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Why socking money away into IRAs and 401(k)s and paying extra principal on your mortgage is counterproductive
HAVE YOU EVER WONDERED if you're on the right path? In my professional travels, I participate in conferences and conventions all over the world. During the past several years, I have traveled to Chicago every three months to meet with a group of fellow entrepreneurs in a program called The Strategic Coach, founded by Dan Sullivan. As anyone who has traveled to the Chicago area knows, O'Hare Airport is one of the busiest airports in the world and can be confusing. On the first few trips, I would retrieve my luggage and walk outside to be picked up at the bus shuttle center. I would follow the crowd from the baggage claim area outside to the ground transportation area, then across eight lanes of traffic to the shuttle center, often in freezing, windy conditions, without a coat.
One blustery cold, wet day, I followed the crowd and arrived at the shuttle center with my hair windblown and my suit sopping wet. To my surprise, I met the gentleman who had sat next to me on my flight.
His hair was in place and his suit was dry. I said, "How did you get here before me and in such great shape?"
He replied, "Oh, didn't you know there's an easier way to get here? And you stay warm and dry!" He told me about a corridor that leads people safely underground to the shuttle center, sheltered from traffic and unpleasant weather.
The next time I flew into O'Hare, I learned that the path leading to the shuttle center had always been there; I just hadn't noticed it. Now it's up to me each trip to choose the path I'm going to take: the way the crowd goes or the safer, more sheltered route.
One day I asked the hotel shuttle service why they didn't instruct people on how to reach the shuttle center by the safer, protected route. They said, "Oh, it's too hard to get people to understand, so we just tell them to follow the crowd."
The ideas presented in this book are not novel; the approaches are. With the insights you are about to gain, I hope you will choose not to always follow the crowd, but to find the best path on your journey toward financial independence.
For the first step on that journey, let's take a look at the two places most Americans accumulate the most money: our home and our retirement plan.
THE FIRST STEP
Following accepted wisdom, we set aside money in qualified retirement accounts, such as IRAs and 401(k)s, enjoying tax-deductible funding and/or tax-deferred accumulation. At the same time, we assume it's best to achieve the goal of outright home ownership and save money on mortgage interest expense by sending extra principal payments against our mortgages.
Unaware, like naïve, inexperienced drivers, we proceed down the highway of life, pursuing financial security with one foot on the brake pedal and the other foot on the gas pedal. We may eventually make it to our destination, but only after a pretty jerky ride. We wonder why a few others arrived at the station of financial independence sooner, achieving more, with a much smoother ride.
"BUT I'M DOING EVERYTHING RIGHT!"
We suddenly realize that during all of those years of earning money, we socked a portion away in investment vehicles that gave us a tax deduction on the front end, just to be hammered with taxes on the back end. At the same time, we were killing our partner, Uncle Sam, by eliminating one of the best tax deductions we have as Americans-our home mortgage interest.
During our "golden years" of retirement, we painfully come to the realization that we increased our tax liability by postponing it to a time when we no longer had significant deductions. In frustration, we complain, "But I did everything right! Everyone concerned about their retirement puts money into IRAs and 401(k)s, and I've always been taught that you should pay off your mortgage by sending extra principal payments to the mortgage company!" There is a valuable lesson a friend and mentor, Marshall Thurber, taught me: All the dogs barking up the wrong tree doesn't make it the right one!
If what you thought to be the best way to save for retirement or to pay off your mortgage turned out not to be the best way, when would you want to know? Now is the time to discover the best way to safely accumulate more money. The sooner you empower yourself with the knowledge to attain financial independence, the greater your net worth will become.
THE LURE OF IRAS AND 401(K)S
Most Americans are lured into saving for retirement with traditional qualified retirement plans, such as IRAs and 401(k)s. They are convinced by financial advisors to contribute pre-tax dollars to 401(k) plans or place tax-deductible contributions into IRAs because of the tax advantages during the contribution and accumulation phases of their retirement planning. They seem to ignore the two most important phases-when you withdraw your money for retirement income, and when you pass away and transfer any remaining funds to your heirs. This book will help you understand how to receive tax-favored benefits during all four phases of retirement planning: the contribution, accumulation, distribution, and transfer phases. Most of us don't want to outlive our money, and no one is getting out of here alive. When people die, they usually leave behind some money in their IRAs and 401(k)s that is transferred to their beneficiaries. Unfortunately, non-spousal heirs far too often end up with only about 28 percent of the money that was left in their parents' IRAs and 401(k)s.
Most people and their advisors feel that tax-deductible or pre-tax contributions to qualified plans such as IRAs and 401(k)s will provide the greatest retirement benefits because of tax-deferred growth. But do they?
If you were a farmer, would you rather save tax on the purchase of your seed in the springtime and pay tax on the sale of your harvest in the fall, or would you rather pay tax on the seed and sell your harvest without any tax on the gain? I would rather purchase the seed with after-tax dollars and later sell my harvest tax-free. In this book, I will teach you how to do the latter.
A Roth IRA is one way to accomplish this, but I believe it still has too many strings attached. The maximum yearly contribution that can be made by an individual was $3,000 for tax years 2002 to 2004; from 2005 to 2008 the limit is $4,000. Distributions may not be taken until at least five years after the first contribution is made. In addition, distributions must be taken when or after the owner reaches the age of 591/2, except in the event of the owner's death or disability, or for "qualified first-time homebuyer expenses."
THE NOT-SO-ADVANTAGED TAX ADVANTAGES
One of the original IRA tenets held that deferring tax until retirement was advantageous because funds would likely be taxed at a lower rate. That is no longer axiomatic. You may well live out your retirement in the same or a higher tax bracket if you accumulate a respectable retirement nest egg. In fact, effective tax rates will likely be higher in the future. So why postpone the inevitable and increase your tax liability?
As a financial strategist and retirement specialist, when I discover how much money my first-time clients have accumulated in yet-to-betaxed IRAs and 401(k)s, I often ask them if they are planning their retirement or Uncle Sam's.
Is postponing tax and thereby increasing the tax you will owe really the best idea? You should be aware that your IRA, pension, and 401(k) benefits will probably be taxable at a higher rate at retirement.
A BETTER RETIREMENT ALTERNATIVE
In my opinion, there is a better alternative to achieve tax-free retirement income, as well as create indirect tax-favored benefits on the contribution amounts without all of the restrictions and rules.
When I contribute money to my retirement fund, there is no restriction on how much I can put in. During good years, I can contribute generously; during not-so-good years, I don't have to contribute anything. Moreover, I can withdraw money if needed without IRS penalties, and I am not obligated to put it back. As a homeowner, I also structure my retirement plan to get indirect tax deductions on my contribution amounts. Most important, my retirement funds accumulate tax-free, and I can access the funds whenever I want on a tax-free basis (including the interest or gain) without having to wait until I'm 59 1/2. If I don't use up my retirement funds before I pass away, they will blossom in value and transfer free of income tax to my heirs.
There is a means by which you can draw out your retirement free of income tax. Not only that, but there is also a means to avoid paying tax on up to 85 percent of your Social Security benefits at retirement. Are you interested in how you can accomplish this?
Through proper planning, a homeowner can utilize home equity retirement planning that may provide tax advantages during the contribution and accumulation years, and more important, you may enjoy tax-free income during your retirement years and transfer any remaining funds to your heirs tax-free. This strategy can increase your net spendable retirement income by as much as 50 percent! How is this possible? Read on.
THE TRUE COST OF EXTRA PRINCIPAL PAYMENTS
Another common misconception about the path to financial independence is that the best way to pay off a house is to make extra principal payments on your mortgage. There are various methods that people use to do this. Some homeowners use the biweekly payment plan to accelerate their mortgage payoff. Others use fifteen-year mortgages rather than thirty-year mortgages to accomplish their goal of outright home ownership. I will prove in this book that no method of paying extra principal on your mortgage is the wisest or quickest method of accomplishing financial independence.
A homeowner can accumulate the amount of cash needed to pay off a home just as soon or sooner by using a conservative, tax-deferred mortgage acceleration plan. The most important elements of home equity management are maintaining liquidity and safety of principal and creating the opportunity for home equity to grow in a separate side fund, where it is accessible in the event of an emergency.
It is essential to maintain control of your home equity to allow it to earn a rate of return. Home equity has no rate of return when it is trapped in the house, as I will explain. I'll also explain why your home may likely sell much more quickly and for a higher price with a high mortgage balance rather than a low mortgage balance.
Learning to manage the equity in your home wisely will allow you to utilize one of the few tax deductions that we Americans have left: our mortgage interest. You can actually pay off a home using a thirty-year mortgage in thirteen and a half years with the same cash outlay required to pay off a fifteen-year mortgage. And you can accomplish this by using some of Uncle Sam's money instead of your own! This book will teach you how to dramatically enhance your net worth and generate an extra million dollars or more by safely using lazy, idle dollars that are trapped in the equity of your home.
Let me reiterate and clarify why many Americans are remiss in arriving at the degree of financial independence they could otherwise obtain. While we do everything in our power to get tax deductions on our retirement contributions and investments, we simultaneously eliminate one of the few and best deductions we have: our home mortgage interest.
Hence, most Americans prepare for the future by postponing tax while getting rid of their tax deductions.
P.L.A.N. FOR TRUE WEALTH
To get where you want to go, you have to know how to get there. I've discovered that the secret to wealth accumulation is to use the best P.L.A.N.-an acronym for "Perpetual Life of Asset Nurturance."? When we learn to nurture all of our assets properly, we create a new life for them that will live on into perpetuity. To understand how, we must first define "true wealth." So let's shift gears in order to view your future from a loftier perspective.
Wealth is usually associated with the accumulation of assets. When asked what their assets are, most people usually think of their house, cash, stocks, bonds, real estate, and insurance. These things constitute our financial assets and represent our material possessions.
But, if I were to ask what their most important assets are, most people would list their family, health, relationships, virtues, values, morals, character, unique abilities, heritage, and the future. This category represents human assets-that is, people rather than things. Another category of assets represents the wisdom we gain in life: our intellectual assets. Wisdom is a product of knowledge multiplied by experiences-both good and bad. Intellectual assets also include our formal education, reputation, systems, methods, skills, ideas, alliances, and traditions.
ASSETS THAT MATTER
Imagine these three categories-financial, human, and intellectual assets-on a "family balance sheet." Say you had to leave one category behind, but you could keep and transfer the others to future generations.
I have asked this question of a wide variety of individuals who have had financial net worths ranging from $10,000 to $2,500,000,000, and the answer is the same. They would choose to give up their financial assets.
Why? Because we can rebuild the financial assets with our human and intellectual assets. Most religions of the world believe that we come into the world possessing the human and intellectual assets to one degree or another. While we live our life, we enhance these assets.
Then when we leave this mortal existence, we take the enhanced human and intellectual assets with us to the next life.
Most people would not trade their human and intellectual assets for more money. When people spend their health trying to create more financial wealth, they usually end up spending their wealth trying to regain their health. If we trade our morals and ethics for more money, we soon become bankrupt in the human asset category. George Bernard Shaw said, "There are two sources of unhappiness in life. One is not getting what you want; the other is getting it." Money does not cause happiness or misery; but your relationship with money can.
It's unfortunate that traditional estate planning focuses on the least important category on the family balance sheet: the financial assets. Regardless of its complexity, traditional estate planning has become a process of four Ds: divide up the estate, defer the distribution, dump the financial assets on ill-prepared heirs, and eventually it dissipates.
Excerpted from Missed Fortune 101 by Douglas Andrew Copyright © 2005 by Douglas Andrew. Excerpted by permission.
All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
Excerpts are provided by Dial-A-Book Inc. solely for the personal use of visitors to this web site.
Chapter 1 All the Dogs Barking Up the Wrong Tree Doesn't Make It the Right One! 1
Chapter 2 Taxes Are Actually an Asset! 18
Chapter 3 Plan Your Retirement-Not Uncle Sam's 37
Chapter 4 Solve Your IRA/401 (k) Dilemma 57
Chapter 5 Free Yourself from the IRA and 401 (k) Trap 81
Chapter 6 Learn to Manage Home Equity Successfully 100
Chapter 7 Manage Your Mortgage to Create Wealth 120
Chapter 8 Homemade Wealth 144
Chapter 9 Choose the Right Investments 170
Chapter 10 Structure Your Life Insurance to Perform as a Superior Investment 192
Chapter 11 Access Your Money Tax-Free at Retirement 216
Chapter 12 Give New Life to Your Assets-Develop the Proper P.L.A.N. 244
Posted January 1, 2007
I was browsing in my favorite bookstore (B&N of course :) ), and I stumbled upon 'Missed Fortune 101'. I flipped open the book and saw a phrase along the lines of 'investing in 401ks and paying down your mortgage are not the smart things to do'. This comment intrigued me and made me mad at the same time, so I sat down and read for 45 minutes and became interested and excited. I bought the book ($19.99 or so after my member discount). After multiple chapters of teasing the reader about what the 'magic pill' to everyone's financial hardships would be, I was very disappointed to see what basically came down to an insurance industry sales pitch. I gave this book a 2 instead of a 1 only for the fact that it fooled me and gave me false hope for a day or two, so that adrenaline rush was worth 1 point :P. What he recommends is very dangerous, and not smart at all in my opinion. But yes, anyone who sells insurance will absolutely LOVE this book, and I would too if I were in their shoes. This is just my opinion of course, but I think it is wiser to keep money in things that you understand versus convoluted/confusing investment vehicles that are designed to make the makers of the vehicles rich. My own experience with life insurance policies was a whole life policy (which he talks about in the book) that started at $55,000 coverage for $30 a month. I paid into this policy for 16 years expecting the high rates of return talked about in the original sales pitch (6 to 8% per year) only to end up putting in roughly $5700 only to finally cash out at $6300 to pay off my car :P. That is approximately a 1% return on my money over those 16 years. If I would have invested in the stock market for those 16 years I would have crushed that insurance 'investment' even after taxes. Keep my personal story in mind if you decide to read this book! I would recommend 'The Millionaire Next Door' and 'The Millionaire Mind' over this book. I read those two books, and they were written by authors who studied millionaires over a very long period of time. It gets into their heads, habits, and belief systems. Which in my opinion is real knowledge, versus taking out a loan on the biggest asset you may have to invest it all in a confusing life insurance policy.
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Posted August 29, 2010
MISSED FORTUNE 101:
A Starter Kit to Becoming a Millionaire
Douglas R. Andrew
Business Plus Trade Paperback
Reviewer: Annie Slessman
Written just before the financial downfall that began in 2006, MISSED FORTUNE 101: A Starter Kit to Becoming a Millionaire by Douglas R. Andrew could have been a factor that made this time of recession less painful for its readers. Mr. Andrew's states the belief that one must pay their home off fully before becoming financial secure is a myth.
After reading this work in its entirety, I am inclined to believe him.
Mr. Andrew has developed a P.L.A.N. (Perpetual Life of Asset Nurturance) whereas one takes the funds they would normally use for a down payment on a new home and puts those funds in a safe side fund that will make the owner more money than the equity in your home can earn in the same period of time. He actually suggests that one should seek out an interest-free mortgage and this particular move can actually make you money. It all sounded rather "iffy" when I began reading this book but after reading further and having my questions answered, it all made sense.
Providing reader's of all age groups examples of how they can maximize their liquid funds, Mr. Andrew's and MISSED FORTUNE 101: A Starter Kit to Becoming a Millionaire provides a reader a real bang for their buck.
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Posted October 1, 2006
You have the freedom of choice to expose yourself to new ideas, apply them for yourself, and share them with others. The consequence is life-changing. Statistic claims only 5% of the Americans achieve financial independence. For a small investment of money and time you get access to The Path For Financial Freedom. At age 60 I started my ¿Second Life¿, getting licenses for real estate, mortgage brokerage, and Life- and Health Insurance with the intention to go far beyond the limits of my 'First Life' as engineer. I am grateful to the author to give me the opportunity after one weekend of intensive study to share the knowledge he accumulated over 30 years. I will dedicate my 'Second Life' to educate as many people as possible and guide them on The Path to Financial Freedom as long as possible. This book is the 'must read' for professionals in the financial services industry as well as anyone else willing and able to make a change in their lives. What you don't know can hurt you, like paying to much ...... (You will find out reading the book!) The American economy is based on CREDIT. Building personal wealth is based on savings. Reading the book you will learn where to put your money.
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Posted February 17, 2005
As a mortgage broker and a financial advisor I find both these books extremely helpful for my clients to really understand that many of the beliefs they hold on to as 'true' about how money works, about how retirment accounts work and about how debt works, are in fact untrue. The author does an excellent job explaining these complex subjects in very simple terms. While MF 101 covers all the topics detailed in the original Missed Fortune, I feel that both books are well worth reading.
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Posted February 10, 2007
I thought I would take a few second and comment on Mike 'the accountant''s comment. I am in the financial services industry and would recommend any book about wealth growth and preservation to be read by all. I spend my life coaching others on being wise stewards with their resources. As a comment to Mike, I will soon find out after reading the book, but wanted to give you more information about whole life policies. Basically they stink! You only saw 1% return due to your trust in a insurance company that invest your money for their benefit and then grant you a dividend at the end of the year in return for your money. After you factor in the expense for insurance as well as the other fees, you are absolutely right, you net 1% instead of the 8% that you thought you were getting. My advice is to look into a Variable Universal Life Insurance which allows you to have that permenant insurance as well as participate in the market and see the kind of returns that you thought you would see. It allows you to build that cash value and borrow against it as well as draw upon those assets during retirement in a tax efficient manner instead of your 401(k) dollars. Fund these vehicles properly, either seven pay or atleast target fund it, and you will experience the kind of financial freedom that you were hoping for. Happy investing!
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Posted September 11, 2009
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Posted December 4, 2011
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