Conference nyoss1::market_investing

    On a strictly contrarian basis, I vote these guys are "visionary".
    
    Witness the cavalier fashion in which equity-weighted 401(k)'s
    are touted as the "can't-go-wrong" retirement vehicle of choice
    by practically everybody in the business. If I remember right,
    real estate limited partnerships enjoyed a similar status
    a few years back. Not only have most of the latter done poorly 
    on a pre-tax basis, I think the Government added insult to injury 
    by jumping in and blowing away most of the related tax benefits.
    
    The total Federal debt relative to GNP, and the debt service
    relative to annual tax revenues, continue to grow to historically
    high levels. Given this politically sticky situation, it is 
    highly unlikely that constant tinkering with the tax code 
    by the Government will end anytime soon. In my opinion, this makes
    any sort of retirement planning around tax-advantaged vehicles
    a chancy proposition, at best.
    
    Ganesh.  
                                    

    Re: .1
    
    Amen!
    
    So-called "tax deferred" investments are an invitation to confiscation
    via the politics of envy.  ("You don't need it until 2020, -WE-THE-PEOPLE-
    need it today, so here's a bond in exchange for your retirement money".)
    
      John

This is quite a significant question when trying to evaluate someone's
advice. If he gets any commission as a result of his 'planning' efforts,
then he may more properly be called a salesman, not a financial planner. And
salesman can be very creative...

Follow this - times are tough, not much loose money laying around, many
people have dug into the foxholes, doing back-to-basics kind of things like
savings and tax deferred retirement planning. So how can this guy loosen up
some money so he can sell you something? By SPECULATING (he really has no
way of knowing, unless his crystal ball works better than mine) about what
future tax law may look like. If you buy the line that your current 401K
contributions are 'not smart' based on supposed future tax law, then this
guy has just found up to ** 10% ** of your income that he can 'help you
invest more profitably'. Slick, but self serving.

On the other hand, he may be fee-only and have some good ideas that can put
you 'ahead of the crowd'. Truly rare...

So, I recommend you study the subject yourself, and draw your own
conclusions. After that, if this guy's programs are consistent with what
you believe to be best, maybe give him a PORTION of your investable funds,
and see what happens.

Good luck!

    Let's do a simple cauculation here...
    
    Let's say that if you invest in stocks, you can get an average of
    12%/year and if you invest in tax-free vehicles, you get an average of
    6%/year. Then, to get a rough (very rough) calculation using the rule
    of 72 shows that the stock portfolio will double your money in 6 years
    and the tax-free portfolio will double your money in 12 years. Do you
    think our tax will double in 12 years? That means that if your tax rate
    is 30% today, it will be at 60% 12 years from now. Even if it does,
    you'll only break even at the end. Unless it goes beyond the 60% tax
    rate 12 years from now, you'll be gaining ground by paying your tax
    now.
    
    Mike

re:.4

You forgot that you are being taxed on the 12% so it is not a 12% return
but only an 9% return (assume 25% marginal tax rate for ease of figures.)
Now on top of that you have to pay taxes on the money if you collect it
as income rather than investing it in a 401K, so the amount of money that
you start with is reduced by another 30% (25% fed, 5% state).  So you 
start out with 70% of the money at 9% return on investment so on a yearly
basis the returns are:

Deferred:	X*.06 = .06X
Taxed:		(X*.7)*.09 = 0.63X

What the above says to me is that it will take 10 years to get back what
was lost to taxes in the first year!

So the question becomes, how long do you need to catch up to the tax-
deferred plan?  And can you really achieve 50% more on your investments
outside of the tax-deferred plan compared with inside for the same amount 
of risk?

Lee G.

P.S. I don't disagree with John H. that the government might try to get
at the tax-deferred money which is a different risk.

    Re .4
    
    Ah, but they don't really have to hike the "earned income" rates
    on wages to 60% - that would probably be an open invitation 
    to tax revolt, an event I would thoroughly enjoy participating in ;-)
    
    When you retire, they could simply call the money stashed in your
    tax-deferred vehicles "unearned income" and tax it at a 
    "special" rate when you want to withdraw and spend it. This 
    would very nicely protect the majority of the peasants who are 
    sensible enough not to stash away anything - the ones most likely 
    to organize a tea party - and royally scr*w the rest.
    
    Ganesh.

RE:.4 by SOLVIT::CHEN

> Let's say that if you invest in stocks, you can get an average of
> 12%/year and if you invest in tax-free vehicles, you get an average of
> 6%/year. Then, to get a rough (very rough) calculation using the rule
> of 72 shows that the stock portfolio will double your money in 6 years
> and the tax-free portfolio will double your money in 12 years. 

I think your calculation is too simple.  The answer is close,  but...

		401K			Taxed current
Start		1000			1000
(tax @ 28%)	1000			720
12 years	3896			1449
(Tax at 62.8%)	1449			1449

Tax rate needs to more than double to make a tax-free investment at 6% better
than a 401K at 12%.


Phil

     Now wait a minute.  In a 401K, you earn (more or less) the same rate
     of return as in a taxable account--you don't need tax free bonds on
     anything.  (This assumes reasonable investment options in 401K).
     
     The 6% vs. 12% is valid if you are talking about tax-free
     investments (i.e. taxed income put in tax-free bonds, etc.).  This
     has never sounded like a good deal to me, but shouldn't be awful
     either.
     
     Now I'm sure that if you invest tax-DEFERRED at 6% vs. taxable at
     12%, the taxable would win out big-time.  Could you guys do your
     calculations on one example or the other, but not both?
     
     Also don't forget that you will tend to be in a lower tax-bracket
     when you retire, since you only withdraw what you need and your home
     should be paid off by then.
     
                                       lance

  Your "Financial Planner" is trying to create a source of fear that will
motivate you to follow his advise.  It is in his best interest to get you to
take your current 401K investments and put them into his funds instead. The 
only thing he can do is convince you that tax rates will have to double to
pay for the government spending, so you are better off by not putting money
into a 401k.  This guy is a SALESMAN, remember that.   

   For a different perpective. Look at 28% (or 33%) of the money you put into
a tax defered account as a 0% loan to be paid back in 20 or 30 years.  Would
you turn down a deal like that even if you were told you had to pay higher 
taxes on your gains?

Brian Hibbert

P.S.  There is a risk that future tax laws and rates will change, but there
is no way of knowing how they will change.  We might even eliminate income
taxes and replace them with value added (sales) taxes.  If this occurs then you
will be MUCH better off with your current dollars being tax defered.

    re: .9	Both points are well made.
    
    I have to believe, though, that were income taxes to be replaced by sales
    or VAT type taxes -- we would see "tax-deferred" savings taxed as a lump.
    The gummint would not let such a massive loophole be created.
    
      John

    
    RE: regarding government taking 401Ks: 
    
    The real fear should be runaway inflation, not confiscation. 
    
    Runaway inflation is confiscation, but in a much more insidious and
    subtle way. 

    Re .11
    
    If you're truly worried about a hyperinflationary scenario in the US 
    (and I wouldn't blame you) you could always get some gold stocks 
    and German marks while they're still going relatively cheap.
     
    Ganesh.

RE:.8 by AUSTIN::RIST "SmallTalk--not small, doesn't talk"

> Now wait a minute.  In a 401K, you earn (more or less) the same rate
> of return as in a taxable account--you don't need tax free bonds on
> anything.  (This assumes reasonable investment options in 401K).

Sure.  12 years investing at 9% return.


			401K		Taxable		
Start			1000		1000
Taxes at 28%				720
12 years 9%		2813
12y @9% taxed at 28%			1529

Hmm.. Tax rate would need to go to 54% after 12 years.  Notice at a 54% tax
rate that a loan from your 401K might give you more cash than a payout from 
your 401K!


> Now I'm sure that if you invest tax-DEFERRED at 6% vs. taxable at 12%,  the 
> taxable would win out big-time. 

If the tax rate is greater than 50%,  the tax-deferred wins.


Phil

	Another scenario : Social Security phaseout for 'high-income'
	folks.  

	'A' has a 401k, 'B' has after-tax investments.  A's 401k payouts 
	are income and put him over the limit, so he gets no SS.
	B has paid his taxes and is free to supplement his income
	from savings while keeping official income low enough to
	keep receiving SS.

	Not straightforward to calculate, but the loss of SS would
	significantly lower the effective return of the tax-deferred 
	option.  After all, what counts is the annual payout.


	Then, again, anything can happen. 	

	Keep it in the mattress where they can't find it.  :^) 

    re: .4, .7 & others
    
    I did say it was a "very rough" calculation, didn't I?!!!!   :-)
    
    But to be serious, I think we are all(most) in agreement here that the
    tax-deffered investment is the better way to go. Even though, some
    people may try to make a point and argue that in certain cases, the
    tax-free investment is better. But, look at the terms and conditions
    one has to meet to beat the tax-deffered returns, you really have to 
    ask yourself: what is the real chance???
    
    As far as the government may try to tackle on the "unearned money"
    thing. Let's get real. If they want to screw us. They can figure out a
    million ways to do it. (They are very good at it and they are doing a
    'good' job so far.) It's up to us, the voters to look out for our own
    interest and to protect. I don't want to turn this topic into a
    political discussion here. What I am saying is that you have to plan 
    your investment strategy based on today's laws and conditions. You plan
    for the future as much as you can. Then, you keep a close eye on the 
    changes of the environment and modify your investment accordingly.
    Trying to predict what the world's going to be like 30 years from now,
    in my opinion, is just not that practicle. And it's even foolish trying
    to plan one's investment strategy TODAY base on some wild speculation of 
    the far future. 
    
    Mike

    There is a way out if tax rates do climb.
    
    Get a job overseas, you can exclude $70,000 plus some housing costs
    from income.  Make sure it is somewhere like Saudi since expatriates
    are not taxed there.
    
    Assuming a family of four with exemptions and the standard deduction
    you can have approximately $14,600 in US income before you have to pay
    tax.
    
    Withdraw $14,600 from your IRA, pay the 10% penalty and no taxes.  10%
    is not a bad tax rate considering you probably saved around 33% in the
    first place.

>    As far as the government may try to tackle on the "unearned money"
>    thing. Let's get real. If they want to screw us. They can figure out a
>    million ways to do it. (They are very good at it ...
    
    I have an automobile alarm.  A thief can still steal my car, but is more
    likely to go after another car, one without an alarm.  As long as there
    are billions in "untaxed excess income", including Mike Chen's retirement
    money, the government isn't going to waste a lot of time going after 
    Mike Chen's post-tax savings.  The point isn't that you CAN get screwed, 
    it's who is Most Likely.  Your choice.
    
>    						And it's even foolish trying
>    to plan one's investment strategy TODAY base on some wild speculation of 
>    the far future. 
    
    Agreed.  Better to go with what you know to be certain.  One thing that is
    certain is that the government will soon soak up all the available capital
    and then will have to turn to thievery to meet its obligations.  This is
    not a political comment (I -have- been restraining myself), it is purely
    an economic one.  And when confiscation occurs, it will be sudden and
    swift, with no opportunity to "prepare" by moving your capital out of reach.
    
      John

re: .17

>    As long as there
>    are billions in "untaxed excess income", including Mike Chen's retirement
>    money, the government isn't going to waste a lot of time going after 
>    Mike Chen's post-tax savings.  The point isn't that you CAN get screwed, 
>    it's who is Most Likely.  Your choice.

To answer you last question, people who are not politically active and have no 
political power are the ones most likely to be the "chosen ones". Haven't we 
seen good examples with the American 'middle calss'? Now, that's been said, 
the government is most likely to pick on the politlcally weak ones and the 
ones they can easily control. If, most of the people in this country have some 
kind of tax-deffered money invested and the government tries to squeeze them 
to their last drop of blood. Then, I think it's time for (and there will be) 
another "Tea Party". 
    
>    Agreed.  Better to go with what you know to be certain.  One thing that is
>    certain is that the government will soon soak up all the available capital
>    and then will have to turn to thievery to meet its obligations.  This is
>    not a political comment (I -have- been restraining myself), it is purely
>    an economic one.  And when confiscation occurs, it will be sudden and
>    swift, with no opportunity to "prepare" by moving your capital out of reach.

I agree with you on this. But, I'll refrain myself from answering this one. 
'cause I don't want my self sound like a politician (now that'd be awful, 
wouldn't it?  :-)) and we should keep this topic to "investing".

     .14>Another scenario : Social Security phaseout for 'high-income'
     .14>folks. 
    
    This one seems pretty likely, since SS is already phased out for folks
    that work too much after retirement.
    
    When you think about it, SS payments are pretty poor considering how
    much you pay in over the years. Everyone could retire extremely wealthy
    if they could put that 15% into a 401K or IRA rather than SS. Instead,
    we'll get a measly stipend every month, as long as we don't make too
    much money elsewhere. :-(
    
    Harry
    

    RE:19
        -< Social Security is one of the biggest scams on the planet! >-

    Harry, you couldn't be closer to the truth.  It is one of the classic
    pyramid schemes that has being fostered on the country.  I know that my
    parents brought the idea that SS would be their retirement even though they
    would pay in a small amount compared to what they got out.  What everyone
    chose to overlook was that more and more people are needed to pay for this
    scheme.  Then on top of that, any extra money that does go into the fund
    over what is paid out is used to reduce the federal budget deficiency.

    What is going to happen when the baby-boomers start to retire and start to
    look for SS?  I suspect that the government will be in a world of trouble
    which really means that you and I are in trouble because there will be no
    way to pay off the debt.  I believe that there is only one way to solve the
    problem; stop SS vesting for anyone below age X (pick a number), allow
    everyone to keep the 7+% for themselves, continue to have companies fund
    SS with their 7+%, and STOP THE SCAM NOW.

    If the above isn't done, then I see John H.'s view of the future coming
    true.  Politicians are very good at spending and taxing while telling the
    voters that they will benefit from the spending but won't be one of the
    ones taxed.  Just look at the current proposals being put forth by the
    current crop of Presidential candidates.  They talk about the middle class
    benefiting while only the "rich" being taxed.  Well if you and your spouse
    make more than about $75K (not a large amount for two professional people),
    you are pushing the top of the middle class.  And not too long in the
    future, you will be in the "rich" group because inflation will push you
    there!

    Lee G.

Is there a limit as to how much tax deferred funds you can put 
in a 401-k Account annually??

RE. -1:

If you're asking what the maximum 1992 deduction allowance permitted by the IRS 
is: $8,724, up from $8,475 in 1991.

Brian

Reading through the replies, it seems that the single disadvantage identified 
is:

The government, at some future time, may change the rules, effectively 
eliminating any advantage to (and possibly penalizing) a tax-deferred 
investment.

The underlying concept (government changing the rules) can be applied 
to any investment (dollars, shares of stock, real estate, etc.). For example,
dollars can be devalued by inflation.

Therefore, this disadvantage is a property of all investments.

Now, we can all argue that certain changes are more likely than others, but 
those assertions would be based on our opinions, not fact.

All investments carry a risk of governmental theft.

    "There are still more onerous and stupid tax ideas to come out of
    Washington.  One new appointee to the Clinton Treasury Department,
    Ms. Munnell, who has been called `Clinton's #2 economic advisor,' has
    the idea that a 15% tax on all past and future IRA and pension plan
    contributions is warranted.  Rationale: This is money that has not been
    taxed previously.

    "There is about $3.1 trillion in corporate pension plans at the moment.
    A 15% tax would be over $450 billion in tax revenues.  It would reduce
    pension benefits by the same amount."

    	Bert Dohmen, _Wellington Letter_, May 1993

    Anybody want to guess what the effect would be of pension funds selling
    15% of their assets to pay sudden new taxes?
    
    At the moment this is just one woman's reported opinion, not even a 
    trial balloon.  But keep your eyes peeled -- Clinton & Co. are casting
    about for any and all readily appropriated capital...
    
      John

    The way I see it,the more odious Clinton's fiscal policy the better.
    This will insure his defeat in '96 and make the Republicans that much
    more popular when they repeal all of his mistakes.
    
    Ken