

This means that a person who was planning on retiring on $6,000 a month will actually have just $4,000 per month after taxes. If inflation were to rise to, say, 10%, in just 14 years that $4,000 would only be able to purchase what $1,000 will buy today. How well could you survive on $1,000 a month?

The third danger is market volatility. Many of the fiscal policies embraced by our political leaders are perpetuating fear and economic uncertainty. If your serious money is directly exposed to the swings of the market, you’re going to be spending valuable time trying to make up lost ground.

Knowing how to eliminate these dangers can immunize you from the effects of higher taxes and rising inflation and shield your retirement nest egg from market volatility.

Seizing the 3 Greatest Financial Opportunities

The first solution you’ll need to seize is that of moving your retirement savings from tax-deferred into totally tax-free strategies. Few people have been educated regarding certain sacred cow sections of the IRS code that have been grandfathered in for over 100 years. Once your money is safely rolled over into one of these savings vehicles, it can accumulate tax-free from that day forward. It will remain tax-free at distribution and eventually transfer to your heirs or your favorite philanthropic cause tax-free at the end of your life.

When your nest egg can generate an 8-10% annual income that’s tax-free, the fear of outliving your retirement money becomes a distant memory.

The second strategy is to link your return to inflation. This means that when inflation goes up, you actually benefit from it. It helps rather than hurts you.

When your rate of return is outpacing the rate of inflation, you can rest easy knowing that you’ll have the necessary income to purchase what you need.

The third strategy is to use indexing to eliminate downside risks while benefiting from upside potential. With indexing, your principal is linked to the market yet protected against market volatility because it’s not directly in the market. If the market drops, you don’t lose a dime. However, anytime the market grows, you enjoy the benefits of that growth. This means that any year that you make money, it becomes newly protected principal.

These strategies allow you to harness the best financial strengths of prudent investing. They allow you to enjoy liquid assets that are safely earning a predictable rate of return.

Don’t be like the king who failed to recognize a promising solution because he was so focused on doing things the way he always had before.

Take the first step toward your brighter future by visiting with a wealth architect today.

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

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