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Missed Fortune – Building Personal Financial Strength In a Weak Economy

Posted on | May 27, 2012

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Weaker Than We Realize

Fox Business News recently interviewed a Harvard professor of economics and former chief economic advisor to Ronald Reagan named Martin Feldstein. While giving his take on the American economy, Professor Feldstein indicated that he believes the economy is weaker than people realize.

Though we’re hearing reports that the economy has grown 3%, Feldstein says the actual growth is closer to just 1% and we’re likely headed for a double-dip recession.

The biggest message from the interview is that we need to change our expectations about future taxes. Instead of thinking that taxes will simply stay the same, we need to carefully consider our assumptions that we’ll be in a lower tax bracket in the days ahead. This hasn’t been true for the past 20 years.

Instead, many people are finding themselves in a higher tax bracket after they retire than they were in during their peak earning years—even if they earn less. How can this be? There are a couple of reasons.

First of all, many if not most of their deductions are no longer there when these folks retire.  These retirees have paid off their homes. They are no longer contributing to a retirement plan like an IRA or 401(k) so they no longer have that deduction. They have fewer exemptions because their dependents have grown up and moved out.

The second big reason is that government spending has swelled the national debt by over $5 trillion in just the last 5 years. At the same time, Congress has further complicated the tax system by adding new brackets and taking away previous deductions. Spending is not decreasing; in fact, it is on the rise still. This can only mean that taxes will be going up to pay for those never-ending spending increases.

Those taxes will take a healthy bite out of your retirement income if you haven’t planned ahead.

Reaping Rewards Without the Risk

One of the greatest challenges for anyone determined to take charge of their future, is striking a balance between keeping their serious money safely growing without settling for an unacceptably low rate of return. Indexing is a strategy that offers the best of all possible worlds.

If you had your money in the market between 1999-2003, you saw the market rise and then fall three years in a row following 9/11. By 2003, many people only had around 60% of what they’d had in the market just three years earlier. From 2004-2007 the market slowly worked its way back to where these folks were almost breaking even. But in 2008, those whose money was in the market saw their value fall nearly 39% in a single year.

This means that if you had $100,000 starting out in 1999, you saw it rise and fall until you only had $60,000 by the end of 2008. This market volatility is why those years have earned the moniker of “The Lost Decade.”

If you had been using indexing, you would have safely doubled your money, tax-free, in spite of the market’s ups and downs. By incorporating rebalancing with lock-in and reset, you would have earned about 2.6 times your money over that same time period.

When you use indexing, your money is not at risk in the market. Instead, it is safely tucked away in the multi-trillion dollar insurance industry where it can grow tax-free. That money is safely earning a general account portfolio rate that, during the worst of the lost decade, was earning 5-7%. This is a far better rate of return than the 1% you’d get from leaving it in the bank.

With indexing, if you choose, you can link your money to a particular index—like the S&P 500, without actually putting it at risk in the market. This means that when the market grows, you are contractually guaranteed a rate of return up to a specified cap. You lock in the gain you’ve made and your return becomes newly protected principal. When the market declines, you don’t lose money. And as soon as the market surges again, you get to participate in the upside. Either way, you win.

This just one of the strategies that can help can help you take control of your future.

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

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