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Missed Fortune – Tactics For Weathering Turbulent Times

Posted on | August 5, 2012

A Dream Solution

The economic forecast isn’t looking too promising. With the expiration of the Bush tax cuts at the end of this year and the imposition of new taxes to shore up increased government spending, taxes are headed higher than ever. These tax hikes will affect every taxpayer, not just the rich.

Even the Congressional Budget Office says that most middle income Americans will be paying about 29.6% more in income tax in the next two to three years than what they paid just last year. But that’s just one part of the forecast.

Inflation will be higher than it has been for the past 20 years. And market volatility and uncertainty will be along for the ride as well.

Before we delve into the dream solution for weathering tough economic times, there are a few key principles that you must understand.

The first of these 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 a second 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 one 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 amount to $27,000. That’s a big enough difference 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 taking at least a third of that money in taxes. That leaves you with just $660,000 that you can actually spend.

Too many Americans assume they’ll be in a lower tax bracket after they retire, but then find out that, without the deductions they once had, they’re paying a higher tax rate than during their peak earning years.

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.

Stopping Money From Going Down the Drain

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?

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

They could be enjoying double or even triple the amount if they’ve saved, by simply redirecting otherwise payable taxes to more productive causes. Most Americans are wasting $6,000-$10,000 each year this way. That’s money going down the drain.

If you can identify this wasted money and put it to work with compound interest in a tax-free environment, that could mean an extra one to two million dollars in their nest egg. 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.

With an average baby boomer couple, one of them will make it to age 96. Those who don’t wish to outlive their retirement savings 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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