Why Your IRA and 401(K) Are Not Conservative Investments
Monday, November 14, 2011
Let's suppose you wanted to borrow $100,000.
As your lender hands you the check, you ask them exactly when you'll be required to pay this loan back. They respond, "Don't worry, I'll tell you when it's time to pay it back."
You enquire further about the interest rate you'll be paying and the response is much the same, "Don't worry, I'll tell you the interest rate I'm charging when it's time to start paying the money back."
Under these conditions, how safe would you feel in endorsing that check? Most people would have alarm bells going off in all directions. Yet this is essentially what most people are doing when they place their money in an IRA or 401(k).
They're putting money into those accounts and it's entirely up to the government through Congress or the IRS to tell you when it's okay to pull that money out and how much in taxes you'll be paying on it. This is because Congress can change the tax laws to reflect the government's need for your tax revenue.
In the next year or so, taxes will likely be going up 5-8% if the Bush tax cuts are allowed to expire at the end of 2012. In the next decade, the Congressional Budget Office (CBO) is predicting that taxes could go up to 50-60%.
This means that an IRA or 401(k) is not the best place to put your money. Higher taxes will whittle your nest egg down faster than you can imagine once you start to withdraw your money.
Students of the Missed Fortune strategies know that better alternatives exist.
You're much better off to put your serious money into cash value insurance contracts that accumulate tax-free under rules that have been grandfathered into the IRS code for decades. This is where you can use the strategy of Indexing where you lock into your gains every year and it resets.
Here's what that means: If you were to invest $1,000 per month and you felt that the economy was going to have a rough year, you could say, "I want to lock this in at 5% this year because I don't want to lose."
On the other hand, if you said, "I think the economy is going to go up more than 5%", and you linked your money to the S&P 500, your return could be even higher. If that particular index did 5%, you'd get 5%. If it did 10% you'd get 10%, etc. The better the economy does the better you'd do, up to a certain cap of say 15%.
Now if the economy did much worse than you expected, you don't lose money because you locked in at that 5% rate and you're protected even if you did guess wrong.
The bottom line is that with this Missed Fortune strategy, you are credited, up to a cap of 15-16%, whatever the Index your money is linked to achieves. But the best part is that if the economy or Index goes down, you don't lose money.
Labels: Conservative, Investments
