Can "American Dream" Save Your Retirement and Tax System

How can it be solved? By using a Traditional IRA, a SEP-IRA, and some other tax-advantaged accounts, Billy could actually shield a big chunk of his income from taxes and ensure those funds are able to grow tax-free for a long, long time.

One of the major Presidential candidates commented that there are really two Americas, separated by wealth and opportunity. In past generations, this expanse could be crossed thanks to bridges established in society (upward mobility, in economic terms.) That is, if you really wanted it, you could build a life for you and your family, moving into the comfortable upper middle class lifestyle with a Mercedes in the garage and a good income. This belief is so embedded in the fabric of our society that it has been dubbed, “The American Dream.” Collectively, we as a people all strive for that stability and prosperity.

It has been lamented that these bridges are being destroyed, locking people into the demographic group into which they were born. It could be argued that nearly all of this has been the result of shifting responsibility for individual security from the corporation and government to the individual. Those who have knowledge of the financial markets are bound to prosper in this system. (Personally, I would thrive under a privatized social security system because of my understanding of Wall Street. Yet, a vast majority of Americans are likely to get swept up into a hot stock or fear-based selling at least once in their life and that’s all it takes to wipeout your nest egg.) Instead of the company or government providing pensions, health care, and social security, those tasks have fallen on the worker. If history has proven any example, most are unable to make intelligent financial decisions and, if left to their own devices, would starve, all the while blaming the system. Perfect case in point from my own family: I once had a very close relative work for a large company, collecting blocks of stock throughout his career. Upon retirement, he sold his entire position to buy new living room furniture and pay off debt. A decade later, those shares would have been worth more than $2,000,000. Yet, who gets the blame? Ask him who is responsible for him working at a local discount retailer trying to make ends meet after staving off bankruptcy and you’ll get a tirade against corporate America, layoffs, and wealthy executives stuffing their own pockets. (For help on how to avoid this fate, read Surviving and Thriving in the New American Retirement System.)

This brings me to the greatest point about the American financial system. Although starting out can be rough (trust me – back during my college days, I was the first to graduate from my family and paid my own way), if you live long enough and have basic insurance protection against health and property catastrophes, in the end, you are likely to end up with what you deserve. In this country, it can truly be said that you are responsible for making your own dreams come true. No one is going to hand them to you. And it’s not going to be easy. But it can be done. If you want it for your own life, here are three investing tips that I think might help you.

1. Buy Cash Generating Assets
When you borrow money, not only do you have to pay it back, but also you must pay “rent” for using it. In financial terms, the cost of “renting” money is known as interest expense. This is devastating when you “rent” money to buy an asset that depreciates – that is, loses value. A perfect example is an automobile. To add insult to injury, you are not just on the hook for the interest cost of your auto loan. In addition, the car loses resale value plus it actually consumes cash in the form of repairs, gasoline, and insurance. There is a reason that most Americans count their biggest non- real estate asset as an automobile; it’s just as much cause as effect.
Instead, imagine you had borrowed money to buy an asset that actually generated, rather than consumed, cash. Perhaps you built a car wash or storage unit in your hometown. Maybe you invested all of your excess money in a diversified group of bank stocks with instructions to reinvest the dividends. Possibly, you or your spouse started an online ecommerce store using your knowledge of a specific industry from your day job. Regardless, instead of eating money, these assets (assuming they are well-run) are likely to spew cash like an oil geyser. You could get used to having checks arrive in your mailbox every month rather than having to send them out to bill collectors. Over time, you use these cash flows to buy more cash generating assets and, before you know it, your net worth is compounding. The emotional stress and worry can disappear. If something were to come up, you know you could simply write a check.

It’s amazing to me how many doctors and lawyers would be unable to support their lifestyle if they were suddenly unable to work. True independence is control over your time and the only way to get that is to have assets that do the heavy lifting for you. If you are self-made (as I am and many of you reading this are likely to be given that most of the wealth in this country is not inherited), the only way to get this capital is to spend far less than you earn and put the money away into tax-advantaged accounts. By the time I was in my early 20’s, my biggest asset wasn’t a car. It was my stock portfolio. As I grew older, it provided the financial foundation that allowed me to start businesses, access capital when it came time for expansion, and support my lifestyle.

2. If You Want to Save Social Security, You Probably Should Favor Amnesty for Illegal Immigrants
Now, before we get into this section, I am not going to get into the political or moral debates about immigration and abortion. Instead, I’m going to point out some economic data that has real implication for your financial future and you can draw your own conclusion (hey – as the Investing for Beginners guide, my job is to provide you with information that could make your life better, not make ethical decrees or enter the fray of this American political machine so you’ll forgive me if I politely dodge these issues and focus on your pocketbook instead.)
The sexual revolution of the 1960’s had an enormous impact on your net worth in terms of whether or not you will be able to collection social security benefits from the United States government. From general estimates, we know that 1 out of every 3 members of the current generation of young people was aborted and we have no way to estimate the number of individuals that weren’t born as a result of the introduction of widespread contraceptive use. Economically, we know that the result was a skewed aging system where the number of retirees for every productive worker is going to skyrocket. That means there won’t be enough money left to fund the current social security obligations. To solve this problem, there are a few options on the table:

Cut benefits
Raise the age of eligibility for benefits
Raise taxes on working-age citizens
Increase the proportion of working-age citizens to retirees
First, no one wants benefits cut. Second, although Roosevelt designed the system to outlive most of the people who hoped to claim benefits, the average retiree probably doesn’t want to put off those checks until they reach their seventies. Third, raising taxes on working-age citizens isn’t likely to succeed. Frankly, if an attempt is made to pass this burden onto younger generations, they will be the one occupying the White House and Congress and, if the situation were to grow dire enough, could very well just axe the whole system. That would be devastating for older individuals who had not planned for their own retirement through building a complete portfolio.

That leads us to item number four. How can we increase the proportion of working-age citizens to retirees? Well, three ways:

Decrease contraceptive use (which would be a disaster for HIV and other disease prevention, raising medical costs and negating the good we intend to cause; plus, it’s not likely to work.)
Ban on-demand abortion. This probably won’t ever happen because the courts have had their say and consistently uphold Roe v. Wade. It’s simply too risky to bank the entire system on the outcome of a political debate that appears to be split evenly down the electorate.
Somehow create a massive influx of able-bodied, working Americans that are, in an ideal world, already grown and employed. Unless we invent some sort of cloning mechanism, the quickest and easiest way to do this is to open the borders.
Now, remember, we aren’t interested in politics here. Our only objective is to look at this from a financial point of view and then you, as an individual and we, as a society, have to weigh the pros and cons and come to some sort of conclusion about where we stand on the issue. But the bottom line is, unless you are an American Indian, all of us came over on a boat and were, at one point, an emigrant. Personally, I wonder if Lou Dobbs ever took a history course; yes, the German, Polish, Irish, Jewish, and Chinese districts existed eighty years ago. But eventually, our modern, consolidated society emerged. As one pundit put it, if you are frightened of immigration, you are betting against the historical ability of the United States to serve as a melting pot of cultures and bring the best of the world to these amber waves of grain.

By raising the population by ten or twenty million people, and getting them into the social security system, it’s possible it could be saved. Should it be done? That’s for you to decide. All I’m saying is that, again, there are no free lunches. Something’s going to have to give and if you want to ensure a socialist retirement system, you’re going to have to bend on one of the other issues.

3. Realize That Our Taxation System is Perverse. You Make More After-Tax Dollars By Sitting on Your Butt Than Working.
Imagine two men – Thomas and Billy – each earn $100,000. Thomas made his income from dividends on his portfolio of common stocks. Billy owns a business outright as an entrepreneur. At the Federal level, Thomas is going to get to keep $85,000 of his income despite sitting by the pool all year. Billy, however, is going to be lucky to end up with $65,000. That’s because he’s responsible for 15.3% in payroll taxes (since he’s self-employed, he has to make the employer’s contribution, as well as his own) plus pay income taxes. Billy’s a hard worker … he spent sixty hours per week building his company, and yet, fewer of his dollars end up in his pocket at the end of the year.

How can this be solved? talk to a well qualified and regarded accountant and tax expert! By using a Traditional IRA, a SEP-IRA, and some other tax-advantaged accounts, Billy could actually shield a big chunk of his income from taxes and ensure those funds are able to grow tax-free for a long, long time. Think about decades of dividends, interest, and capital gains compounding without Uncle Sam getting a bite of the pie. If you are in this situation, spending a couple thousand dollars to work with someone who can build this foundation for your balance sheet is well worth it.

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