Posted by Jim on Jan 23, 2012 in Blog
I received this message in an email and checked to see if I could find anything to validate it, but could not. Whether it is true or not, I think it worth reprinting. The lesson is classic!
When the reward is great, the effort to succeed is great, but when government takes all the reward away, no one will try or want to succeed.
Is this man truly a genius?
An economics professor at a local college made a statement that he had never failed a single student before, but had recently failed an entire class. That class had insisted that Obama’s socialism worked and that no one would be poor and no one would be rich, a great equalizer.
The professor then said, “OK, we will have an experiment in this class on Obama’s plan”.. All grades will be averaged and everyone will receive the same grade so no one will fail and no one will receive an A…. (substituting grades for dollars – something closer to home and more readily understood by all).
After the first test, the grades were averaged and everyone got a B. The students who studied hard were upset and the students who studied little were happy. As the second test rolled around, the students who studied little had studied even less and the ones who studied hard decided they wanted a free ride too so they studied little.
The second test average was a D! No one was happy. When the 3rd test rolled around, the average was an F.
As the tests proceeded, the scores never increased as bickering, blame and name-calling all resulted in hard feelings and no one would study for the benefit of anyone else.
To their great surprise, ALL FAILED and the professor told them that socialism would also ultimately fail because when the reward is great, the effort to succeed is great, but when government takes all the reward away, no one will try or want to succeed.
Could not be any simpler than that. (Please pass this on)
Remember, there IS a test coming up. The 2012 elections.
These are possibly the 5 best sentences you’ll ever read and all applicable to this experiment:
1. You cannot legislate the poor into prosperity by legislating the wealthy out of prosperity.
2. What one person receives without working for, another person must work for without receiving.
3. The government cannot give to anybody anything that the government does not first take from somebody else.
4. You cannot multiply wealth by dividing it!
5. When half of the people get the idea that they do not have to work because the other half is going to take care of them, and when the other half gets the idea that it does no good to work because somebody else is going to get what they work for, that is the beginning of the end of any nation.
Can you think of a reason for not sharing this? Neither could I.
Tuesday, April 10, 2012
Tuesday, December 06, 2011
Too Late to Save for Your Future? NOT!!!
An article in the WSJ, addressed a late starter’s ability to adequately save for retirement. The author made it clear by suggesting it isn’t easy, but it is certainly possible to achieve some financial security by working a little longer and by being consistent with your saving efforts. He warned about the temptations to pick investments paying a higher rate of return, a strategy that could “backfire” by inflicting losses that may never be recovered! (Do you think anyone has had such an experience lately?). Well stated!
The suggestion of more savings and retiring a little later than originally planned is good advice. The sources of the author’s information fell short, however, as a more complete strategy is necessary. The suggestion of larger percentages of one’s income going to savings may be prohibitive and thus cause the late starter to just give up and do nothing! The suggestion of downsizing your home may be an option, but it should not be a priority in a financial plan, especially in this market. There is so much more to preparing a strategy for such an individual! Let’s start by finding money being transferred away unknowingly and unnecessarily. Is the client paying more taxes than he/she needs to? Are they paying higher rates of interest than they need to? Can money be found in these areas which would lessen the percentage of savings necessary from their income?
By finding money that could be saved for retirement or college savings, one can divert that money directly to savings without any change to their lifestyle. Granted, it may not be enough, but it makes sense to start there! Like many, I am not receptive to a planner whose first comments are to invest my current savings in better investments paying higher rates of return or to suggest that he will find ways to reduce my current lifestyle to save more. Ironically, people in general, think that is what financial planners do. They find ways to cut back on lifestyle so we can save more, something we know we should already be doing! But, most are not ready and / or willing to cut back on their lifestyle to do so. Others have already cut back and cannot tolerate further cuts to the budget. Still others say there is nothing left to cut in their lifestyle budget! So, what to do???
If you work with a planner who understands wealth transfers, is able to find money being transferred away unknowingly and unnecessarily, understands opportunity costs and how to consolidate debt, they will teach you the strategies you need to understand in order to adequately manage your money and save for your future. If you only concentrate on saving more, you will take on unnecessary levels of risk, which is unnecessary! Sadly, your debt, interest payments and opportunity costs will grow right along with your savings, further complicating your financial affairs.
We tell our clients that there are two ways to fill a bucket with holes in it. First, pour more water in or plug the holes and the bucket will fill even if the water is slowed to a trickle. Substitute the water for money and the bucket for savings. The holes represent wealth transfers as mentioned. If you can eliminate the transfers of money, by plugging the holes in the wealth bucket, you will be able to save more and stress less without change to your lifestyle. So, before you seek out investments paying higher rates of return, seek to eliminate the wealth transfers by working with someone who understands the damaging effects those transfers have on your ability to grow your wealth. Watch this seven minute video for more insight on avoiding wealth transfers before you begin putting more money into your financial strategy!
The suggestion of more savings and retiring a little later than originally planned is good advice. The sources of the author’s information fell short, however, as a more complete strategy is necessary. The suggestion of larger percentages of one’s income going to savings may be prohibitive and thus cause the late starter to just give up and do nothing! The suggestion of downsizing your home may be an option, but it should not be a priority in a financial plan, especially in this market. There is so much more to preparing a strategy for such an individual! Let’s start by finding money being transferred away unknowingly and unnecessarily. Is the client paying more taxes than he/she needs to? Are they paying higher rates of interest than they need to? Can money be found in these areas which would lessen the percentage of savings necessary from their income?
By finding money that could be saved for retirement or college savings, one can divert that money directly to savings without any change to their lifestyle. Granted, it may not be enough, but it makes sense to start there! Like many, I am not receptive to a planner whose first comments are to invest my current savings in better investments paying higher rates of return or to suggest that he will find ways to reduce my current lifestyle to save more. Ironically, people in general, think that is what financial planners do. They find ways to cut back on lifestyle so we can save more, something we know we should already be doing! But, most are not ready and / or willing to cut back on their lifestyle to do so. Others have already cut back and cannot tolerate further cuts to the budget. Still others say there is nothing left to cut in their lifestyle budget! So, what to do???
If you work with a planner who understands wealth transfers, is able to find money being transferred away unknowingly and unnecessarily, understands opportunity costs and how to consolidate debt, they will teach you the strategies you need to understand in order to adequately manage your money and save for your future. If you only concentrate on saving more, you will take on unnecessary levels of risk, which is unnecessary! Sadly, your debt, interest payments and opportunity costs will grow right along with your savings, further complicating your financial affairs.
We tell our clients that there are two ways to fill a bucket with holes in it. First, pour more water in or plug the holes and the bucket will fill even if the water is slowed to a trickle. Substitute the water for money and the bucket for savings. The holes represent wealth transfers as mentioned. If you can eliminate the transfers of money, by plugging the holes in the wealth bucket, you will be able to save more and stress less without change to your lifestyle. So, before you seek out investments paying higher rates of return, seek to eliminate the wealth transfers by working with someone who understands the damaging effects those transfers have on your ability to grow your wealth. Watch this seven minute video for more insight on avoiding wealth transfers before you begin putting more money into your financial strategy!
Tuesday, October 18, 2011
Effects of the Baby Boomers on the Markets
The oldest baby boomers are now 65! Those that can afford to, are beginning to retire. Others who cannot afford to retire are continuing to work, but one thing might ring true to both camps; they are beginning to draw on their retirement funds, much of which has been invested in the stock markets for the past thirty years! This thought, raised in a recent industry article that I read, caused me to think about the next significant paradigm. The article went into much greater detail, but I wanted to discuss the main point along with my own spin on the subject. The baby boomers have had significant impact in many ways over the years and there appears to be one more on the horizon!
If you think about the general mindset of most Americans, you will probably agree that when it comes to their savings and investments, most leave that to the money managers. In and of itself, that is not a bad thing as long as you understand that you lose control of your money when you put someone else in charge! In one of my recent posts, I used the words of my partner, that people just follow the crowd when it comes to their saving and investments.
The S & P 500 Index was used to illustrate a few points in the article. It shows that very few Americans owned stock in 1950; less than five percent. The index and the number of Americans holding stock or stock funds changed very little over the next thirty years. In 1980, ownership was about twelve percent. In the 1980’s, qualified plans were introduced and the baby boomers, the oldest of whom were in their middle thirties, were encouraged to invest their retirement savings. With perhaps a vague understanding, many thought they would lessen their tax liability by making contributions, so they did! As more baby boomers were introduced to qualified plans, (about half of us were now employed in careers) a large number of us followed the crowd! Money began to flow in to the fund managers.
The S & P 500 Index closed on December 31, 1999 at 1469, due in part to the fact that there were now better than 50% of Americans owning stock or stock funds. The economy was doing well and large numbers of the seventy-five million baby boomers were contributing to plans. There was a continuous flow of new money coming to fund managers to purchase additional stock. That trend continued and the index moved a little higher through 2007, closing at 1565 on October 9, 2007. Although it is unclear if contributions slowed immediately, it is clear that the banking crisis among other disconcerting news caused great volatility for the next two or three years. The S & P 500 Index closed on August 26, 2011 at 1177, approximately 19% lower than its close in 1999! And if you examine the charts through that time period, you will see that the Index had been below the 1999 close for a great majority of the time! As mentioned, the bad news along with a troubling economy has affected the markets. Looking ahead from here, we add the new paradigm to the mix, the baby boomers.
The oldest of the baby boomers are no longer in the accumulation phase of their financial lives. Those who have done well, have retired and have begun to draw on their funds. For the next twenty or so years, the baby boomers will continue to be eligible for retirement and whether they do retire, remains to be seen. But one thing is certain. They too, will begin to draw from their retirement funds. Even those who do not need the money will have to take their required minimum distributions. That cycle will start in a few years! The bottom line… more money coming out of the markets than will be going in as more and more of the baby boomers reach retirement age! Money managers will face new challenges. They are going to have to be more aggressive to produce adequate return on investments for their remaining clients to stay in the markets. Do you think this will have an effect on the market’s performance?
The burden on government is also growing because of the increasing numbers of baby boomers collecting social security and medicare benefits. There are simply not enough Americans to neutralize the effect that the baby boomer’s will have on social security and medicare benefits. And, it doesn’t appear that in our lifetime, that will change! So what can we do? What should we expect? Change is certainly in our future!
If the baby boomers do have such an effect on the markets, the future may mean lower returns on your investment and more underperforming mutual funds! It also might indicate that after taxes and fees, your savings may not be enough to carry you through your retirement years.
One can also expect changes to Social Security and Medicare. Those plans, when enacted were meant to be a supplement for people in their last few years, based on life expectancy of 67 years! The government cannot sustain those programs without considerable cutbacks or changes to eligibility as well as additional taxes. The article I read suggested that even a thirty to forty percent increase in taxes would not be enough to pay the government’s costs for these programs!
So, plan for significant tax increases at some point in the future. They will probably not come as one large increase, but in smaller increments over a longer period of time. Plan also for reductions in social security and medicare benefits. Since the government can no longer sustain those benefits as we know them, there will be changes, especially for those who are younger and have perhaps ten or more years before retirement. This means that if you examine your long term financial plan and if you make adjustments now, there is still time to insure a financially secure retirement. For those who are at or near retirement and even those approaching the age of required minimum distributions (time to pay the taxes you deferred!), there are ways to limit your losses (wealth transfers), and maximize your financial strength. You can insure that your money will last your lifetime or will pass to your heirs without any unnecessary taxation.
Most importantly, you must be in control of your money, not the banks, money managers or the government. Get a complete analysis of what you will need to accumulate in order to maintain your standard of living in retirement. A dollar twenty years from now will not have the buying power it has today! Make sure you understand the difference between saving and investing. Make sure your strategy examines things like taxes and interest you are paying unnecessarily or unknowingly. Determine what savings plans will afford you liquidity, use and control of your money. Having control will give you an unlimited number of options that should include guaranteed tax deferred growth, no loss of principal, tax free withdrawals, tax free retirement income, guaranteed no loss of principal, and no market risk. Remember, savings are not money you can afford to lose. So maintain control and eliminate the risks that so many Americans are currently taking when they look for larger rates of return on their savings and investments!
If your 401K or mutual funds have underperformed the market indexes, you can probably expect more of the same. If you think it is time to take control of your finances, we agree! Let us help you learn the strategies used to grow wealth and enhance your current standard of living. We will show you alternatives to conventional planning for college funding and retirement. Show us what you are doing now, and we will in turn, show you a better today and a financially secure tomorrow!
Contact Jim Dierking or visit his personal web page or the company web page for more information.
If you think about the general mindset of most Americans, you will probably agree that when it comes to their savings and investments, most leave that to the money managers. In and of itself, that is not a bad thing as long as you understand that you lose control of your money when you put someone else in charge! In one of my recent posts, I used the words of my partner, that people just follow the crowd when it comes to their saving and investments.
The S & P 500 Index was used to illustrate a few points in the article. It shows that very few Americans owned stock in 1950; less than five percent. The index and the number of Americans holding stock or stock funds changed very little over the next thirty years. In 1980, ownership was about twelve percent. In the 1980’s, qualified plans were introduced and the baby boomers, the oldest of whom were in their middle thirties, were encouraged to invest their retirement savings. With perhaps a vague understanding, many thought they would lessen their tax liability by making contributions, so they did! As more baby boomers were introduced to qualified plans, (about half of us were now employed in careers) a large number of us followed the crowd! Money began to flow in to the fund managers.
The S & P 500 Index closed on December 31, 1999 at 1469, due in part to the fact that there were now better than 50% of Americans owning stock or stock funds. The economy was doing well and large numbers of the seventy-five million baby boomers were contributing to plans. There was a continuous flow of new money coming to fund managers to purchase additional stock. That trend continued and the index moved a little higher through 2007, closing at 1565 on October 9, 2007. Although it is unclear if contributions slowed immediately, it is clear that the banking crisis among other disconcerting news caused great volatility for the next two or three years. The S & P 500 Index closed on August 26, 2011 at 1177, approximately 19% lower than its close in 1999! And if you examine the charts through that time period, you will see that the Index had been below the 1999 close for a great majority of the time! As mentioned, the bad news along with a troubling economy has affected the markets. Looking ahead from here, we add the new paradigm to the mix, the baby boomers.
The oldest of the baby boomers are no longer in the accumulation phase of their financial lives. Those who have done well, have retired and have begun to draw on their funds. For the next twenty or so years, the baby boomers will continue to be eligible for retirement and whether they do retire, remains to be seen. But one thing is certain. They too, will begin to draw from their retirement funds. Even those who do not need the money will have to take their required minimum distributions. That cycle will start in a few years! The bottom line… more money coming out of the markets than will be going in as more and more of the baby boomers reach retirement age! Money managers will face new challenges. They are going to have to be more aggressive to produce adequate return on investments for their remaining clients to stay in the markets. Do you think this will have an effect on the market’s performance?
The burden on government is also growing because of the increasing numbers of baby boomers collecting social security and medicare benefits. There are simply not enough Americans to neutralize the effect that the baby boomer’s will have on social security and medicare benefits. And, it doesn’t appear that in our lifetime, that will change! So what can we do? What should we expect? Change is certainly in our future!
If the baby boomers do have such an effect on the markets, the future may mean lower returns on your investment and more underperforming mutual funds! It also might indicate that after taxes and fees, your savings may not be enough to carry you through your retirement years.
One can also expect changes to Social Security and Medicare. Those plans, when enacted were meant to be a supplement for people in their last few years, based on life expectancy of 67 years! The government cannot sustain those programs without considerable cutbacks or changes to eligibility as well as additional taxes. The article I read suggested that even a thirty to forty percent increase in taxes would not be enough to pay the government’s costs for these programs!
So, plan for significant tax increases at some point in the future. They will probably not come as one large increase, but in smaller increments over a longer period of time. Plan also for reductions in social security and medicare benefits. Since the government can no longer sustain those benefits as we know them, there will be changes, especially for those who are younger and have perhaps ten or more years before retirement. This means that if you examine your long term financial plan and if you make adjustments now, there is still time to insure a financially secure retirement. For those who are at or near retirement and even those approaching the age of required minimum distributions (time to pay the taxes you deferred!), there are ways to limit your losses (wealth transfers), and maximize your financial strength. You can insure that your money will last your lifetime or will pass to your heirs without any unnecessary taxation.
Most importantly, you must be in control of your money, not the banks, money managers or the government. Get a complete analysis of what you will need to accumulate in order to maintain your standard of living in retirement. A dollar twenty years from now will not have the buying power it has today! Make sure you understand the difference between saving and investing. Make sure your strategy examines things like taxes and interest you are paying unnecessarily or unknowingly. Determine what savings plans will afford you liquidity, use and control of your money. Having control will give you an unlimited number of options that should include guaranteed tax deferred growth, no loss of principal, tax free withdrawals, tax free retirement income, guaranteed no loss of principal, and no market risk. Remember, savings are not money you can afford to lose. So maintain control and eliminate the risks that so many Americans are currently taking when they look for larger rates of return on their savings and investments!
If your 401K or mutual funds have underperformed the market indexes, you can probably expect more of the same. If you think it is time to take control of your finances, we agree! Let us help you learn the strategies used to grow wealth and enhance your current standard of living. We will show you alternatives to conventional planning for college funding and retirement. Show us what you are doing now, and we will in turn, show you a better today and a financially secure tomorrow!
Contact Jim Dierking or visit his personal web page or the company web page for more information.
Monday, October 10, 2011
The Truth About Qualified Plans
I continually have conversations with clients about their perceptions of qualified plans. Some tell me they save on taxes, others say they avoid paying taxes or do not pay as much tax as a result of their contributions to a plan. Still others tell me that the company matches their contributions, so they put the maximum they can into their plan. I even hear from some that they are saving for their retirement and think that is a good way to do so. Basically, they follow the advice of someone in the payroll department or simply do what the crowd is doing!
It is probably a good time to share some simple facts about these investment plans and perhaps dispel some of the untruths! First, let me say that a qualified plan, in and of itself, is not bad. What is bad is the fact that so few who use qualified plans know how their money is treated in these programs. It is important then, to understand exactly what these plans do. In that way, you can make a more sound decision if they are right for you!
There are many rules for qualified plans. But we can set aside most of those rules and focus on a select few that will clearly help you decide if they are right for you. Let’s just mention that depending on the plan the contribution amounts are limited. The funds are not liquid, meaning that you cannot withdraw the money before age 59.5 without penalty. There are some exceptions to the rule. Your tax advisor can advise you about those. Suffice it to say you cannot get at the money easily if you should need it. At age 70.5, you must take distributions, whether you need the money or not. Those are some of the obvious things that most are aware of. From here I want to focus your attention on three things.
First and foremost, traditional qualified plans, whether a 401K, 403B, IRA, SEP, SIMPLE, etc., do two things. They defer the tax and the tax calculation. Better said, they postpone the tax and the tax calculation! Your contribution allows you to delay paying the tax until a time in the future! Since the tax calculation is also postponed until you draw the funds, it is possible that you could pay the tax at a higher rate than when you contributed the money!
You may be thinking that when I retire, I will be in a lower tax bracket, so I will pay less tax. That may be true, but are you planning to cut back on your lifestyle to insure that you will be in a lower bracket? I certainly do not want to lower the standard of living I have become used to; do you? And, because you may earn less in retirement, doesn’t mean you will pay fewer taxes. Look back at history. Since the inception of income taxes, they have varied significantly, especially after wars in which our country has been involved. We are experiencing a very weak economy and our current president that wants to raise taxes to pay for the wars, the national debt and the additional stimulus spending, authorized by Congress. Be honest with yourself. Are taxes going to go up or down?
If you put money into a plan while in a higher tax bracket and you ultimately take distributions (or withdraw the entire amount) at a lower tax bracket, you win. You postponed paying the tax at the higher bracket when you made the contribution and you paid at a lower rate when you withdrew it! If the tax rate is the same, there was no advantage and perhaps another investment or saving plan may have proved more beneficial. If the tax rate is higher, you lose! You will pay more tax than perhaps, you needed to! In this case, had you paid the tax at the time you contributed to your plan and deposited the funds into a different type of tax favored account, you would have paid less tax.
You must also keep in mind that you will probably not have the deductions you have now when you retire. For many, the house is paid for or they move to a smaller house and pay cash for it (another topic for another day!), the kids are gone and so are two of the biggest tax deductions most people have! Education credits are also gone. Another important fact to consider is inflation. Based on a modest 3% inflation rate, you will need two dollars thirty years from now to have the buying power of one dollar today!
So, what tax bracket will you be in at retirement? Even if you may be earning a little less money in retirement, when all factors are considered, you will probably be in a higher tax bracket or at least in the same bracket you were in before retirement. What deductions will you have? Clearly, fewer than you have now. And that assumes no changes to the tax code which is also highly unlikely.
Many believe if they put a dollar into a qualified plan, they have a dollar invested. Assuming a 30% tax bracket, you have $0.70 invested. Thirty cents belongs to the IRS! That is the tax you deferred. And, those thirty cents will now grow inside your account until you withdraw funds. At that time, the IRS will calculate the interest on their money and you will pay the tax at interest. Here is an example that considers a $1,000.00 annual contribution with a 30% tax bracket for both, the deferral and withdrawal periods, and a 5% rate of return for thirty years.
Account Balance $69,761
Your Share $48,833
Tax You Deferred $ 9,000
Amount You Owe IRS $20,928
Company match is also something that is often misunderstood. If you are receiving a company match, I urge you to contribute only enough to your plan to receive the maximum the company match offers. If you do that, the company’s contribution will most times, cover your tax liability. To wrap your mind around this, consider your contribution of one dollar and your company match of 50% or $0.50. You now have $1.50 in your account. If you are deferring at a 30% tax bracket, $0.45 belongs to the IRS. That $0.45 will be paid to the IRS at some point in the future at interest!
One last thing to consider is that mutual funds have historically underperformed the indexes. If you research the history of mutual funds, you will draw that conclusion on your own. So, I am not going to spend any time discussing that. The more important point is that mutual funds are traded on the markets and come with various levels of risk. The potential for loss of principal exists with every fund. And in most cases, we participate in these plans to save for retirement or for college planning. The operative word in the preceding sentence is save. When we save, it suggests that it is money we will eventually need. Can we afford to risk loss of principal with our savings in a very volatile market? Don’t be fooled by the thought of being able to time your withdrawals with market highs. Ask our retirees today how that is working for them! Just look at the losses in the markets since the highs in 2007!
At Integrated Financial Concepts, we insure that our clients understand important factors like those discussed here. We teach them the strategies they need to know in order to insure no loss of principal as well as contractually guaranteed growth of their funds, to minimize their taxes and have complete control of their finances at all times. If your money is not working for you 24/7, contact us for a free, no obligation consultation. Visit our company web page or contact me directly for more information.
Jim Dierking
It is probably a good time to share some simple facts about these investment plans and perhaps dispel some of the untruths! First, let me say that a qualified plan, in and of itself, is not bad. What is bad is the fact that so few who use qualified plans know how their money is treated in these programs. It is important then, to understand exactly what these plans do. In that way, you can make a more sound decision if they are right for you!
There are many rules for qualified plans. But we can set aside most of those rules and focus on a select few that will clearly help you decide if they are right for you. Let’s just mention that depending on the plan the contribution amounts are limited. The funds are not liquid, meaning that you cannot withdraw the money before age 59.5 without penalty. There are some exceptions to the rule. Your tax advisor can advise you about those. Suffice it to say you cannot get at the money easily if you should need it. At age 70.5, you must take distributions, whether you need the money or not. Those are some of the obvious things that most are aware of. From here I want to focus your attention on three things.
First and foremost, traditional qualified plans, whether a 401K, 403B, IRA, SEP, SIMPLE, etc., do two things. They defer the tax and the tax calculation. Better said, they postpone the tax and the tax calculation! Your contribution allows you to delay paying the tax until a time in the future! Since the tax calculation is also postponed until you draw the funds, it is possible that you could pay the tax at a higher rate than when you contributed the money!
You may be thinking that when I retire, I will be in a lower tax bracket, so I will pay less tax. That may be true, but are you planning to cut back on your lifestyle to insure that you will be in a lower bracket? I certainly do not want to lower the standard of living I have become used to; do you? And, because you may earn less in retirement, doesn’t mean you will pay fewer taxes. Look back at history. Since the inception of income taxes, they have varied significantly, especially after wars in which our country has been involved. We are experiencing a very weak economy and our current president that wants to raise taxes to pay for the wars, the national debt and the additional stimulus spending, authorized by Congress. Be honest with yourself. Are taxes going to go up or down?
If you put money into a plan while in a higher tax bracket and you ultimately take distributions (or withdraw the entire amount) at a lower tax bracket, you win. You postponed paying the tax at the higher bracket when you made the contribution and you paid at a lower rate when you withdrew it! If the tax rate is the same, there was no advantage and perhaps another investment or saving plan may have proved more beneficial. If the tax rate is higher, you lose! You will pay more tax than perhaps, you needed to! In this case, had you paid the tax at the time you contributed to your plan and deposited the funds into a different type of tax favored account, you would have paid less tax.
You must also keep in mind that you will probably not have the deductions you have now when you retire. For many, the house is paid for or they move to a smaller house and pay cash for it (another topic for another day!), the kids are gone and so are two of the biggest tax deductions most people have! Education credits are also gone. Another important fact to consider is inflation. Based on a modest 3% inflation rate, you will need two dollars thirty years from now to have the buying power of one dollar today!
So, what tax bracket will you be in at retirement? Even if you may be earning a little less money in retirement, when all factors are considered, you will probably be in a higher tax bracket or at least in the same bracket you were in before retirement. What deductions will you have? Clearly, fewer than you have now. And that assumes no changes to the tax code which is also highly unlikely.
Many believe if they put a dollar into a qualified plan, they have a dollar invested. Assuming a 30% tax bracket, you have $0.70 invested. Thirty cents belongs to the IRS! That is the tax you deferred. And, those thirty cents will now grow inside your account until you withdraw funds. At that time, the IRS will calculate the interest on their money and you will pay the tax at interest. Here is an example that considers a $1,000.00 annual contribution with a 30% tax bracket for both, the deferral and withdrawal periods, and a 5% rate of return for thirty years.
Account Balance $69,761
Your Share $48,833
Tax You Deferred $ 9,000
Amount You Owe IRS $20,928
Company match is also something that is often misunderstood. If you are receiving a company match, I urge you to contribute only enough to your plan to receive the maximum the company match offers. If you do that, the company’s contribution will most times, cover your tax liability. To wrap your mind around this, consider your contribution of one dollar and your company match of 50% or $0.50. You now have $1.50 in your account. If you are deferring at a 30% tax bracket, $0.45 belongs to the IRS. That $0.45 will be paid to the IRS at some point in the future at interest!
One last thing to consider is that mutual funds have historically underperformed the indexes. If you research the history of mutual funds, you will draw that conclusion on your own. So, I am not going to spend any time discussing that. The more important point is that mutual funds are traded on the markets and come with various levels of risk. The potential for loss of principal exists with every fund. And in most cases, we participate in these plans to save for retirement or for college planning. The operative word in the preceding sentence is save. When we save, it suggests that it is money we will eventually need. Can we afford to risk loss of principal with our savings in a very volatile market? Don’t be fooled by the thought of being able to time your withdrawals with market highs. Ask our retirees today how that is working for them! Just look at the losses in the markets since the highs in 2007!
At Integrated Financial Concepts, we insure that our clients understand important factors like those discussed here. We teach them the strategies they need to know in order to insure no loss of principal as well as contractually guaranteed growth of their funds, to minimize their taxes and have complete control of their finances at all times. If your money is not working for you 24/7, contact us for a free, no obligation consultation. Visit our company web page or contact me directly for more information.
Jim Dierking
Tuesday, September 06, 2011
Your Wealth Circle
The circle shown in the image featured in this article represents your circle of wealth. It represents all the money you will ever have in your life. It may be smaller than some people’s, yet larger than others. There is a commonality we all share, however. We all want our circles to grow!
Potential clients see a second circle that is broken into three parts. Those parts categorize the money in your wealth circle; two parts that most money managers focus on (Savings and Lifestyle) and the third part, called transferred funds that Jim Dierking and the members of Integrated Financial Concepts focus on first. (You can view a seven minute video titled "Your Circle of Wealth" in the right margin on this page.)
In order to grow your circle of wealth, conventional wisdom says you must curb your lifestyle to save more or take more risks to earn a higher rate of return with your saving / investments. The Specialists at IFC say you have to stop or reduce the money that is being transferred away from you. Those funds are in the form of interest on debt such as mortgages, credit cards and car payments to name just a few as well as taxes you pay or will pay on savings, qualified plans above and beyond the match, college planning and mandatory distributions. There are several other ways money is transferred away from your circle, but they are too numerous to mention here! One thing rings through to the members of IFC time and again, however. Those transferred funds are most often transferred away unnecessarily and often unknowingly. Jim and other private banking specialists at IFC work to change that!
So you are probably wondering how exactly do they do that! Jim will tell you they have a unique approach to growing their client’s circles of wealth. We look for ways to turn the transferred funds around and redirect them back into your circle, thus adding to your savings and growing your funds for such things as retirement, college planning, asset preservation and your current banking and saving plans without market risk and without effecting your current lifestyle!
If you can, imagine for a moment a water hose pouring water into an old bucket with holes in it. As the water flows in from the hose, it is continually leaking out through the holes. In order to fill the bucket, you have to increase the flow of water so that more is going in than is leaking out. If you plug the holes in the bucket, however, it will fill quite nicely, even with a slower flow of water. Jim believes that to be true when building wealth as well! The funds your designate to savings, represented by the water pouring into the bucket will not grow without doing one of two things. Conventional wisdom says you have to put more money into your accounts, which could affect your current lifestyle, or you must invest in products that yield a higher rate of return on your saving. The problem here is when the rate of return is higher, so is the risk you take! You could lose part or all of your funds!
Alternatively, you can reduce or eliminate the transferred money described earlier, which is analogous to the leaks in the bucket. It is much easier and far less risky to eliminate the funds transfers (plug the holes in the bucket), allowing your money to grow in a safe environment with guaranteed growth. That is the key to the success members of IFC are having is assisting their clients toward a happy and prosperous future as well as a comfortable lifestyle along the way. And, Jim and the members at IFC never charge their clients a fee for their services! They explain that to all of their potential clients during their first exploration meeting.
So, if you are not happy with the size of your wealth circle, if you are making more money than you ever have and you still feel like you are not getting any further along with your financial goals, or if you just want another opinion, contact Jim at Infinite Financial Concepts for a free and confidential conversation about your goals. See for yourself how they can help you establish a plan that will give you better control of your finances, both now and in the future. It is time to plug those holes your wealth bucket and to begin working toward a better future that you richly deserve!
Jim enjoys working with young and middle aged families and couples nearing retirement as well as those already retired who are looking for a way to preserve their assets from unnecessary taxation. He says that young people who are new to the business world are a welcomed challenge. He enjoys assisting them with retirement plans and private banks, much the same as he has done for his children and their peers.
Feel free to contact Jim, using the contact form on our corporate web page, or by email to jim .
Potential clients see a second circle that is broken into three parts. Those parts categorize the money in your wealth circle; two parts that most money managers focus on (Savings and Lifestyle) and the third part, called transferred funds that Jim Dierking and the members of Integrated Financial Concepts focus on first. (You can view a seven minute video titled "Your Circle of Wealth" in the right margin on this page.)
In order to grow your circle of wealth, conventional wisdom says you must curb your lifestyle to save more or take more risks to earn a higher rate of return with your saving / investments. The Specialists at IFC say you have to stop or reduce the money that is being transferred away from you. Those funds are in the form of interest on debt such as mortgages, credit cards and car payments to name just a few as well as taxes you pay or will pay on savings, qualified plans above and beyond the match, college planning and mandatory distributions. There are several other ways money is transferred away from your circle, but they are too numerous to mention here! One thing rings through to the members of IFC time and again, however. Those transferred funds are most often transferred away unnecessarily and often unknowingly. Jim and other private banking specialists at IFC work to change that!
So you are probably wondering how exactly do they do that! Jim will tell you they have a unique approach to growing their client’s circles of wealth. We look for ways to turn the transferred funds around and redirect them back into your circle, thus adding to your savings and growing your funds for such things as retirement, college planning, asset preservation and your current banking and saving plans without market risk and without effecting your current lifestyle!
If you can, imagine for a moment a water hose pouring water into an old bucket with holes in it. As the water flows in from the hose, it is continually leaking out through the holes. In order to fill the bucket, you have to increase the flow of water so that more is going in than is leaking out. If you plug the holes in the bucket, however, it will fill quite nicely, even with a slower flow of water. Jim believes that to be true when building wealth as well! The funds your designate to savings, represented by the water pouring into the bucket will not grow without doing one of two things. Conventional wisdom says you have to put more money into your accounts, which could affect your current lifestyle, or you must invest in products that yield a higher rate of return on your saving. The problem here is when the rate of return is higher, so is the risk you take! You could lose part or all of your funds!
Alternatively, you can reduce or eliminate the transferred money described earlier, which is analogous to the leaks in the bucket. It is much easier and far less risky to eliminate the funds transfers (plug the holes in the bucket), allowing your money to grow in a safe environment with guaranteed growth. That is the key to the success members of IFC are having is assisting their clients toward a happy and prosperous future as well as a comfortable lifestyle along the way. And, Jim and the members at IFC never charge their clients a fee for their services! They explain that to all of their potential clients during their first exploration meeting.
So, if you are not happy with the size of your wealth circle, if you are making more money than you ever have and you still feel like you are not getting any further along with your financial goals, or if you just want another opinion, contact Jim at Infinite Financial Concepts for a free and confidential conversation about your goals. See for yourself how they can help you establish a plan that will give you better control of your finances, both now and in the future. It is time to plug those holes your wealth bucket and to begin working toward a better future that you richly deserve!
Jim enjoys working with young and middle aged families and couples nearing retirement as well as those already retired who are looking for a way to preserve their assets from unnecessary taxation. He says that young people who are new to the business world are a welcomed challenge. He enjoys assisting them with retirement plans and private banks, much the same as he has done for his children and their peers.
Feel free to contact Jim, using the contact form on our corporate web page, or by email to jim .
Thursday, August 11, 2011
James Grant make the argument for monetary system tied to a gold standard
Some might say that fiscal conservatives would not be watching CNBC on a regular basis. That may be true, but I will admit that I was watching Sqawk Box this morning and caught a very good interview with James Grant, the publisher of Grant's Interest Rate Observer. Mr. Grant held his own and made a compelling point, as have so many others, to establish a modern day monetary system that is tied to a gold standard.
The banking system has proven more than once in recent years, that it is not working well as it exists and our dollar continues to be weakened by the policies of the FED and the uncontrolled spending of government. Mr. Grant was asked to speak on the volatility affecting every corner of the market and to comment on Joe's question that our prosperity sits on top of a lot of paper money!
The interview can be seen here .
The banking system has proven more than once in recent years, that it is not working well as it exists and our dollar continues to be weakened by the policies of the FED and the uncontrolled spending of government. Mr. Grant was asked to speak on the volatility affecting every corner of the market and to comment on Joe's question that our prosperity sits on top of a lot of paper money!
The interview can be seen here .
Friday, July 29, 2011
College Saving Plans; Are they good investments?
Having two daughters who attended college and graduate school (four years of two in school at the same time!), I feel the pain of those who are putting children through college, or who are approaching that time. I also acknowledge that schools are pricing many of our young people right out of the opportunity to attend college. One might argue that not all young people should go to college and although I do not disagree with that thought, I do think that every child and parent should have the choice and the financial resources, should the child desire a higher education.
You may have read that 529 College Saving Plans are great ways to put money away for your child’s education. You may have also read that not only can you contribute to the plan, but grandparents and even Junior’s rich aunt and uncle can contribute to the same plan. And, you can contribute up to the amount of the anticipated cost of the child’s education. That sounds pretty good, right? But, let’s look at the bigger picture. Although your funds grow tax deferred and you can withdraw funds for qualified college expenses tax free, (not all expenses are considered qualified) money managers tell you to make sure you time your withdrawals with the tuition credits and market movements.
It is important to know your money is typically invested in mutual funds. Research the decline in values of the major 529 plans in recent years. (And, if you haven’t read my post comparing saving versus investing, you should!) So, having your money invested with market risk prevailing, I cannot help but ask why you would put money away for college that may or may not grow? Even worse, it may actually be worth less when you need it. Just one more thought. What if Junior decides not to go to college? You now have to go through the trouble of applying to change the beneficiary or you are going back to school… or face taxation and possible penalty on those funds when you withdraw them! Remember, the government crafted all qualified plans. And, government doesn’t craft anything that they do not receive financial benefit from!
With savings in a privatie reserve account, there is no limit on how much you can put into your account. The money is contractually guaranteed to grow, there is no exposure to the market. Your money grows tax deferred and can be withdrawn or borrowed afgainst tax and penalty free. And, if Junior decides not to go on to college, no problem! Your money can be used for any purpose and eventually become a supplemental, tax free income in retirement years!
Infinite Banking or privatized banking as we at Integrated Financial Concepts like to call it, was developed by R. Nelson Nash about thirty years ago. He developed a concept based on what banks and credit unions have been doing for about 200 years. He began teaching others how banks work and how we could mimic what banks do.
Two of the biggest drains on our wealth are taxes and market risk. You can eliminate those two concerns from your long term savings, college savings and retirement savings. In addition, you can have the following benefits:
• Recapture the interest you now pay to the banks
• Contractually guaranteed growth with no loss of principal
• Penalty and Tax Free Access to your money at any age
• NO Government control
• Tax Free Retirement Income
• Your money is creditor and lawsuit proof
• You pay NO fees, ever!
If you think that what I have described here sounds too good to be true, then I will just say thank you for reading my post! If you want to know how I use my money in my private reserve account, then contact me. Or, simply view the 7 minute video to the right. Start plugging the holes in your wealth bucket and allow your money to work for you instead of the banks and government! Let us show you how and guide you through the discovery process. You can also view our corporate web page.
You may have read that 529 College Saving Plans are great ways to put money away for your child’s education. You may have also read that not only can you contribute to the plan, but grandparents and even Junior’s rich aunt and uncle can contribute to the same plan. And, you can contribute up to the amount of the anticipated cost of the child’s education. That sounds pretty good, right? But, let’s look at the bigger picture. Although your funds grow tax deferred and you can withdraw funds for qualified college expenses tax free, (not all expenses are considered qualified) money managers tell you to make sure you time your withdrawals with the tuition credits and market movements.
It is important to know your money is typically invested in mutual funds. Research the decline in values of the major 529 plans in recent years. (And, if you haven’t read my post comparing saving versus investing, you should!) So, having your money invested with market risk prevailing, I cannot help but ask why you would put money away for college that may or may not grow? Even worse, it may actually be worth less when you need it. Just one more thought. What if Junior decides not to go to college? You now have to go through the trouble of applying to change the beneficiary or you are going back to school… or face taxation and possible penalty on those funds when you withdraw them! Remember, the government crafted all qualified plans. And, government doesn’t craft anything that they do not receive financial benefit from!
With savings in a privatie reserve account, there is no limit on how much you can put into your account. The money is contractually guaranteed to grow, there is no exposure to the market. Your money grows tax deferred and can be withdrawn or borrowed afgainst tax and penalty free. And, if Junior decides not to go on to college, no problem! Your money can be used for any purpose and eventually become a supplemental, tax free income in retirement years!
Infinite Banking or privatized banking as we at Integrated Financial Concepts like to call it, was developed by R. Nelson Nash about thirty years ago. He developed a concept based on what banks and credit unions have been doing for about 200 years. He began teaching others how banks work and how we could mimic what banks do.
Two of the biggest drains on our wealth are taxes and market risk. You can eliminate those two concerns from your long term savings, college savings and retirement savings. In addition, you can have the following benefits:
• Recapture the interest you now pay to the banks
• Contractually guaranteed growth with no loss of principal
• Penalty and Tax Free Access to your money at any age
• NO Government control
• Tax Free Retirement Income
• Your money is creditor and lawsuit proof
• You pay NO fees, ever!
If you think that what I have described here sounds too good to be true, then I will just say thank you for reading my post! If you want to know how I use my money in my private reserve account, then contact me. Or, simply view the 7 minute video to the right. Start plugging the holes in your wealth bucket and allow your money to work for you instead of the banks and government! Let us show you how and guide you through the discovery process. You can also view our corporate web page.
Monday, July 18, 2011
Saving or Investment; What is the Difference
I often ask business people if they share my philosophy about preserving their capital and saving for retirement. Most people, business or otherwise would agree that it is important to preserve capital, especially those who are approaching retirement in the next few years!
Might I suggest you watch the 7 minute video, titled Your Cirle of Wealth on the right side of this page before you read any further?
Second, I want to point out the difference between saving and investment. Investments are funds we can afford to lose! Savings are funds that we depend on, either now or in the future, but are not funds that we can afford to lose! I mention this because in general, Americans have become enamored by the stock market over the past 50 years and as a result, have invested funds with the hope of considerable gains. What has also happened is that money managers have convinced us that there is no difference between saving and investing, much to their advantage! They get paid no matter what our investment does! Stocks, bonds, 401K, 403B, IRA, Mutual Funds, etc., are all subject to market risk. With markets as they are and with a desire to maintain our lifestyle in retirement, is that what we want to do with our savings? I think banking, a system that has been in existence since 2000 BC, is a safe alternative and one that I teach clients to make the most of!
It is true our money earns little interest in the bank, however, I am not suggesting that you simply put your money in a local banking institution or credit union. Think about it for a minute; the names on some of the biggest buildings across the country are banks, right? Why? Well, the Golden Rule comes to mind; those with the gold make the rules! Banks have us trained to deposit money, allowing them to use it in their sweep accounts, while paying us very little for the use but making a considerable profit from our deposits. We are also taught to go to the bank for a loan when we need money. Banks love us when we are the borrower about 9 times more than they love us a saver (another topic for another post!). But… What if you were the bank? What if you had a source for expenses throughout your life that could grow into a considerable TAX FREE supplemental retirement income and a legacy for your heirs?
When you borrow money from the bank, you pay your banking institution volumes of interest. When you withdraw funds from your savings to make a purchase, you lose interest on your savings. You become a victim of “lost opportunity costs”, a major wealth transfer we describe in our training.
It is analogous to the individual that withdraws money to purchase a new car. Once the money is out of his/her account, it no longer has the potential to grow and build wealth for them. Let’s say after a four year period, the individual has a depreciated asset and nothing more unless they faithfully put the money back into their savings account over that four years. Even still, the opportunity to grow wealth was limited by the pace at which the money was returned to savings, not to mention the interest they lost whiel the money was out of their account. What if you could use the money from your savings and continue to receive the full benefit of interest and dividends as if you had never taken the money out of your account?
The reality is this. For fifty or so years, money managers and our government have encouraged us to use investment vehicles that put our hard earned money at risk in the stock market. And, the only one that benefits by this strategy is the government (via the taxes we pay when we withdraw funds), the money managers and large corporations. If it is money that you can afford to lose, than good luck with the investment! But if it is retirement, long or short term savings, then consider that banking has been around and working well for thousands of years. The difference between banking with the banks and privatized banking is that we now teach you principals that the banks never wanted you to know!
So, what happens to your money? First, it is not invested and has little or no risk, since it is not in the market. It will be contractually guaranteed to grow and you will have penalty free and tax free access to the cash whenever you want it or need it. You can pay it back and use it again and again. There are no loan applications, no credit checks and no jumping through hoops to get the money. It is lawsuit and creditor proof and there is no government control. (Read the article printed in Forbes.com.) Banks use this same savings vehicle as one of their core assets. And, there is no fee for our services, ever!
If you would like some additional information, let us set up a no cost seminar for you to view over the internet. Simply use the contact form on the corporate web page to participate from the comfort of your home. I welcome the opportunity to speak to those who have an interest in privatized banking and wish you continued success in your endeavors.
There are many great published resources available for you to learn more. One such book is “A Path To Financial Peace of Mind” by Dwayne Burnell and can be purchased on the Internet. Feel free to peruse the FAQ’s or my personal web site as well at http://www.jdierking.com/ .
Jim Dierking
Might I suggest you watch the 7 minute video, titled Your Cirle of Wealth on the right side of this page before you read any further?
Second, I want to point out the difference between saving and investment. Investments are funds we can afford to lose! Savings are funds that we depend on, either now or in the future, but are not funds that we can afford to lose! I mention this because in general, Americans have become enamored by the stock market over the past 50 years and as a result, have invested funds with the hope of considerable gains. What has also happened is that money managers have convinced us that there is no difference between saving and investing, much to their advantage! They get paid no matter what our investment does! Stocks, bonds, 401K, 403B, IRA, Mutual Funds, etc., are all subject to market risk. With markets as they are and with a desire to maintain our lifestyle in retirement, is that what we want to do with our savings? I think banking, a system that has been in existence since 2000 BC, is a safe alternative and one that I teach clients to make the most of!
It is true our money earns little interest in the bank, however, I am not suggesting that you simply put your money in a local banking institution or credit union. Think about it for a minute; the names on some of the biggest buildings across the country are banks, right? Why? Well, the Golden Rule comes to mind; those with the gold make the rules! Banks have us trained to deposit money, allowing them to use it in their sweep accounts, while paying us very little for the use but making a considerable profit from our deposits. We are also taught to go to the bank for a loan when we need money. Banks love us when we are the borrower about 9 times more than they love us a saver (another topic for another post!). But… What if you were the bank? What if you had a source for expenses throughout your life that could grow into a considerable TAX FREE supplemental retirement income and a legacy for your heirs?
When you borrow money from the bank, you pay your banking institution volumes of interest. When you withdraw funds from your savings to make a purchase, you lose interest on your savings. You become a victim of “lost opportunity costs”, a major wealth transfer we describe in our training.
It is analogous to the individual that withdraws money to purchase a new car. Once the money is out of his/her account, it no longer has the potential to grow and build wealth for them. Let’s say after a four year period, the individual has a depreciated asset and nothing more unless they faithfully put the money back into their savings account over that four years. Even still, the opportunity to grow wealth was limited by the pace at which the money was returned to savings, not to mention the interest they lost whiel the money was out of their account. What if you could use the money from your savings and continue to receive the full benefit of interest and dividends as if you had never taken the money out of your account?
The reality is this. For fifty or so years, money managers and our government have encouraged us to use investment vehicles that put our hard earned money at risk in the stock market. And, the only one that benefits by this strategy is the government (via the taxes we pay when we withdraw funds), the money managers and large corporations. If it is money that you can afford to lose, than good luck with the investment! But if it is retirement, long or short term savings, then consider that banking has been around and working well for thousands of years. The difference between banking with the banks and privatized banking is that we now teach you principals that the banks never wanted you to know!
So, what happens to your money? First, it is not invested and has little or no risk, since it is not in the market. It will be contractually guaranteed to grow and you will have penalty free and tax free access to the cash whenever you want it or need it. You can pay it back and use it again and again. There are no loan applications, no credit checks and no jumping through hoops to get the money. It is lawsuit and creditor proof and there is no government control. (Read the article printed in Forbes.com.) Banks use this same savings vehicle as one of their core assets. And, there is no fee for our services, ever!
If you would like some additional information, let us set up a no cost seminar for you to view over the internet. Simply use the contact form on the corporate web page to participate from the comfort of your home. I welcome the opportunity to speak to those who have an interest in privatized banking and wish you continued success in your endeavors.
There are many great published resources available for you to learn more. One such book is “A Path To Financial Peace of Mind” by Dwayne Burnell and can be purchased on the Internet. Feel free to peruse the FAQ’s or my personal web site as well at http://www.jdierking.com/ .
Jim Dierking
Sunday, July 17, 2011
The following article appeared on the Mises Institute Web page and is the daily newsletter to subscribers for Friday, July 15, 2011. If you are curious about the potential default of the US Treasury and how it will affect your saving or banking activities, the article is a good read. It speaks for itself.
July 15, 2011
Mises Daily
A Short History of US Credit Defaults
by John S. Chamberlain on July 15, 2011
On July 13th, the president of the United States angrily walked out of ongoing negotiations over the raising of the debt ceiling from its legislated maximum of $14.294 trillion dollars. This prompted a new round of speculation over whether the United States might default on its financial obligations. In these circumstances, it is useful to recall the previous instances in which this has occurred and the effects of those defaults. By studying the defaults of the past, we can gain insights into what future defaults might portend.
The Continental-Currency Default
The first default of the United States was on its first issuance of debt: the currency emitted by the Continental Congress of 1775. In June of 1775 the Continental Congress of the United States of America, located in Philadelphia, representing the 13 states of the union, issued bills of credit amounting to 2 million Spanish milled dollars to be paid four years hence in four annual installments.
The next month an additional 1 million was issued. A third issue of 3 million followed. The next year they issued an additional 13 million dollars of notes. These were the first of the "Continental dollars," which were used to fund the war of revolution against Great Britain. The issues continued until an estimated 241 million dollars were outstanding, not including British forgeries.
Congress had no power of taxation, so it made each of the several states responsible for redeeming a proportion of the notes according to population. The administration of these notes was delegated to a "Board of the Treasury" in 1776. To refuse the notes or receive them below par was punishable by having your ears cut off and other horrible penalties.
The notes progressively depreciated as the public began to realize that neither the states nor their Congress had the will or capacity to redeem them. In November of 1779, Congress announced a devaluation of 38.5 to 1 on the Continentals, which amounted to an admission of default. In this year refusal to accept the notes became widespread, and trade was reduced to barter — causing sporadic famines and other privations.
Eventually, Congress agreed to redeem the notes at 1,000 to 1. At a rate of 0.82 troy ounces to the Spanish milled dollar, if we take the current (July 2011) price of silver, $36 to the troy ounce, this first default resulted in a cumulative loss of approximately $7 billion dollars to the American public.
Benjamin Franklin characterized the loss as a tax. Memory of the suffering and economic disruption caused by this "tax" and similar bills of credit issued by the states influenced the contract clause of the Constitution, which was adopted in 1789:
No State shall enter into any Treaty, Alliance, or Confederation; grant Letters of Marque and Reprisal; coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debts; pass any Bill of Attainder, ex post facto Law, or Law impairing the Obligation of Contracts.
The Default on Continental Domestic Loans
In addition to its currency issuance, the Continental Congress borrowed money both domestically and abroad. The domestic debt totaled approximately $11 million Spanish dollars. The interest on this debt was paid primarily by money received from France and Holland as part of separate borrowings. When this source of funding dried up, Congress defaulted on its domestic debt, starting on March 1, 1782. Partial satisfaction of these debts was made later by accepting the notes for payments of taxes and other indirect considerations.
In an act of 1790, Congress repudiated these loans entirely, but offered to convert them to new ones with less favorable terms, thereby memorializing the default in the form of a Federal law.
The Greenback Default of 1862
After the Revolutionary War, the Congress of the United States made only limited issuance of debt and currency, leaving the problems of public finance largely to the states and private banks. (These entities defaulted on a regular basis up to the Panic of 1837, in which a crescendo of state defaults led to the invention of the term "repudiation of debts.")
In August of 1861, this balance between local and federal finance switched forever; the Civil War induced Congress to create a new currency, which became known as the "greenback" due to the green color of its ink. The original greenbacks were $60 million in demand notes in denominations of $5, $10, and $20. These were redeemable in specie at any time at a rate of 0.048375 troy ounces of gold per dollar. Less than five months later, in January of 1862, the US Treasury defaulted on these notes by failing to redeem them on demand.
After this failure, the Treasury made subsequent issues of greenbacks as "legal-tender" notes, which were not redeemable on demand, except through foreign exchange, and could not be used to pay customs duties. Depending on the fortunes of war, these notes traded for gold at a discount ranging from 20 percent to 40 percent. By the stratagem of monetizing this currency with bonds and paying only the interest on those bonds in gold acquired through customs fees, Lincoln's party financed the Civil War with no further defaults.
The Liberty Bond Default of 1934
The financing of the United States government stepped up to a whole new level upon its entry into the Great War, now known as World War I. The new enterprises of the government included merchant-fleet maintenance and operation, production of ammunition, feeding and equipping soldiers entirely at its own expense, and many other expensive things it had never done before or done only on a much smaller scale.
To finance these activities, Congress issued a series of debentures known as "Liberty Bonds" starting in 1917. The preliminary series were convertible into issues of later series at progressively more favorable terms until the debt was rolled into the fourth Liberty Bond, dated October 24, 1918, which was a $7 billion dollar, 20-year, 4.25 percent issue, payable in gold at a rate of $20.67 per troy ounce.
By the time Franklin Roosevelt entered office in 1933, the interest payments alone were draining the treasury of gold; and because the treasury had only $4.2 billion in gold it was obvious there would be no way to pay the principal when it became due in 1938, not to mention meet expenses and other debt obligations.
These other debt obligations were substantial. Ever since the 1890s the Treasury had been gold short and had financed this deficit by making new bond issues to attract gold for paying the interest of previous issues. The result was that by 1933 the total debt was $22 billion and the amount of gold needed to pay even the interest on it was soon going to be insufficient.
In this exigency, Roosevelt decided to default on the whole of the domestically held debt by refusing to redeem in gold to Americans and devaluing the dollar by 40 percent against foreign exchange. By taking these steps the Treasury was able to make a partial payment and maintain foreign exchange with the critical trade partners of the United States.
If we price gold at the present-day value of $1,550 per troy ounce, the total loss to investors by the devaluation was approximately $640 billion in 2011 dollars. The overall result of the default was to intensify the depression and trade reductions of the 1930s and to contribute to fomenting World War II.
The Momentary Default of 1979
The Treasury of the United States accidentally defaulted on a small number of bills during the 1979 debt-limit crisis. Due to administrative confusion, $120 million in bills coming due on April 26, May 3, and May 10 were not paid according to the stated terms. The Treasury eventually paid the face value of the bills, but nevertheless a class-action lawsuit, Claire G. Barton v. United States, was filed in the Federal court of the Central District of California over whether the treasury should pay additional interest for the delay.
The government decided to avoid any further publicity by giving the jilted investors what they wanted rather than ride the high horse of sovereign immunity. An economic study of the affair concluded that the net result was a tiny permanent increase in the interest rates of T-bills.
What Will Happen in August of 2011?
Many people are wondering about the possibility of a default by the Treasury on August 3, 2011, when, according to the Treasury's projections, it will no longer be able to meet all expenses without additional borrowing.
$25 $18
In this event, it is unlikely a default will occur. Historically, governments prioritize debt service above all other expenses. If the expansion of funds via debt becomes ipossible, the Treasury will cease paying other expenses first, starting with "nonessential" discretionary expenditures, and then it will move on to mandatory expenditures and entitlements as a last resort.
In extremis, what will happen is that all the losses will be foisted onto the Federal Reserve. The Fed holds something on the order of $1.6 trillion in debt issued by the Treasury of the United States. By having the Federal Reserve purchase blocks of Treasury debt and defaulting on these non-investor-held securities, the United States can postpone a default against real investors essentially forever.
John S. Chamberlain lives in Natick, Massachusetts, and works as a software engineer specializing in earth science and artificial intelligence. He has an A.B. in politics from Princeton University and an M.S. in computer science from Northeastern University. Send him mail. See John S. Chamberlain's article archives.
You can subscribe to future articles by John S. Chamberlain via this RSS feed.
July 15, 2011
Mises Daily
A Short History of US Credit Defaults
by John S. Chamberlain on July 15, 2011
On July 13th, the president of the United States angrily walked out of ongoing negotiations over the raising of the debt ceiling from its legislated maximum of $14.294 trillion dollars. This prompted a new round of speculation over whether the United States might default on its financial obligations. In these circumstances, it is useful to recall the previous instances in which this has occurred and the effects of those defaults. By studying the defaults of the past, we can gain insights into what future defaults might portend.
The Continental-Currency Default
The first default of the United States was on its first issuance of debt: the currency emitted by the Continental Congress of 1775. In June of 1775 the Continental Congress of the United States of America, located in Philadelphia, representing the 13 states of the union, issued bills of credit amounting to 2 million Spanish milled dollars to be paid four years hence in four annual installments.
The next month an additional 1 million was issued. A third issue of 3 million followed. The next year they issued an additional 13 million dollars of notes. These were the first of the "Continental dollars," which were used to fund the war of revolution against Great Britain. The issues continued until an estimated 241 million dollars were outstanding, not including British forgeries.
Congress had no power of taxation, so it made each of the several states responsible for redeeming a proportion of the notes according to population. The administration of these notes was delegated to a "Board of the Treasury" in 1776. To refuse the notes or receive them below par was punishable by having your ears cut off and other horrible penalties.
The notes progressively depreciated as the public began to realize that neither the states nor their Congress had the will or capacity to redeem them. In November of 1779, Congress announced a devaluation of 38.5 to 1 on the Continentals, which amounted to an admission of default. In this year refusal to accept the notes became widespread, and trade was reduced to barter — causing sporadic famines and other privations.
Eventually, Congress agreed to redeem the notes at 1,000 to 1. At a rate of 0.82 troy ounces to the Spanish milled dollar, if we take the current (July 2011) price of silver, $36 to the troy ounce, this first default resulted in a cumulative loss of approximately $7 billion dollars to the American public.
Benjamin Franklin characterized the loss as a tax. Memory of the suffering and economic disruption caused by this "tax" and similar bills of credit issued by the states influenced the contract clause of the Constitution, which was adopted in 1789:
No State shall enter into any Treaty, Alliance, or Confederation; grant Letters of Marque and Reprisal; coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debts; pass any Bill of Attainder, ex post facto Law, or Law impairing the Obligation of Contracts.
The Default on Continental Domestic Loans
In addition to its currency issuance, the Continental Congress borrowed money both domestically and abroad. The domestic debt totaled approximately $11 million Spanish dollars. The interest on this debt was paid primarily by money received from France and Holland as part of separate borrowings. When this source of funding dried up, Congress defaulted on its domestic debt, starting on March 1, 1782. Partial satisfaction of these debts was made later by accepting the notes for payments of taxes and other indirect considerations.
In an act of 1790, Congress repudiated these loans entirely, but offered to convert them to new ones with less favorable terms, thereby memorializing the default in the form of a Federal law.
The Greenback Default of 1862
After the Revolutionary War, the Congress of the United States made only limited issuance of debt and currency, leaving the problems of public finance largely to the states and private banks. (These entities defaulted on a regular basis up to the Panic of 1837, in which a crescendo of state defaults led to the invention of the term "repudiation of debts.")
In August of 1861, this balance between local and federal finance switched forever; the Civil War induced Congress to create a new currency, which became known as the "greenback" due to the green color of its ink. The original greenbacks were $60 million in demand notes in denominations of $5, $10, and $20. These were redeemable in specie at any time at a rate of 0.048375 troy ounces of gold per dollar. Less than five months later, in January of 1862, the US Treasury defaulted on these notes by failing to redeem them on demand.
After this failure, the Treasury made subsequent issues of greenbacks as "legal-tender" notes, which were not redeemable on demand, except through foreign exchange, and could not be used to pay customs duties. Depending on the fortunes of war, these notes traded for gold at a discount ranging from 20 percent to 40 percent. By the stratagem of monetizing this currency with bonds and paying only the interest on those bonds in gold acquired through customs fees, Lincoln's party financed the Civil War with no further defaults.
The Liberty Bond Default of 1934
The financing of the United States government stepped up to a whole new level upon its entry into the Great War, now known as World War I. The new enterprises of the government included merchant-fleet maintenance and operation, production of ammunition, feeding and equipping soldiers entirely at its own expense, and many other expensive things it had never done before or done only on a much smaller scale.
To finance these activities, Congress issued a series of debentures known as "Liberty Bonds" starting in 1917. The preliminary series were convertible into issues of later series at progressively more favorable terms until the debt was rolled into the fourth Liberty Bond, dated October 24, 1918, which was a $7 billion dollar, 20-year, 4.25 percent issue, payable in gold at a rate of $20.67 per troy ounce.
By the time Franklin Roosevelt entered office in 1933, the interest payments alone were draining the treasury of gold; and because the treasury had only $4.2 billion in gold it was obvious there would be no way to pay the principal when it became due in 1938, not to mention meet expenses and other debt obligations.
These other debt obligations were substantial. Ever since the 1890s the Treasury had been gold short and had financed this deficit by making new bond issues to attract gold for paying the interest of previous issues. The result was that by 1933 the total debt was $22 billion and the amount of gold needed to pay even the interest on it was soon going to be insufficient.
In this exigency, Roosevelt decided to default on the whole of the domestically held debt by refusing to redeem in gold to Americans and devaluing the dollar by 40 percent against foreign exchange. By taking these steps the Treasury was able to make a partial payment and maintain foreign exchange with the critical trade partners of the United States.
If we price gold at the present-day value of $1,550 per troy ounce, the total loss to investors by the devaluation was approximately $640 billion in 2011 dollars. The overall result of the default was to intensify the depression and trade reductions of the 1930s and to contribute to fomenting World War II.
The Momentary Default of 1979
The Treasury of the United States accidentally defaulted on a small number of bills during the 1979 debt-limit crisis. Due to administrative confusion, $120 million in bills coming due on April 26, May 3, and May 10 were not paid according to the stated terms. The Treasury eventually paid the face value of the bills, but nevertheless a class-action lawsuit, Claire G. Barton v. United States, was filed in the Federal court of the Central District of California over whether the treasury should pay additional interest for the delay.
The government decided to avoid any further publicity by giving the jilted investors what they wanted rather than ride the high horse of sovereign immunity. An economic study of the affair concluded that the net result was a tiny permanent increase in the interest rates of T-bills.
What Will Happen in August of 2011?
Many people are wondering about the possibility of a default by the Treasury on August 3, 2011, when, according to the Treasury's projections, it will no longer be able to meet all expenses without additional borrowing.
$25 $18
In this event, it is unlikely a default will occur. Historically, governments prioritize debt service above all other expenses. If the expansion of funds via debt becomes ipossible, the Treasury will cease paying other expenses first, starting with "nonessential" discretionary expenditures, and then it will move on to mandatory expenditures and entitlements as a last resort.
In extremis, what will happen is that all the losses will be foisted onto the Federal Reserve. The Fed holds something on the order of $1.6 trillion in debt issued by the Treasury of the United States. By having the Federal Reserve purchase blocks of Treasury debt and defaulting on these non-investor-held securities, the United States can postpone a default against real investors essentially forever.
John S. Chamberlain lives in Natick, Massachusetts, and works as a software engineer specializing in earth science and artificial intelligence. He has an A.B. in politics from Princeton University and an M.S. in computer science from Northeastern University. Send him mail. See John S. Chamberlain's article archives.
You can subscribe to future articles by John S. Chamberlain via this RSS feed.
Tuesday, July 12, 2011
A.M. Best Affirms Mutual Trust's Rating as A- (Excellent)
One of the Company's that I use for our Privatized Banking Clients is Mutual Trust Life, part of the Mutual Trust Financial Group. In the company newsletter to agents, the following quote was printed. I have copied it to my blog so that my clients can see the continued progress and successes of MTL!
"We are pleased to announce that A.M. Best, the largest and longest-established credit rating organization serving the financial services industry, has affirmed—effective June 14, 2011—Mutual Trust Financial Group's rating as A- (Excellent), with a stable outlook. A rating of A- is assigned to companies that have, in A.M. Best's opinion, an excellent ability to meet their ongoing obligations to policyholders"
TAre you saving for retirement? Are your retirement plans performing well? Are your retirement saving plans tied to the market? With Privatized Banking, you control your money. There is guaranteed no loss of principal and your funds are accessible whenever you need them! To know more about privatized banking, watch our Online seminar
"We are pleased to announce that A.M. Best, the largest and longest-established credit rating organization serving the financial services industry, has affirmed—effective June 14, 2011—Mutual Trust Financial Group's rating as A- (Excellent), with a stable outlook. A rating of A- is assigned to companies that have, in A.M. Best's opinion, an excellent ability to meet their ongoing obligations to policyholders"
TAre you saving for retirement? Are your retirement plans performing well? Are your retirement saving plans tied to the market? With Privatized Banking, you control your money. There is guaranteed no loss of principal and your funds are accessible whenever you need them! To know more about privatized banking, watch our Online seminar
Subscribe to:
Comments (Atom)