Financial freedom: The American dream

By Paul Cross

Annuity National Brokerage Co.


In the 1700s, Samuel Johnson wrote, "The first years of man must make provision for the last." Today, his words ring loud and clear, as our clients must stay a step ahead in order to retain their retirement savings.

Financial freedom and money management begins with managing tax dollars -- and every penny counts. How many pennies are in a million bucks? One hundred-million pennies, that's how many. And, if your client comes up a penny short, he or she doesn't have a million bucks.

I.O.U.S.A

So, how many pennies must you earn to have 100,000,000 pennies after tax? The answer is about 167,000,000. And, considering that we pay federal and state income tax, Social Security tax, and Medicare tax, this will soon tally up to a required figure of 200,000,000 pennies -- all in order to earn 100,000,000 pennies after-tax. But it doesn't stop there: We also pay sales tax, real estate tax and estate tax on the figure that remains.

Does your client own his home, or does the government? If he owns his home, when will he have paid off his taxes? Before you answer, remember: Some people in retirement are now paying more in real estate tax than they paid in mortgage payments.

With this in mind, it seems the quickest way to wealth accumulation is to enroll in qualified retirement plans, such as IRAs, 401(k)s, and 403(b)s. In these plans, captured tax dollars are compounded and grow tax-deferred income. With this strategy, some people can generate $1 million -- pure and simple.

However, 50 percent of that $1 million is eaten away by tax dollars and growth on the tax dollars -- at least, that was the case until the economy went bust. As a result, many American lost their jobs and some families lost their home. And, these people also lost 50 percent of their hard-earned qualified retirement plans -- and now our individual I.O.U.S.A., tallies up to $37,118. Now, multiply that times the number of family members and a family of four now owes the government $148,472.

The government is spending money like there is no tomorrow and the New York national deficit time clock chimes no more... it busted when it ran out of numerical digits. As of June 15, 2009, the National Deficit was $11,384,852,540.52, and it's growing by billions of dollars a day. To make matters worse, tax rates are going to go through the roof.

The market crash of 2000 and 2001 left many people holding empty moneybags. Dollar-cost averaging throughout the past 10 years has turned into dollar-loss averaging. Our 401(k)s just recovered market losses from the years 2000 and 2001 last year. Then, the market tanked again and robbed us of 40 percent to 50 percent of our hard earned retirement plans. Sad, but true: Many families have lost both jobs, there home is in foreclosure, their $250,000 401(k) is now worth only $150,000 and their family of four owes the U.S. $148,472. With this in mind, what is your client to do now?

The long road to recovery

Now is the time to recognize salvage value and focus on recovery. As producers, we must plan for the implementation of TIPRA 408A and plan for retirement income for life that is income-tax-free.

The Tax Increase Prevention Reconciliation Act (TIPRA) is more than 800 pages and was signed into law in 2006 (effective in 2010). It can save your client's IRAs and 401(k)s from runaway taxation. In a nutshell, your client can make Roth IRA conversions in January 2010 and spread out the income tax over three years. At the same time, your client will earn tax-free interest and develop tax-free income for life -- but it doesn't end there. With proper beneficiary designations, your clients' family heirs can also enjoy tax-free income.

With TIPRA 408A, your client can elect Roth IRA conversions, spread the tax throughout three years (with a premium bonus annuity with a lifetime income benefit rider that can increase your income values by 18 percent to 20 percent in the first year), and more than double the tax-free income amount in eight years. A word of caution: All annuities are not created equal. It's time to give up on make-believe gains, especially if you are older than age 55. To survive this busted economy, we must stop losing money to the IRS and Wall Street.

Did you know that many seniors are holding $19 billion in expired U.S. government bonds? Why would people hold U.S. government bonds that earn zilch? Very simply, because they were purchased years ago and the government never sends annual reports or statements. And, when the bonds mature and/or expire, the government notifies no one -- not even the heirs.

Remember: Be it at the race track, in the casino, or on Wall Street, gamble with no more than you can afford to lose today.

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