Friday, July 24, 2020

How to deal with the bankruptcy stigma


Is giving your 401k money to a hedge fund/private placement right for you?
Trump has provided wealthy money managers a great new year present. With access to our $5.6 trillions in 401k money, the super rich will earn 2-4% commission/fees. They also pay less tax since they invented the offshore tax haven and contribute nothing to our way of life. They take their money OUT of this country. For us, this ‘alternative’ wealth option earns less for us. Over time their fees rob us of up to 63% total accumulation due to the compounding effect. Some pension funds with better fee deals than we can make have already dropped these investment options after losing more than a simple index fund. The SEC has already issued a warning about these investment managers. So why do some wealthy people buy ‘alts’ as they are called. Some say they are great for diversification and high returns. However, scientists who have studied their history say they are a poor investment choice even for the super wealthy. Warren Buffett beat the returns of 6 of these funds with his recommendation for everyone.

How to deal with the bankruptcy stigma
With 50 million Americans out of work and the end of unemployment help and eviction hiatus, many working people will need to consider this strategy for a “fresh start.” Most of us consider filing for bankruptcy an admission of failure. However, the way some have gotten through it (Recession 2007-8) was to accept the reality and move forward with the positive. One client I have was over 60 years of age and had been laid off from 3 firms that closed. Even though he had much quality experience and professional degrees, he could not find anything comparable to his former management positions. He tried sales but found that that would take years to build a customer base for a decent income.
He and his wife were forced to declare bankruptcy in 2010 after trying to live on credit cards and running up debts of $231,000. It cost them a year of anxiety, near divorce and $3,000 in legal fees. Positives: No more creditors calling at all hours, multiple letters, and fear of losing all retirement account assets, cars, home, etc. They did not share the experience with family or friends so that eliminated some feelings of shame and guilt. They were able to keep all their retirement assets, home and cars. The husband started his reduced Social Security benefits. They lived on the wife’s salary. They lived with poor credit scores for 10 years and then they had to work hard to remove it from the records. I was able to help them with advice from my books, but they had to make the tough choices. The husband tried making his own business but after spending $3,000 from credit cards, he gave up. When debt is overwhelming, you must choose the “fresh start” to be able to live your life again.

Investing has been described in many ways it is not
For some folks, it is a game, a casino, a lottery, a gamble. You hear some say they ‘play’ the market, ‘bet’ the ranch, raise their ‘stakes,’ ‘hit the big one,’ make "10-baggers," and all sorts of slang. Some dream of becoming wealthy by picking an unknown stock that blossoms into a perpetual money tree. Most working people fear losing all their money in the stock market so they don’t grow their long-term savings. Others have steadily invested all their lives because their parents were regular savers too. Some people are just lucky: consider those who purchased just 10 shares in Warren Buffett’s company Berkshire Hathaway's stock in 1985. BRK is now the costliest stock in the world, with its current price at $286,899 a share. This is primarily due to CEO Warren Buffett's choice to NOT split the shares as they rise in value. He once said that keeping the share price so high drives away traders looking to make a quick buck. BRK owns many profitable companies like GEICO and stock in others like Coke, American Express, Bank of America, and Apple. Buffett’s advice for investors follows from his experience as owner NOT as a salesperson advisor/broker.

Why the Roth IRA may be the best investment option
Other than a legal offshore tax haven, the Roth IRA/Roth 401k are the best investment account for most people. All your earnings in the account can be spent with no income tax due. Unlike a regular IRA or 401k, you pay tax on just the contributions NOT the earnings. Assuming you are saving for your later spending years, this may provide an extra 25% spending power when you most need it. Later when you can’t work or can’t work harder, this tax-FREE income will lower your tax on Social Security benefits too. The Roth IRA and Roth 401k are relatively new so in my AARP tax volunteer time, I don’t see them very often. When I do, I congratulate that client for thinking ahead. Another fact: Income tax rates are lower now so paying tax on your contributions now can save you a bundle later. For instance, let’s say you invest $250 a month, $3,000 a year in a stock index fund inside a Roth IRA for 33 years ($99,000). Your nest will be worth about $980,000. You can spend every cent of $4,683 a month tax-FREE. Plus your SS benefits are probably not taxed. With a regular IRA or 401k, you pay 22-25% in tax on this income (including 60% of SS benefits). $4,683 minus tax is $3,512 a month or $1,171 a month less. Over the average retirement life, that is $351,000 less in spending.

The stock market recovery reflects the inequality of Two Americas
With 50 million on unemployment and without jobs, how can wealthy Americans continue to support the same 2019 market level? Why are investors so confident? Where did positive 2nd quarter company earnings come from? Wealth inequality. 10% of the richest folks own 70% of all assets. The middle class is shrinking so the top 20% own more assets than the other 80%. Since most of the market assets are owned and traded by the top 20%, it can keep going forever as long as there is confidence that their assets will grow in value. That confidence seems to come from the feeling that the US gov will print more money to bail out any large business. Jamie DimonThis is not a normal recession.”
Our national bank, the Federal Reserve has been buying the stocks and bonds of struggling companies in this crisis. This means we, the taxpayers of a ‘capitalist’ country, are now the owners of these businesses (socialism) without any say in how poorly they are run. Investors have confidence because large companies are too big to fail. In the past if almost every retail firm was closed or severely limited in sales revenue, with millions of workers not working, the economy would be in recession or depression. Almost every store in my neighborhood has been closed or limited in traffic. Almost every family with kids has been home or working from home so we only go out for food. Yet Wall Street booms on concentrated wealth and more national borrowings. How much of American business can we afford to buy? Who will pay off our debts?

Your 401k balance is what?
Where are you compared to others by age, income, gender, industry? Don’t look at the average since one wealthy person with $ millions can demoralize all the rest. That person probably owned a company and added their lifetime profits to their 401k rollover. Not a fair comparison. For instance, the median 401(k) balance is $22,217. But a better indicator of what the majority of Americans have saved for retirement is by age.
Age                              Average 401(k) balance           Median 401(k) balance
Under 25          $4,236                                                 $1,427
25 to 34           $21,970                                               $8,126
35 to 44           $61,238                                               $22,123
45 to 54           $115,497                                             $40,243
55 to 64           $171,623                                             $61,738
65 and up         $192,887                                             $58,035
            However, a 44 year old earning minimum age is probably not going to have $22,123 in their account. You must compare income and gender to take a more realistic measure of your progress. In most cases, adding an additional 2-3% of salary a year will help because of compounding. That is the factor that helps you end up with more money without more contributions. In a stock fund, that can add another 50% to your total. Another 50% can be added by choosing a low-cost stock index fund. Check your fund costs: https://www.finra.org/investors/tools-and-calculators/using-finra-fund-analyzer. Your advisor can’t control the markets. Cost is the only factor you can control after the amount of our contribution. Over time a lower annual cost can add 50% or more.


**********ACCOUNTABILITY**************

Like 1776, this period is a test of democracy—do we really want ‘low-IQMobster?



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