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Missed Fortune – This Simple Arithmetic Mistake Could Leave You High & Dry

Posted on | April 3, 2011

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Adding When You Should be Subtracting

3 of the biggest financial dangers facing most Americans face financially are, taxes that will be going up, inflation, and market uncertainty.

Too many Americans are adding up what they think their retirement nest egg will be without subtracting the effect of taxes and inflation.

When they hit retirement, they may find themselves in just as high a tax bracket as they were in their earning years because Congress keeps raising their taxes.

In years like 2008, many people’s retirement accounts lost 30, 40 or 50 percent of their value.  With that kind of loss it can take another 4 to 5 years just to break even on what you had initially.

But the day you’ll suffer the greatest loss on those IRAs and 401(k)s will be the day you start to withdraw your money.   That’s when the IRS will come and take a huge chunk of your nest egg in the taxes you pay on the back end.

If your nest egg is exposed to risk in the market and you suffer a 33% loss, you have to experience a 50% gain just to break even.

Even if you manage to save up a million dollar nest egg and you’re pulling out $70,000 a year, now you have to report that as taxable income.

Even today about a third of that is going to be eaten up by federal and state taxes.  That means your million dollar nest egg will only be worth about $600,000 after taxes.

The Congressional Budget Office estimates that by mid century, most middle income Americans will be paying 50-60% of their income in taxes.  The reason is our incredible national debt which has increased from $9 trillion to $14 trillion just in the last 5 years.

That means if you’re living on $50,000 a year right now, you’ll need to pull $100,000 out of your IRA just to net the $50,000 income you need to live on.

And that’s not even taking inflation into consideration.  If inflation averages about 5%, the cost of living will double every 15 years.  So 15 years from now you’ll need to pull out $200,000 a year in order to buy the same things you’re buying today for $100,000.

It means your nest could be quickly depleted and you may outlive your money– especially if you retire at age 65.

In 30 years a million dollar nest egg will only net a monthly income that’s equivalent to what you could purchase with $1,000 a month today.

3 Strategies to Protect Your Money in Good Times or Bad

The best way to hedge against taxes, inflation and market uncertainty is to eliminate the loss years.  Safe Indexing helps you safely navigate the down years without losing any money.  It helps you safely earn money during the up years without risk.

You currently have about a two year window to get the money out of your IRA or 401(k) and into a tax free environment that will remain tax free down the road.

A strategic rollout can get your money into investments that are linked to those things that inflate when there is inflation.  This way inflation helps you rather than hinders you.

Finally, you need to reposition your money to participate risk-free in any upside the market may provide when the market is growing.  Your money isn’t actually invested in the market itself so when the market goes down, you don’t lose a dime.

3 Opportunities You Face but May Not Recognize

The three opportunities you must understand are liquidity, securing the safety of your principle so it never experiences a loss, and earning a conservative rate of return that’s tax free and safe from inflation.

You can experience 50-100% more of net spendable income at retirement.  You can afford to have a nest egg that’s half as big and still generate the same amount of spendable income if it’s tax free and hedges against inflation.

When the market goes down, you can sleep at night because your money is not exposed to that risk.  You’ve learned how to act and not react to those circumstances over which we have no control.

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

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