Retirement Planning – Which is more important, Time or Money?

Making Your Money Work for You

Making Your Money Work for You

Almost everyone knows that it is important to get started early in saving for retirement, but do not understand the magnitude of that importance.

Here, we will try to show the real importance of starting early in a simple and understandable way. To do this, we will show two friends saving money. One is Mary and the other is Sue.

Mary starts saving money right out of high school with her first job at the age of 18. Sue, waits till she is 28. Both save $2,000 per year, but Mary gets married and has a child at the age of 28 and stops saving money and never puts another dime in the plan. She made a total of $20,000 in contributions.

Sue starts saving at age 28 and makes $2,000 contributions till age 48 when she got laid off of her job. A total of $40,000.

Let’s look ahead at age 65 and see what their retirement plans are worth.

Even though Sue contributes twice as much as Mary, Mary’s retirement fund at age 65 is $187,813 higher than Sue’s.

Let’s stop and ponder that a moment. Mary has more money than Sue, even though Sue contributes twice as much to her fund. Why?

The answer is the Miracle of Compound Interest. How… Mary has more compounding periods than Sue. At 8% money doubles every 9 years. Mary had one additional doubling period than Sue. At age 56, 9 years before retirement, Mary had $93,954 more in her fund than Sue. So the next 9 year when the funds doubles again, that’s a gain of $187,908 during that last compounding period that Sue didn’t have.

Conclusion: While the amount of money one contributes and while the interest rate they earn are important, nothing compares to the “time value” of money and compounding periods.

So, start today and don’t delay.

See table below

Contributions Contributions 8.00% 8.00%
Age Mary Sue Mary Sue
18 2,000 0 2,160 0
19 2,000 0 4,493 0
20 2,000 0 7,012 0
21 2,000 0 9,733 0
22 2,000 0 12,672 0
23 2,000 0 15,846 0
24 2,000 0 19,273 0
25 2,000 0 22,975 0
26 2,000 0 26,973 0
27 2,000 0 31,291 0
28 0 2,000 33,794 2,160
29 0 2,000 36,498 4,493
30 0 2,000 39,418 7,012
31 0 2,000 42,571 9,733
32 0 2,000 45,977 12,672
33 0 2,000 49,655 15,846
34 0 2,000 53,627 19,273
35 0 2,000 57,917 22,975
36 0 2,000 62,551 26,973
37 0 2,000 67,555 31,291
38 0 2,000 72,959 35,954
39 0 2,000 78,796 40,991
40 0 2,000 85,100 46,430
41 0 2,000 91,908 52,304
42 0 2,000 99,260 58,649
43 0 2,000 107,201 65,500
44 0 2,000 115,777 72,900
45 0 2,000 125,039 80,893
46 0 2,000 135,042 89,524
47 0 2,000 145,846 98,846
48 0 0 157,514 106,754
49 0 0 170,115 115,294
50 0 0 183,724 124,517
51 0 0 198,422 134,479
52 0 0 214,295 145,237
53 0 0 231,439 156,856
54 0 0 249,954 169,404
55 0 0 269,951 182,957
56 0 0 291,547 197,593
57 0 0 314,870 213,401
58 0 0 340,060 230,473
59 0 0 367,265 248,911
60 0 0 396,646 268,823
61 0 0 428,378 290,329
62 0 0 462,648 313,556
63 0 0 499,660 338,640
64 0 0 539,632 365,731
65 0 0 582,803 394,990
Totals 20,000 40,000 582,803 394,990
+ 187,813

Is Federal Income Tax Legal?

Uncle Sam is After Your Money

Uncle Sam is After Your Money

The 16th Amendment to the Constitution does empower the Congress to levy and collect income taxes. There is no question as to the wording of that amendment.

The question is whether it is legal or not.

Since it is an amendment to the Constitution, it requires that 3/4th of the states ratify it. Some say that it was never ratified by that margin of states. In fact, Bill Benson, former Investigator for the Department of Revenue for the state of Illinois says it is not. He did an exhausted search, state by state on the question of proper ratification and wrote a two volume book entitled “The Law that Never Was”.

So if it wasn’t ratified properly as required by the Constitution, why hasn’t someone challenged it in court?

Well it has, in fact. In 1986 Leland Stahl was sued by the United States, which attempted to collect Stahl’s unpaid taxes. Read more at

Essentially, the courts will not even hear a case on the question of whether legal ratification occurred with regard to the 16th Amendment, rather its position is that a bill is legal once signed by the Speaker of the House, President of the Senate and approved by the President. That the issue is a political one, not a judicial one. In other words, “it doesn’t matter”… it is deemed to be legal just by the mere signing of the bill.

Bottom line, the 16th Amendment became the “law of the land” in 1913.

Is it legal? Probably not, but who of us in the General Public has the “where-with-all” to stand up to the Internal Revenue Service? Few topics strike fear more in hearts of strong men and women than the IRS.

There is an organized group called “Project Toto”. The name came from Dorthy’s little dog who pulled back the curtain to reveal the All and Powerful Wizard of OZ. You can search more information about this group at .

401-K plan… What is it, How does it work and Is it a Good Deal ?

Man Riding the market up

Without a doubt, participation in a 401-K plan could be a good option for employees to participate in. For some, however, there may be better options.

So what is a 401-K plan?

According to Wikipedia, a 401-K plans is:

In the United States, a 401(k) plan is the tax-qualified, defined-contribution pension account defined in subsection 401(k) of the Internal Revenue Code.[1] Under the plan, retirement savings contributions are provided (and sometimes proportionately matched) by an employer, deducted from the employee’s paycheck before taxation (therefore tax-deferred until withdrawn after retirement or as otherwise permitted by applicable law), and limited to a maximum pre-tax annual contribution of $18,000 (as of 2015).

Boy, that’s a mouth-full, isn’t it?

Sometimes, it is also referred to as an Qualified Employer Sponsored Retirement Plan. Is that good. Maybe?

Well let’s break down my description above, namely, Qualified Employer Sponsored Retirement Plan.

Retirement Plan – A plan of Retirement- a savings account for retirement.

Employer Sponsored – meaning the plan is offered by the employer, to all eligible employees. It’s his plan.

Qualified – a government program that offers tax advantages to the plan participants (employees), usually where employee contributions are “pre-tax” meaning that they do not show up as income in the year contributions are made. Also, employer contributions are not shown in reportable income either for the tax year contributions are made to the plan. All funds earn with no taxes due on the earning each year. Taxes are due, however, when funds are withdrawn. Like all government plans, there are “strings” attached as to when you can access your funds.

In my view, there are two things that participation in a 401-K plan accomplishes for the employee that is seemingly good.

  1. Employer Match – generally the employer will match a percentage of money, up to a limit, that the employee puts in. Say the employee puts in 3% of his income. The employer may put in a “matching” amount of say 3%. This “matched” amount is additional money the the employee would not have received if he did contributed to the company retirement plan. Some call this “free money”. But, is it?
  2. Encourages Employees to save money for retirement. With 96% of the population reaching age 65 with not enough money saved to retire, 401-K plans may help more have something for retirement because of the “free money” and because of the taxes saved on their contributions. It is an enticement to save. A good thing I think.

Look’s hard to beat, right? But what about the “Drag”?

What is Drag? It is anything that takes money away from the retirement saver’s retirement savings efforts. Namely, there are three. They are:

Types of Drag

  1. Lost Money due to Market Declines
  2. Lost Money Due to Taxes
  3. Lost Money due to plan Fees

In my Retirement Planning business, it is common for me to hear the words, “I already have a retirement plan at work”. The way that these words are spoken by those who have those plans reminds me of a Vampire Movies where the “Cross” is show to the vampire and he has no choice but to retreat… it’s like a “trump card”, a nuclear bomb or something. Those words are spoken as if they are suppose to “stop me in my tracks”… that there is nothing I can do to help those who have these 401-K plans. Nothing could be further from the truth. See, the real test is revealed with their answer to the “important question”. What is the important questions? “How much will that provide you in retirement income when you reach age 65?

This is about the time I see eyeballs rolling up in the back of people’s heads… the “cross” doesn’t work with this vampire, they think… he must be a “Day Walker” or something like that.

Retirement is serious business, yet almost no one can answer the important question… “how much retirement income will my plan yield”. And if the retirement saver can’t answer this question, then how can they know it will meet their retirement needs or not? They can’t.

The purpose of this article is not to analyze retirement needs. Rather, to show how “drag” could affect their current retirement efforts over the years. So, let’s get to it.

Retirement #1 Drag – Market Losses

We hear all the time when the market is doing well. Almost daily, they news reports the daily gain for the Down Jones Industrial Average, S &P 500 Index and the Man riding the market downNASDAQ. Market trends typically affect all three exchanges in similar fashion. We’ll look at the S & P 500. The S & P 500 Index represents the 500 most widely held stocks held in the U.S., and represents almost all industries from manufacturing, retail and the service industry. It makes up about 70% of the American Economy. So it is a broad representation of the market. So how has it done?

s&P500 10 year gainsIf you will add up the annual gains for 10 years and divide by the number 10, it will give you the Average Return. Here are those numbers.

So our Money has had an average return of 6.05%. Hold on, not so fast. The Average Return is Not the same as Actual Return. Actual Return? Yep, Actual Return. Well what does that mean?

Well if you were in the market for this 10 year period, I think you could hardly count the gains in 2009 through 2011 as gains and couldn’t count most of 2012 either. If you add up these number for this 4 year period, almost all of those gains would be “gobbled up” by the 2008 loss of -37.47%. So to include them as a positive number in computing an Average Return is ludicrous. Yet, that is how the average is calculated.

These four years would have only actually increased your pre 2008 holdings by 2.28%. But the Average Return reflects a gain of 39.75%. Of which 37.47% of those gains you had earned previously… they in no way represented an additional gain over this 10 year period. You have already counted them once. You were just getting your money back. The numbers average well but in actuality, this was money you already had earned. You can’t count it twice, can you? So, how much did you actually make after paying for market losses?

To get a true picture, you have to look as Actual Return and to do that is to measure Return on Investment. You take a starting point, and ending point and a ROI calculator and Voilà; you get your Actual Return. You can see our results below.

Actual Return temp

What you wind up with is an actual return of 3.9% instead of 6.05%.

That’s a loss of more than 1/3 of your earnings and represents Drag #1 – Market Losses. They have to be paid for and guess what… they are coming directly our of your retirement savings, in real time, and the way you pay for them, is by having to earn them back. (twice)

Retirement #2 Drag – Taxes

The second drag is easy to explain because everyone understands taxes. They are going to have pay taxes some day. Would it be unreasonable to assume that might be 33% or better. So, the retirement saver is losing 1/3 of their earning to taxes. And on that note, wouldn’t it be better to pay that tax on “the seed” rather than “the harvest”? Rather than deducting $100,000 in contributions over a thirty year period and having to pay taxes on $500,000 in retirement savings, why not receive the whole $500,000 tax free? Can you do that? Maybe. All I can tell you is that many of our clients don’t pay taxes… ever!

Retirement #3 Drag – Fees

The third type of drag is hard for the retirement saver to see. It is almost hidden. It takes a number of calculation to figure out the real cost of fees. In the chart below, we show the results over a 30 year period for a typical 3%-3% Match 401-K plan for an high income earner earning $100,000 annually in all years, earning 8% on their money and 3% in fees annually.

Fees 30 yrs temp

Can you believe that fees come to 40.59% of what the retirement saver wound up with. Here the broker and plan administer have almost half as much as the retirement saver and employer have and they didn’t put a dime into the plan. Wouldn’t you rather keep most of these fees for yourself?

Now fees can’t be avoided all together. After all, the financial industry doesn’t work for nothing. But what if we could save half of those fees and have those add to you’re plan’s retirement values each year and add compound growth on top of that? That could make a big difference.

Can we save fees for our clients. Probably. Most time, we can save our clients fee expense)

To know for sure, we have to analyze that on a case by case basis.

So there you have it. The retirement saver is:

Losing 1/3 of their money due to market declines (Drag #1)

Losing 1/3 of their money in taxes (Drag # 2) and

Losing 1/3 or more in fees (Drag #3)

So, that Begs the Question:

How can the retirement saver ever hope to retire losing this much of their money to Drag”?

I invite you to find out if there is a better way.


Health Care Reform Needed for Retirees during Retirement

The Debate is on for health care reform and especially for those in their retirement years. Let’s face it.  Older people use the “Lion’s Share” of health care in this country… expensive care I might ad.  The debate is “what do we do about it?”

This is particularly problematic for retirees.  On the one hand, most haven’t saved enough to fund a worry free retirement let alone finance increasing health care cost associated with aging.  According to HealthView Service, Inc of Danvers, MA, 30% of retirees income will go for traditional medical expenses.  That’s not counting the “Grandaddy of the All” Long Term Nursing services.  By the time you consider that most retirees retire on a fraction of what they were making when working, I think you can begin to see why so many struggle during their retirement years.  For some, it comes down to choosing between buying prescription medications or food.  So many need help, yet most fall just short of federal guidelines in receiving that assistance. Continue reading

Poverty Among 401K, IRA and Defined Contributions Retirement Funds Money

According to a study which is based on U.S. Census Bureau data, retirees today and in the future are Nine Times more likely to retire in poverty if their primary source of retirement is a 401K, IRA or other forms of Defined Contribution Retirement plan as opposed to those retiring with a pension. (Defined Benefit Plan) see

For a refresher on what Defined Benefit Plans Are go to

For a refresher on what Defined Contributions Plans are go to

It’s all happening because of the erosion in Social Security, the housing crash where Americans saw 1/3 of their home values decline as well as the deep and lengthy recession our country has faced for the last 4 years.  This is the longest recession that our country has seen since before the Great Depression in the late 1920’s.  Even following World War II, our country only saw 8 months of a recession and in the late 1970 when Jimmy Carter was president and we saw 21% interest rates, we only saw a 16 month period of recession. Continue reading

Life Insurance Options may offer Assistance in Retirement Planning Solutions

Retirement planning can be difficult.  You work for 30 or 40 years to retire on less than you were making when you were working.  You may have heard that you don’t need as much income after your retire.  That’s easy to say… doing it’s quite a different thing after you retire.

One of the things you may be able to do is to cut living expenses.  Look for things you are paying for that perhaps you don’t need.  One of those expenses you may be able to eliminate is life insurance premiums.  You may have an option to do that without canceling your policy. Continue reading

Wharton School of Business – Retirement Annuities Increase Retirement Funds Money

According to Wharton School of Business, you can increase your monthly retirement income from  your retirement funds money up to  25% to 40% by using a special type of annuity product with an insurance company as opposed to other retirement investment strategies.  Imagine having 25% or more income to help create a “worry-free” retirement.

On Page 5 of this report, the authors of this report (Babbel & Merrill) make the following remarks:  Click Here To View The Entire Report Continue reading