Saturday, January 8, 2011

Give me a break... and I don’t mean an ‘Alberta Break’


For most of us, saving $10,000 to $20,000 per year is not going to make us rich. It may make us financially comfortable, especially if we start early (before age 30) and we keep it up until 65. Ough! What about freedom 55? That is for insurance company adds! Not real life. So we need a break!
"Yep, I have been playing the lotto for years now. It is my main retirement plan", you may say. Well good luck but the odds are definitely against you. And even if you win, too often the winnings are spent unhappily in a few short years. "Oh, but I also count on the death of dear Aunt Jeremiah!" you may say. Well, many have waited for the death of a rich relative, but statistically the rich are happier, healthier and live longer. Ruining your life, getting an ulcer while trying to outlive dear Auntie may not be that happy an experience.

No I speak of other breaks. Breaks most of us will get in life but are not ready to recognize. I am thinking more along the line of creating 'Multiple Income Streams' as described in a book by Robert Allen. Or... as discussed by Eric Edelman in 'Ordinary People, extraordinary wealth". This is the direction we have to look in. One of the least appreciated and most wasted opportunities mentioned in Eric Edelman's book is the employee savings plan, where your employer ads one or sometimes even 2 dollars to every dollar gross salary you put in. Thus, you combine the 'pay yourself first' principle of David Chilton's Wealthy Barber with an amazing accelerated return on investment. Use this employment benefit to the absolute maximum. Many plans, for good employer reasons, restrict you total annual contribution to 10% of your gross salary. Use it ALL! Then invest it in whatever limited options you have within the plan. If the performance of it is acceptable just let it grow. Otherwise transfer it out into a self-directed investment account ASAP but ensure you don't incur any withdrawal or contribution penalties.

Say your annual salary is $70,000 and you can only save 10% with the rest sorely needed to meet your lifestyle. Put it all in this employer's savings plan. You save $7000 deducted in instalments from your pay check. After a while you will not even notice the deductions in your lifestyle. Within one year, your savings account balloons to $14000 or maybe even $21,000 thanks to your employer's contribution. Your portfolio value will be growing depending on the investment option you choose. This will last as long as you work at your employer – so say you work there for 5 years and the money was invested in a stock market index ETF like XIU or the Dow Jones that accumulates at 11.2% per year similar to Jeremy Siegel's numbers. It would be worth close to $92,000 on a dollar for dollar match plan and an amazing $138,658 if it was a 2 for 1 dollar matched program. This is of course before taxes and inflation but still a very impressive result. And... we haven't talked about the effects of your annual salary increase which when added to your savingsplan contributions could be quite substantial gains!

Would you be working at that same employer for 20 years, then your savings plan would be worth: $971,000 and $1,465,858, respectively. Now that I would call a break! But what about making this not just any break, but a SUPER break? Well, nothing to it! Many such company savings plans are issued by publicly traded companies. You, as an avid investor will know which companies are good stock market performers and which ones are only OK! So be careful where you work. When looking for a job, select a strong public company with good or excellent management and good earnings growth. One of the savings plan's investment options is often to invest in your company's shares (without paying commissions)! Well selected employers may have share value appreciation that easily outperforms the stock market. Since you are employed by this company you are better positioned to know whether management is good or mediocre. Whether management interests are aligned with the company shareholders or whether their interests collide. You know about company moral and many other important details that make you know your employer's public company much better than the typical stock market investment. Consequently you understand the risks and awards of investing in your employer's company very well and you can dedicate a large proportion of your portfolio to this potential outperformer with returns much better than the typical 11.2%. I would think that up to 20 to 30% of your overall net worth could be invested in such a company. So don't let any employer hire you, select the employer you want to work for and get hired there. This way your employment proceeds are truly optimized. Don't get greedy and put all or an excessive amount in your company's shares – remember the lessons of Calgary's Home and Dome who left many such employees penniless. "Bulls and Bears get rewarded, but Pigs get slaughtered".

What would be even a better break than this SUPER break? Of course, a SUPER-SUPER Break – A posting coming soon in a blog near you.

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