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Financial Opinion and Insights

Income Without Growth Equals Eventual Poverty

Jim Lorenzen, CFP®, AIF®

Jim Lorenzen, CFP®, AIF®

Don’t get panicky; but, you should be concerned. 

If you have Bill Gates’ money, you probably don’t need to worry about growth; but, most of the rest of us do.  The reason is simple:  Inflation and taxes can take a huge toll on purchasing power.

Last night at dinner,  I was asked about my first car and how much gasoline cost in those days.  Well, it was a little hatch-back with a ten-gallon tank, and gas was 35-cents a gallon.

“What?  You could fill your tank for $3.50?”

Yes, Virginia.  I remember when Coca-Cola was 5-cents – I think Grant was President, I forget.

But, you don’t have to go back that far.  When Reagan was president, a first-class postage stamp was 8-cents!  The lesson is simple and as unchanging as a politician’s desire to get reelected:  Every year everything will cost a little more than it did the year before because our money is worth less and therefore purchases less.

Wealth cannot be measured by how many pictures of presidents we have in our wallets; but by what those pictures of presidents will buy.

I remember when $2,000 a month was a good income; now it’s poverty level.  But real growth – the kind that’s achieved after the effects of both inflation and taxes – isn’t easy.

The sales pitches are everywhere, too.  Take the case of an executive who put more than $2.5 million into a tax-deferred annuity with a five-year contract!  This wasn’t some idiot; this was an executive making more than $600,000 annually who bought the annuity based on the insurance company’s sales pitch that he could invest in it like it was a CD.  He anticipated making a 2.8% annual tax-deferred return – more than a bank pays, right?

Not so fast.  Taking the proceeds at the end would have exposed him to high taxes – he was already in a high tax bracket – resulting in an after-tax net gain of 1.4%!  

That was about what he would have earned in a CD and, if you’ve been following inflation lately – you can do it at the grocery store and gas pump – you’ll notice he would have lost purchasing power on the money as well.  In other words, it was a sure loser.

What would have been better?   In my opinion,  sitting down with a fee-only Certified Financial Planner® professional,  and working through a plan instead of a sales pitch.

Jim

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Jim Lorenzen is a Certified Financial Planner® and an Accredited Investment Fiduciary® in his 20th year of private practice as Founding Principal of The Independent Financial Group, a fee-only registered investment advisor with clients located in New York, Florida, and California.   IFG provides investment and fiduciary consulting to retirement plan sponsors and selected individual investors. Plan sponsors can sign-up for Retirement Plan Insights here.  IFG does not sell products, earn commissions, or accept any third-party compensation or incentives of any description.  Nothing contained in this material is intended to constitute legal, tax, securities, or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader.  The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.

Written by Jim Lorenzen, CFP®, AIF®

April 17, 2012 at 8:00 am