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"There's More Risks In Riskless Investments Than You May Think!"Karla Leonard

Thinking “Risk” Just Involves Losing Principle! Here is a big mistake we deal with almost every day. In fact, a client that’s going to be retiring said, “We don’t want to take any ‘risk’ with our retirement funds and stock! We want them to be totally safe and free of ‘risk’!” There’s More Risk In “Riskless” Investments Than You May Think! Let’s discuss what the definition of “risk” is, in the first place? If you look it up in the dictionary, you’ll see that it is defined as “A chance of encountering a loss of harm, a hazard or danger”. Now, you’ll notice it doesn’t say, “loss of principle”. It just is defined as “loss”. This is a major distinction we need to make here. Most retirees think “risk” means that you put your investments somewhere, and the $100,000 you started with is now worth far less than $100,000. And yes, this is one type of risk…and a real one at that! But it is only one type of risk. There are others that are just as scary and that can hurt you just as badly as losing principle! By the way, if I told you that you are actually losing real money in the bank, would you believe me? Would you think I was lying, because CD’s are insured by the FDIC? I guess this is the time to explain what I mean. If you are making 4% interest on a CD, and you are in the 28% tax bracket, your net, after tax, yield is only 2.88%! 4.00% interest earned X 28% tax = 1.12% lost to taxes 2.88% net after tax yield. Now, that would be bad enough, but we cannot forget about our friend, inflation. Yes, they claim inflation has been licked. That was gone in 1992. Why? Because it was hovering around 3.5-4%. In 2008 inflation average was 3.85%. Since 2011 inflation has had a high of 3.19% to Nov. 2015 low of 0.50%. But, did you know that in the early ‘70’s, when president Nixon instituted price controls, inflation was an incredibly high 4%. Isn’t that interesting? That in 1972, 4% inflation was considered so high, that the government tried putting price controls in place. In 1992, when inflation was at the same exact level, 20+ years later, it’s considered insignificant by our friend in the Capitol! How can this be? Could it be that inflation has changed, or is it more likely that the government has changed the way they want us to view and perceive it? Anyway, how does this supposed “not so bad” inflation affect our CD example? (For our example we will use the 3.5% inflation rate.) Losing Money On So-Called “Riskless” Investments Is Very Real! Well, remember in our example that we’re at 2.88% net, after tax yield. Now let’s subtract inflation from this yield, to arrive at your true change in value, adjusted for the loss of purchasing power: 2.88% net, after tax yield less 3.50% inflation (0.62%) True return Those brackets, by the way, mean a negative real rate of return! Yes, that means that you have a loss of value, of $62 for each $10,000 you have invested in CD’s! Now, if I asked you to put money in an investment that was guaranteed to lose $62 for each $10,000 you invested, you’d run away from me faster than a deer from a lion. Yet, if you have CD’s, then you are doing the exact same thing! So, what does a retiree do to get a better return, and avoid the higher taxes on their Social Security and other income? As I said a couple of minutes ago, the real secret is to know what items you can invest in, that are off of the “tax hit list”. Things like CD’s and bonds get special tax treatment. So special, that they cause the maximum taxes to be paid! What you need to do is figure out how much monthly income you need, and then build a plan that uses the tax-favored items! This assures that you get the cash flow you need and avoid wasting money on paying the taxes you don’t need… with assets that have some chance to keep up with our inevitable inflation! See, the risk we’re talking about here is the risk of losing purchasing power! This risk is so profound, yet almost totally ignored by most retirees, that is, until it’s too late! Let me tell you a story about a woman, Grandma Liz. Liz was a very frugal woman. When she retired at age 65, she had a Social Security income of $400 a month, plus a pension from her late husband, that paid her $205 a month. And, Liz had $12,000 in the bank. Now, in 1956, this total of $605 a month income, plus $12,000 in savings was BIG MONEY! Liz’s mortgage payment was $81 a month. And with her car payment of $45 a month, and her other necessities, Liz was living on EASY STREET! Let’s move ahead to 1966. Now, Liz had sold her home, and pocketed $65,000 from the sale, which was all shielded from income tax because of the special once in a lifetime capital gains tax exclusion. (She sold the home because it was too much for her to keep up, at age 75.) She had that money, plus most of the $12,000 she started retirement with. But her expenses had increased, especially her rent. She was now paying $150 a month in rent, and most of her other expenses had gone up as well due to inflation. She Ended Up Having To Depend On Her Grandchildren To Take Care Of Her For The Rest Of Her Life. Over the next several years, she went through a lot of her nest egg, by helping out her kids and grandkids, paying for down payments, college expenses, and so on. Now, it’s 1982, and Liz is broke. Her rent is $657 a month. Her medical expenses that are not covered by Medicare and insurance are over $200 a month. Her food, clothing, etc. is way up, and she has long since stopped helping the younger folks, because her savings are gone. If she didn’t have so many grandchildren that she had helped, now pitching in to help her, she would have ended up on welfare. Liz didn’t understand how powerful a risk the loss of purchasing power provides. Believe me, this kind of story can break your heart. The only way to assure you won’t run out of money is to have a plan that both meets your income needs, and provides the opportunity to keep up with inflation. Now, no one is suggesting you not keep some money in CD’s or other guaranteed programs, because that would be foolish. But, on the same token, having too much in these type of investments can assure that you have a high risk of running out of money! No one wants to outlive their money. Misunderstanding the risk of the loss of purchasing power is a mistake you do not want to make! 0 Comments to "There's More Risks In Riskless Investments Than You May Think!":

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