The Federal government is poised to make several changes to the rules for the "working man's" investment, the IRA.
One of the changes is to raise the minimum amount required to open an IRA. Currently anyone can open an IRA with an initial deposit of $250. The government wants to make the minimum amount $25,000. That is correct. If the rule goes into effect you can't open an IRA unless you are one of those few that happen to have $25,000 just "laying around". The average middle class wage earner will have to save up for several years, just to get started on their retirement program.
Right now you can open an IRA account with $250 and deduct that and ongoing deposits from your income**. If you have to save up for several years to get enough money together for the initial deposit, you have to pay taxes on that money, and the interest it earns, until you are able to get enough to open an IRA. (no, you don't get "retro" deductibility)
This simply is a scheme to allow the Federal Government to impose more taxes on the lower and middle class.
Some of the other proposed changes will require the company that manages your IRA to provide additional, (and unneeded), services that will add to the cost of the management fees charged to the depositor, (you). This means that your money probably won't grow as fast as before because more of your investment "profits" are going to be eaten up in fees.
It almost looks like the Federal Government is trying to fix it so that more people are dependent on Social Security rather than encouraging them to become financially independent.
I urge you to contact your representatives in Washington, DC and express your displeasure about the proposed changes.
** (Consult your tax professional for deduction rules and tax return preparation assistance.)
Sunday, June 12, 2011
Thursday, June 2, 2011
The True Cost of a Guarantee
Risk is a part of our lives. But understanding risk and knowing how to use is something that few people are willing to learn. Coming next will be a series of posts discussing risk and how most peoples faulty perception of risk can affect your financial health.
The article: The True Cost of a Guarantee talks about one component of risk, the impression that we need to have a guarantee to "protect" us.
The article: The True Cost of a Guarantee talks about one component of risk, the impression that we need to have a guarantee to "protect" us.
Saturday, April 30, 2011
When Does $10,000 equal $9,900 ?
There is a simple piece of information that will continually separate those who are financially healthy and the rest of the people: The effect that “inflation” has on the purchasing power of money. The average American’s failure to learn and accept this principle will guarantee that they will forever be locked out of enjoying the benefits of financial health.
When I speak of inflation, I am not referring to one of the complicated financial models and formulas used by the Federal Government, investment firms, or what is often talked about in the media. The “inflation” that I am talking about is how the value, (purchasing power), of money decreases as time goes by.
Remember when you could buy a full sized candy bar for 10 Cents? How about a loaf of bread for 35 Cents? How about the commercial where a large hamburger chain advertised that you could buy a “burger, fries, and a drink” and get “change back for your dollar”?
So why are candy bar prices now approaching $2.00 and fast food “value meals” are getting into the $4 and $5 range? That is the long term loss of purchasing power caused by Inflation.
If you attempt to measure inflation over short periods of time, (1 – 4 years), it is very hard to predict it’s effect on your money. But measured over a longer period of time, (10 – 20 years), we find it’s effect is essentially constant. Over the last 30 years in America, the purchasing power of your money has been decreasing at a rate of about 3% per year on average.
The reason this is important is if you are trying to save or invest money to use at a future time, (such as retirement), you need to understand how inflation affects your money. If your money is not growing at a rate that is faster than inflation, you are losing purchasing power.
If you retired at age 65 and were living on $50,000 a year income. After 20 years, at age 85, your money would purchase a lifestyle equivalent to about $25,000 a year.
Imagine taking what you earn today, cut it in half, and then trying to live on that reduced amount. This is what is happening to so many Americans now.
I hope you aren’t one of them.
When I speak of inflation, I am not referring to one of the complicated financial models and formulas used by the Federal Government, investment firms, or what is often talked about in the media. The “inflation” that I am talking about is how the value, (purchasing power), of money decreases as time goes by.
Remember when you could buy a full sized candy bar for 10 Cents? How about a loaf of bread for 35 Cents? How about the commercial where a large hamburger chain advertised that you could buy a “burger, fries, and a drink” and get “change back for your dollar”?
So why are candy bar prices now approaching $2.00 and fast food “value meals” are getting into the $4 and $5 range? That is the long term loss of purchasing power caused by Inflation.
If you attempt to measure inflation over short periods of time, (1 – 4 years), it is very hard to predict it’s effect on your money. But measured over a longer period of time, (10 – 20 years), we find it’s effect is essentially constant. Over the last 30 years in America, the purchasing power of your money has been decreasing at a rate of about 3% per year on average.
The reason this is important is if you are trying to save or invest money to use at a future time, (such as retirement), you need to understand how inflation affects your money. If your money is not growing at a rate that is faster than inflation, you are losing purchasing power.
If you retired at age 65 and were living on $50,000 a year income. After 20 years, at age 85, your money would purchase a lifestyle equivalent to about $25,000 a year.
Imagine taking what you earn today, cut it in half, and then trying to live on that reduced amount. This is what is happening to so many Americans now.
I hope you aren’t one of them.
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