An important distinction.....

I don't believe the only, or best, path to wealth is through earned income,
and investment in the stock market. The government incentives and tax
structures
are completely biased favoring active investors and business owners in the
Warren
Buffet style where his investments are hands-on ownership and management of
real companies and real properties in which he invests. That activity
supports and
finances his lifestyle and personal wealth and defers taxable earned income
... That
is the way to get rich.

Maybe a small investment in a local company or a small strip mall, or just
starting
a small side-line business with some investment seed money etc will be more
rewarding than dealing with a stock broker new at the job because he just
got fired
from Sam's Used Car Lot, or playing big-time speculator with click and buy
over
the internet (All with earned after tax income or restricted IRA or 401k
money which
will eventually be taxed as earned income) while insiders lie, cheat and
steal and the
SEC regulators wait to retire and pick up their new Vice Presidencies on
Wall Street.

The Wall Street stock, bond, and fund pimps would like us to think that
their way is
the only way.


- quote -



======================================= MODERATOR'S COMMENT:
A gentle reminder that all points of view are accepted here. Those who disagree are also entitled to state their views on the issues.

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Tad Borek wrote:

- quote -

Any chance that spreadsheet can make its way onto the internet for other
people to tinker with?

If it is something you use in your business dealings and you can't
really disclose it, I understand.

- --
Michael Loll / michael.loll[at]NO.MORE.SPAM.verizon.net
"Opportunities multiply as they are seized."
Sun Tzu, The Art of War
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"D. Stephen Heersink" <dsh[at]intergate.com> wrote in message
news:400c1191.173238855[at]news.intergate.com...
- quote -

Tad is right. The tax law favors the investor/business owner, in a big way.
The reason many families have two people working is they can't do math, or
they live a lifetyle beyond what they need.

There was a show on TV a few years ago where they showed three couples how
they could enjoy a better lifestyle if one parent stayed home. A year later,
they interviewed the couples again, and all three were much happier with the
one income lifestyle, and in two cases both parents had lost weight as a
result (eating at home, not fast food).

Brent D. Gardner, ChFC
Chartered Financial Consultant
http://members.cox.net/brentdgardner1378/

"Be ever questioning. Ignorance is not bliss. It is oblivion. You don't go
to heaven if you die dumb. Become better informed. Learn from other's
mistakes. You could not live long enough to make them all yourself." - Hyman
George Rickover (1900-86), Admiral, US Navy, advocated development of
nuclear subs & ships

The Chartered Life Underwriter (CLU) and Chartered Financial Consultant
(ChFC), designations owned and exclusively offered by The American College,
signify the highest standards of academic study and professional excellence
in the financial services industry.

- quote -

The real trajedy is that people don't realize it works both ways.

Just as you can slowly amass a considerable sum through the
magical wonders of compounding over time, when you're
*paying* compounded interes, you slowly dig a huge hole
that you can never get out of.

Most people don't think of it this way. They pay 18% (or higher)
on credit card debt, and miss out on, say, a 10% a year investment
opportunity because the funds are servicing the debt. When you net
them together that's a difference of *28%* -- compounded over
the long haul, and makes a *huge* difference in where you end
up 30 years down the road.

Tad Borek borekfm[at]pacbell.net, you wrote:

<< <I> I realize I am in a minority on this one but I think all of those things
are luxuries that should be considered only if the essentials (including
savings) are covered. Especially the car, which is why I mentioned it three
times. An early-in-life new car can literally be the difference between
retiring comfortably, or not. God forbid, two new cars. </I> >
That's a wonderful point and a great example.

. . . . it's all goes back to understanding the power of compounding over time
and being able to use it early in one's life.

It seems what when people are asked whether they'd like to have $1 million in
hand today or $. 01 doubled each day for the next 30 days, they seem to choose
the $1 million and too lazy of mind to understand what they would have if they
had chosen the latter.

D. Stephen Heersink wrote:
- quote -

I see it completely opposite...savings (rather, ownership - by investing
your savings) is strongly incentivized, and working is highly taxed. If
you want to get the best benefits out of the tax code, you own stuff,
and get the heck out of the work force!

Remember everyone is taxed at least 15.3% on _every_ dollar earned at
work, at least up to a certain level (social security/medicare). That's
more than the total tax on dividends and long-term capital gains (and
the latter are only paid when realized). THEN you tack on the income
tax, which will clip as much as another 1/3 of your earnings. Investment
income fares much better really.

It's not just that either. When you sell your home, a great deal of the
gains aren't taxed. When you pass property on to heirs, the gains aren't
taxed, as long as you avoid the estate tax. If you're smart about real
estate investing, your gains aren't taxed, you roll them into another
property. This is absolutely a system favoring saving and investing (so
the lesson is, become an owner, even if in a small way).

and most
- quote -

I hear that, but I think the counter-argument is that our middle class
looks like most other countries' upper class in terms of consumption. So
I don't think the argument that savings is impossible can be made, it's
more likely that savings isn't the chosen alternative. Certain it's not
chosen by anyone who drives a car less than 5 years old (or a
low-mileage car, or lives in a household with more than one car), who
owns a cell phone, who pays for cable/sat TV, who smokes, who purchases
non-essentials using credit. These are all choices, and costly ones.

I realize I am in a minority on this one but I think all of those things
are luxuries that should be considered only if the essentials (including
savings) are covered. Especially the car, which is why I mentioned it
three times. An early-in-life new car can literally be the difference
between retiring comfortably, or not. God forbid, two new cars.

I realize there are people who don't spend money on any of those things,
and who still have trouble making ends meet. But the consumer statistics
for the US show a lot of consumption by the middle class that I consider
completely discretionary. Most of the consumption by the upper class is
discretionary. And once something's discretionary, it means there's the
alternative of saving those dollars. That more people don't do so keeps
the economy going, of course, but nobody is forcing those purchases on
anyone. There's a huge reward to making that choice, and becoming an
owner. This makes perfect sense - in capitalism, you want to be one of
the people with the capital.

As for the lower class I think that's a completely different discussion.
It is truly impossible for a large subgroup to save even a dime and the
issue is privation more than discretionary spending. But I think that
becomes a discussion not of financial planning, but of public policy.
And the moderators are watching!

-Tad

On Thu, 15 Jan 2004 13:09:28 CST, Tad Borek <borekfm[at]pacbell.netwrites the message:

[snip]

- quote -

All good and well, except that our economy discourages savings at
every turn. It taxed savings and dividends (twice mind you), and most
people are lucky if they can get by on two paychecks, with two spouses
working. The diminishment of the middle class and the growth of the
underclass make savings for many people untenable. Not until the
middle class returns to save the surplus of their income minus
expenses can such an easy policy ever come about.


Kind regards,
___________________
D. Stephen Heersink
San Francisco
dshsfca[at]intergate.com

"Tad Borek" <borekfm[at]pacbell.net> wrote in message
news:2zBNb.11373$bk7.7434[at]newssvr27.news.prodigy.com...
- quote -

A little bit of a tangent, but I have to mention this, because I'm always
writing letters to justify larger face amounts on life insurance than some
companies want to issue, based on their arhaic financial underwriting
guidelines.

For example, I routinely submit life insurance applications for 20 times
income covering breadwinners through age 40 (and this doesn't include
business owned insurance, I'm just talking about personal coverage).
Earlier in my career, I used figures like 7-8% withdrawals from capital,
expecting that it might last a long, long time, if not forever. I blame
Peter Lynch and his books, bless him! But, I didn't know what survivors did
with large lump sums, either. Now I know, because I deliver the checks on a
regular basis. The average widow puts the money in savings, sometimes I have
to encourage them to put some in a CD, because plain vanilla savings
accounts don't pay much these days. Some blow it. Some find out how much
their kids love them, too. Loving them for their money, that is. But most
are scared to death of touching the principal, and there's often a powerful
emotional attachment to this legacy. Back in the day, when I was a very
unsophisticated, and not that good at keeping assets under my purview, I had
a widow stolen away by a local broker, who proceeded to trade away her
husband's life insurance death benefits with some poor choices (probably
unloading some bond inventory, as some wirehouses are famous for). She was
back in my office less than a year later, with 20% less money to work with.
I thought she needed a fixed annuity (she was in her 60s, with NO experience
handling large lump sums).

Today, when I'm talking about death benefits with breadwinners, many of whom
haven't saved enough yet, I'm not talking about 7 or 10 times income, like
some of our more famous financial pornographers tout in the books one can
splurge on at Barnes & Noble. Since dead people are going to be dead an
awful long time (I say this with a smile, and a laugh), then we need enough
capital to last at least as long as a survivor might need it. While many
think that in this modern age a survivor is going to go back to work, the
average widow is going to earn less (statistically), assuming she can find
employment (some stay-at-home parents have no work skills -- try minimum
wage at age 60 -- it doesn't go far). I see the written work of financial
planners, some with more letters after their name than I have, who have
plain forgotten about the Social Security blackout period. It's an easy
mistake to make, I suppose, but the results of ignoring it can be traumatic
financially.

So, these days I use current CD rates as a proxy for a risk free investment
of capital to replace earned income of a breadwinner. Clients have joked
about how they are worth more dead that alive. Some quick math on a legal
pad shows that even the high face amounts I recommend aren't overinsuring.
Their Dad owned $10,000, and maybe purchased another $100,000 since the kids
were grown. The idea of purchasing $2,000,000 appears large, in comparison.
But it isn't, really, given the long term average returns of a conservation
of principal investment strategy.

Brent D. Gardner, ChFC
Chartered Financial Consultant
http://members.cox.net/brentdgardner1378/

"Be ever questioning. Ignorance is not bliss. It is oblivion. You don't go
to heaven if you die dumb. Become better informed. Learn from other's
mistakes. You could not live long enough to make them all yourself." - Hyman
George Rickover (1900-86), Admiral, US Navy, advocated development of
nuclear subs & ships

The Chartered Life Underwriter (CLU) and Chartered Financial Consultant
(ChFC), designations owned and exclusively offered by The American College,
signify the highest standards of academic study and professional excellence
in the financial services industry.

That PAW thread is going too far to the right in my reader but I think
Skip raised an interesting point that's worth discussing:

HW "Skip" Weldon wrote:
- quote -

While getting wealthy in absolute terms is out of most people's reach
(by definition) I think just about anyone stands a good chance of
becoming "relatively wealthy." Relative to their own lifestyle, that is.
To me that means they could walk into work on any day, say "sayonara"
and never work another day in their life again, while maintaining
roughly the same standard of living. If that's not wealthy, what is?

There are a lot of unknowns of course in picking the Sayonara Point but
that 20X-25X rule of thumb isn't bad. While it's age-dependent, you
stand a decent chance of outliving your assets if you draw down no more
than 4-5% of them per year, and of course keep them working for you. The
flip side of this is that you need to accumulate 20-25X your income need
to meet those drawdowns. Assuming there are costs associated with
working (taxes) and things you'll stop doing once you retire (like save)
then the 20X number seems reasonable as a savings goal. Meaning, once
you accumulate 20X your current salary, you have a decent chance of
retiring while sustaining your current standard of living...even without
considering Social Security. I think this is a conservative point; a lot
of people would be willing to retire before that.

The neat thing is, this isn't really dependent on your salary (though of
course taxes complicate that). If you're making $25k or $50k or $100k,
and at least scraping by, the same multiple applies. That suggests you
should be able to find a savings rate that anyone can use to figure out
when they might reach the 20X point.

I have a spreadsheet that models this very roughly. And it illustrates
Skip's observation is that for most, getting wealthy isn't realistic
"...because of the relatively small amount of our income that is
invested each year." That's the problem...it has everything to do with
the savings rate.

In the sheet I've assumed a zero-motivated worker whose earnings
increase only at 3% per year. I've done this in part because it's
easier, but also to overcome the objection that only those with
substantial career advancement opportunities stand a chance of getting
wealthy. That's simply not true - though of course it is if you speak in
terms of absolute wealth. Once you think in terms of relative wealth
things look a lot better.

What the illustration shows is that if you make full use of a 401k plan
(15% of income) and save another 5% of your income elsewhere (seems
reasonable) and average 8% on your investments, you hit 20X after 38
years of working - late 50s, early 60s. This would apply generally to
anyone saving 20% of their income, though taxes complicate things of course.

If you put the savings rate at just 10%, you need to work an additional
10 years to reach 20X...ie 50 years of work, ending early 70s. At 5%, it
just ain't gonna happen, at least, not while sustaining your current
lifestyle.

If there's any initial amount invested already, retirement comes sooner
of course...the illustration above just shows the path for someone
starting at ground zero. And to me, that ain't bad...commit to maxing
out your 401k and saving another 5% (or otherwise saving 20%), and
_never even attempt to advance your income beyond basic inflation_, and
there's a good chance you can clock out by your early 60's.

The above illustration requires 8% average annual returns, ideally
weighted towards your later years. If your investments get in the 9%+
returns range, then you'll be done by your early-mid 50's, and if you
put in aggressive numbers of course it's much sooner. At 6% it pushes it
out maybe 8-10 years, so it'd be good to get something in the 8% range.
Where can you find such returns? Suddenly access to the stock market
isn't looking so bad. It may even be the average individual's best
chance at getting wealthy. You just need to save and show a great deal
of patience.

Of course the "best" and fastest path is to earn/save at one income
level, then drop your standard of living substantially at retirement.
And that can really accelerate things. Work in a city where $90k is
common, move somewhere that suits you where a house costs $90k. That's a
separate thread though!

-Tad