Those who are misinformed or ignorant about the facts surrounding fees, interest and taxes will suffer the consequences. People are destroyed for lack of knowledge. This is true in all areas of life but particularly when it comes to finances.
One example of this is the common use of average rates of return by financial planners and advisors. A projected value is not a determined or actual value and not being able to differentiate the immense difference between projected and actual returns has left 90% of Americans dependent on Social Security for their retirement.
Some might say, “Good for Social Security, with 90% of people dependent on Social Security, it must be working like it was intended to work.” But that would be like saying how great it is that wheelchairs are so readily available. Yet the truth is, how wonderful it would be if nobody ever needed a wheelchair.
The unseen part of the financial world is that you are as rich or as poor as compared to someone else. And if everybody is paying fees, interest and taxes, which you can learn to legally avoid, then you will become better off financially than they are. And that is a wonderful thing.
A small fee of just 1% can rob you of hundreds of thousands of dollars over the course of a 40-year investment period. This small fee is what it costs you to hire a financial planner or advisor to project future values for you. But that 1% will come right off the top of your earnings and therefore reduce the compounding effect of whatever the financial planner or advisor has projected.
It is reported that Americans spent $122 billion on credit card interest alone in 2019. This is horrible enough, but when interest that is paid on the mortgage, the car, and other major purchases is calculated, nearly 35 cents of every dollar earned in this country is spent on interest. Then there is the interest lost because money is spent and therefore the interest that could have been earned on that spent money is never able to compound for the person who spent it. The cost of interest, therefore, either lost or paid, is huge! Learning to keep that interest, or a percentage of it, and allowing it to compound upon itself over and over throughout your lifetime is a tremendous value.
Paying taxes is part of life. In fact, taxes and death are two things you can always count on. But paying the least amount in taxes is somethings our Constitutional Republic provides for, yet few people understand or take advantage of these provisions. Deferring taxes today can require more taxes to be owed in the future. Most tax deferred methods of storing money is based on a political idea that the government will collect more money when allowing this taxed deferred money to grow over a number of years than if the IRS required the tax to be paid in full at the time the money was earned.
Assuming 2% of earnings go to pay those taxes, and another 0.5% comes right off the top each year, a portfolio earning a 7% annual rate of return over 40 years which started off with $25,000 and added an additional $10,000 each year, will lose nearly 50% of the growth and end up costing its owner over $1.1 million.
To add insult to injury a 7% average annual rate of return for 40 years is nearly impossible to achieve consistently in today’s economy. J.P Morgan, Black Rock, as well as many others are projecting a mere 5% or less over the next decade at least. With tax rates rising and government expenditures increasing, the amount of taxes which will be owed in the future is unpredictable.
This is why we strongly advocate the purchase of participating whole life insurance which builds cash values and grows tax deferred but can also be accessed tax free in the future as needed. The growth in participating whole life is not huge, but with a fixed fee instead of a percentage-based fee, the participating whole life guaranteed values provide a wonderful tail wind to everything that you do financially.
Then there are the dividends which are paid to participating whole life owners. These too can compound in a tax deferred manner and can be accessed at a future date without taxes or penalties by simply following the IRS determined guidelines.
Cash value in participating whole life insurance builds faster than the equity in your home mortgage, and it does so based upon guaranteed values, not market values. Having those guaranteed values available throughout a lifetime can make all the difference in the world when opportunity knocks, or an emergency arises.
There is no question about what the cost of fees, interest, and taxes can do to destroy wealth accumulation and sustainability. Participating whole life, however, provides a welcome relief from these ornery nuisances.
Dr. Tomas P. McFie
Most Americans depend on Social Security for retirement income. Even when people think they’re saving money, taxes, fees, investment losses and market volatility take most of their money away. Tom McFie is the founder of Life Benefits which helps people keep more of the money they make, so they can have financial peace of mind. His latest book, How to Build Sustainable Wealth, can be purchased here.