Depositphotos 26272927 s 2019In this final prosperity proof, we’re going to cover one of the most misunderstood financial vehicles: qualified plans. Job seekers today are taught to look for companies that offer qualified plans with an employer match–“It’s free money!” Plenty of financial advisors advocate for qualified plans, and plenty of clients funnel as much money as they can into said plans. While qualified plans are not bad, they cannot be considered a savings vehicle, or even the most viable retirement plan, when you consider the facts. When you look at the facts, you must consider: who do these plans benefit most? Where does typical financial planning steer you? And how can Prosperity Economics help?  

Qualified Plans…

…have tax-advantaged contributions. Typical financial planners tell clients to expect to be in a lower tax bracket in the future. This is merely based on the hope of having a LOWER income upon retirement, so taxes are deferred until distribution rather than paying them beforehand. Unfortunately, being in a lower tax bracket is often not the case.  

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Prosperity Economics Advisors…

…advocate for contributions after tax. Prosperity Economics seeks to maximize future income, which may push clients into a higher tax bracket upon distribution. Paying taxes beforehand can balance that out.  

Qualified Plans…

…have an employer match. Due to the allure of the match, many clients contribute additional un-matched funds without understanding the impact.  

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Prosperity Economics Advisors…

…encourage clients to contribute ONLY to the match limits. The REAL impact for the match might be less than expected, and the contributions even less so. An advisor who practices Prosperity Economics will be able to show their client how, in detail, their qualified plan works using financial calculators like Truth Concepts.  

Qualified Plans…

…are based on a risk/reward investment strategy. The plans are rooted in the securities market. The idea that many have is that with increased RISK, they are rewarded with increased rates of return.  

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Prosperity Economics Advisors…

…are risk averse. They understand that the true definition of risk is the likelihood of loss, NOT the likelihood of success. Prosperity Economics is rooted in certainty, and the advisors help clients to make financial decisions that they KNOW will have desirable outcomes.  

Qualified Plans…

…are forced savings plans. Money is automatically deducted from your paycheck, which improves the likelihood of saving for those that are undisciplined.  

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Prosperity Economics Advisors…

…teach disciplined savings to their clients. It requires self-reliance and good stewardship because it offers flexibility in the amount and consistency of saving. Prosperity Economics Advisors can be a great help in teaching their clients this discipline, but it does require that the client be committed.  

Qualified Plans…

…promote a herd mentality. There is “comfort” in doing what everyone else is doing—the belief is that there is “safety in numbers.” It allows for a peace of mind where “ignorance is bliss.”  

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Prosperity Economics Advisors…

…push for independent thinkers. These thinkers understand that more people fail financially than succeed, so following the herd is unlikely to be the best path. It requires COURAGE and effort from both the advisor and the client.  

Qualified plans…

…mean a loss of control for the client. Because these plans are government sponsored, they are also GOVERNMENT CONTROLLED. The rules on accessing these funds are constantly changing, and not in a way that is beneficial to the client.  

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Prosperity Economics Advisors…

…teach their clients how to retain control of their money. The proposed savings vehicle of Prosperity Economics Advisors is whole life insurance. Clients must understand and agree to the contractual terms up front, with rules that can’t be changed. This way, the client retains control. There are no surprises.  

Qualified plans…

…are set up to protect the money from withdrawals. It is difficult to use the money within the asset for other things (government and employer rules). While beneficial in some ways for the undisciplined, each dollar can only do one job.  

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Prosperity Economics Advisors…

…advocate for accessible funds. Money can be easily used in the event of emergencies and ideally in the event of OPPORTUNITIES. Each dollar is able to perform multiple jobs (in the same way banks use their dollars) and puts clients in the position to capitalize on opportunities.  

Practical Applications

Qualified plans are not the enemy. They can be a PART of a great financial strategy. But the use of a qualified plan alone will not make a man rich, and will likely be unable to provide a comprehensive retirement income. Using the Truth Concepts software, advisors can do the research themselves. Our Qualified Plan calculator shows a comprehensive look at how they work, and what percentage of the money a client can actually access. The below chart is from the Qualified Plan calculator. Based on contributions alone, it looks like the client in question has a pretty comfortable setup! He’s got an 8% rate of return and over three million dollars! Qp base When the employer match is factored in, the Gross Account Value only rises. But it doesn’t rise very much, does it? Qp with employer match

But what happens when, management fees are added?

Suddenly, the client’s Net Spendable portion of the account drops. When you consider who is managing the account—likely the employer—the amount they contribute no longer seems very generous. Overall, they contribute $246,330 to receive $608,939. But that $608,939 worth of management fees has also cut the value of your money by over $1 million. The money they earned from managing the account, had the potential of $1 million for you. Qp with management fees

And how about taxes?

While the addition of a deduction on the front end seems great, when the money comes out it is taxed. And since there’s more money at the back end, the government actually makes more money from the tax deferral. It’s a government-controlled account, and the tax deferral presents the ILLUSION of a good deal. In reality, it ends up providing the government with a little extra. The client gets a deferral of $130,000, only to have almost $1 million in taxes due later. Of course, that money won’t be taxed in a lump sum, it will be taxed as the money is withdrawn. Qp with management fees and At the end of all the fees and taxes, the client’s Net Account Value is less than half of what the account was worth before fees and taxes. But $1.5 million is still a lot…right? Not exactly. When you consider inflation and the fact that the money must last the client for his whole retirement, $1.5 million isn’t very much money. Their rate of return has also dropped by more than 3%.

So What is a Better STRATEGY?

Contribute only up to the employer match. You’ll see below that the client gets a higher rate of return. Then take the difference—a whopping $14,000—and put it towards a whole life insurance premium. By the age of 65, your client will have a much higher sum, and it will be completely accessible. Qp only contributing up to employer match Prosperity Economics is a method that empowers everyone involved—including clients. By empowering clients, not only do they build real wealth, but they’ll build real trust with their advisors. Qualified Plans are a good tool to be used, but Prosperity Economics encourages diversification of your funds. Put your dollars to work in multiple places, and you’ll see your money multiply. For a step-by-step walkthrough of the Qualified Plan calculator, visit our tutorial page. If your client is considering Whole Life insurance, take a look at this questionnaire from the Prosperity Economics Movement. Advisors who are interested in learning more about the Prosperity Economics Movement, and how to take part, can visit Prosperity Economics Advisors. Clients can learn more at Prosperity Peaks.