401k Education - Improving Financial Quality of Retirement

Compound interest is truly amazing. If you were given $1.00 at birth and were able to double that dollar every year:

• At age 15, you’d have enough money to buy a mid priced-car
• At age 18, you’d be able to buy a home valued at $130,000
• At age 22, you’d be earning $200,000 in interest from your investments if they were invested at 10 percent
• At age 30, you could own a $1 million dollar home in over 500 cities worldwide.
• At just over 43 years of age, you would be able to pay off the national debt in the amount of $5 trillion.
• Just in time for retirement at age 65, you would have amassed a tidy sum of $18,000,000,000,000,000,000. I honestly have no idea what the name is for that large amount of money. Suffice to say that you could give about $72 billion to approximately 250 million people.

Bart was a modest investor and great saver. He invested primarily in mutual funds, but because the best performing funds were invested in tech stocks in 1999, he moved all his mutual funds into tech stocks. By the end of 2001, Bart had lost 60% of his funds and decided never to invest in stocks again.

Johnny could have been a poster child for “Wealth in a decade”, my previous book, which covered how to achieve wealth in a reasonable amount of time. He and his wife lived modestly on his $50,000 per year government retirement pension. What’s more – they were completely debt-free, as they owned their home free and clear since paying off their mortgage. Unfortunately when a bank CD came due, Johnny’s local bank officer suggested they get a mortgage, to increase their tax deductions and increase their income.

In 25 years his quiet neighborhood home appreciated 8 fold. They took a $1 million dollar home equity line of credit on their $1.25 million dollar home in December 2006, and followed the advice of their bank to put the entire proceeds into mortgage sub-prime debentures recommended by the youngest bank investment representative, “These pay almost 1.5 percent more than the 6.6 percent mortgage rate your charged, which should increase your income by $15,000, while creating a large tax deduction!” according to the advisor.

The plan looked impressive on paper. However, by the end of 2007, their $1 million dollar investment portfolio was now worth $379,000. They had lost 62 percent of their investment portfolio, and are still saddled with a $1 million dollar mortgage and the $66,000 in annual payments that go along with it.

Audrey and Gus loved each other and had just celebrated their 40th wedding anniversary. They were high school sweethearts who had met at their junior prom. While with other dates, as they danced, their eyes met. Gus explains with a childish grin. “I just knew Audrey, with her bright brown eyes, was the one.” Three kids and a lifetime of experiences later, we sat down with them.“No one needs insurance until they NEED it. Like when the storm comes and wipes out your home, a freak accident cripples your back, or sickness puts you into a nursing home. Plug up the hole in your financial boat instead of letting it be the key flaw that sinks your ship before it can come in.” - Brett

Gus was scared and Audrey was mad. For years he’d bragged about all the money they saved in long term care health care and life insurance premiums. Now, two weeks ago he was diagnosed with prostate cancer and the treatments were eating away at all their savings. Audrey was afraid of losing her lifetime friend and of living her golden years broke and alone.