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How to Keep More of What You Earn

Too many financial planners, CPAs and life insurance agents are so busy talking about rates of return that can be earned either in mutual funds, stocks, bonds or even life insurance, that they fail to properly inform you that most Americans are not saving enough money to retire on.  In fact, outside a brief spike in the savings rate in the mid-1980’s, savings haven’t even approached the minimal rate of 10% since the 1960’s and 1970’s when Americans saved 10-15% of their income consistently.

With an inflation rate of only 2% annually prices will rise by 50% over 20 years. And with an inflation rate of 3% you will see prices rise by 80% over the same time period.  Stretch that to 25 years and prices will double for you.  The important thing to understand is that either of these two time frames, 20 or 25 years, is well within the life span of a retired American today.

If you can save 10% of your income over a 40 year period of your life, while earning $50,000, which is $18,000 below the national average income level, then you can generate a nice little nest egg for your retirement.  For example, earning merely 6% on that savings would generate over $773,800.  But by the time you pay the taxes on that savings you will lose a large portion, nearly $300,000, to be more exact. And that means that you will have to do better because in 40 years it will take $1,777,712 to purchase what $473,800 ($773,800 – $300,000) will purchase today.

But the kicker is that American’s aren’t earning an average 6%.  Moreover, they aren’t saving 10%. So the actual numbers are much worse.  Imagine if you only save 5% of your income for the next 40 years earning 6%.  You would only have $237,500 and some change by the time you retired.  And of course, inflation will take its toll on that as well, reducing your purchasing power significantly.  In other words, what you can purchase today for $237,500 will cost you $888,619 to purchase 40 years from now.

So while earning a higher rate of return on your dollar is nice, saving more money now is even more important.  Here is the reason why.  $2500 a year (5% of a $50,000 annual income) earning 8%, will only deliver $114,405 in 20 years.  While saving 10%, $5000 a year, earning only 4% will deliver $148,890.  Couple this with the fact that most Americans are not saving anywhere near 10% of their income and if you do, that will give you an even bigger advantage over the average American in the coming years.

But it becomes most significant to save your money in a place that allows you to leverage it and not lose the growth on your savings while you do so.  Imagine if you could earn 4% on the 10% of your income that you have saved.  And on top of that, anytime you needed money to invest or finance something with, you could leverage your savings and not lose any growth on your saving while doing so.

All you would have to make sure of is that when you leveraged against your savings that you pay it back just like any other loan you would take advantage of.  Then, if you can earn a higher rate of return on the investment you make or recover a higher interest rate than what you would pay on that loan against your savings, you come out a big winner.

Here’s an example:

  • You have $150,000 of savings earning 4%
  • You have the opportunity to earn 8% on an $50,000 investment over a 5 year period
  • You borrow money against your savings and pay 5% simple interest for 5 years
  • The investment pays off and you pay off the $50,000 loan you took to make the investment

At this point you need to determine if this investment was profitable.  And so you do the calculations.

  1. If you hadn’t borrowed the money against your savings you would have earned $73,466 just on the 5 year investment.
  2. But in this example you borrowed against your savings to make the investment AND you are still allowed to keep the interest earned on the $150,000 of savings. At 4% that comes to $32,498.
  3. This allows you to keep more of the money you make. $73,466 from the investment itself, $32,498 from interest earned on your savings, minus the interest paid on the interest only loan which amounts to $12,500 PLUS the deduction on the interest you paid on the loan.

Of course, those who follow this blog know that I am talking about Participating Whole Life Insurance.  The only product that allows you, the owner, to create equity.  And because of that equity you can leverage your death benefit and still enjoy the guaranteed growth of the policy along with any dividends the insurance company shares with you, while you get to use the money borrowed against your policy to invest or finance anything that you would like.  Just make sure that the interest you are paying on the loan against your policy is more than offset by the growth on the investment and you will be in safe waters.

Over time, this process allows you to keep more of the money you make.  And as every little bit adds up to mean greater savings for you in your retirement, it makes sense to start your Participating Whole Life Policy sooner than later.  That way you will have more opportunity to leverage more money when opportunities show up over your lifetime. And that means you will end up making more money too.