Here's a piece from MSNBC that asks whether banks and credit card companies are trusted friends or profit-driven giants. Here's their bottom line:
Banks and credit card companies like to portray themselves as trusted friends, our partners in financial life. But the reality is that these financial institutions are profit-driven friends of convenience whose relationship with you is riddled with trip wires and fees contrived to extract just a little extra at every turn.
I have to agree with this. Some companies are "friendlier" than others and we say that "they have better customer service", but in the end, businesses have one priority: to make money. And when confronted with a choice on the issue, a company will always make the choice that makes them the most money (either in the short-term or the long-term depending on the company's needs and philosophy).
Generally, this is acceptable. After all, this is America, the land of competition and free enterprise and consumers are pretty savvy. However, even the best consumer can sometimes forget why companies exist, and when that company happens to handle your money, that memory lapse can be expensive.
In addition, banks are getting more and more "aggressive" in collecting fees. Here's an example:
Consider, for example, this scenario: The automatic debit for your mortgage hits your checking account on the fifth of every month, the same day two small insurance payments of about $25 each are deducted automatically. Now, let's say one month there's not enough in the account for the mortgage, but enough to cover both insurance payments twenty times over.
So what happens? The mortgage payment bounces, triggering a $30 penalty for insufficient funds. Painful, but fair enough since it's your mistake. But most mainstream banks then employ some creative arithmetic, pretending you don't have sufficient funds for the two small insurance payments either. And because your bank is such a reliable friend, it will cover those payments as a courtesy, then add two more bounce fees, or $90 altogether.
Wow! I'd heard of this happening, but wasn't sure it was "official policy."
All this to say the following: Just like you treat any other business, be sure you know it's "buyer beware" when you deal with your bank and credit card company. They are in business to make money and work hard at doing just that. And if they can do it "on the sly" and without you seeing it, they will.
This is why I am becoming leary of traditional retirement accounts. You are limited to options that your broker or bank can make significant money. Stock, bonds, mutual funds, and CDs. Sometimes, they will even let you invest in real estate, but they crank up the fees to cover the seemingly invisible money they make by handling your money through traditional investments. I am looking to manage five IRAs in the near future, and I just do not see much of a point in earning what will likely be about 8% in the long run, and potentially much less in the short term... just to pad the wallets of banks.
IRAs can wholly own an LLC with you as the manager. You have one asset in your IRA, and you pay a smaller annual fee to keep it. Then, you can make all sorts of investments in things like tax liens and real estate. Three of the IRAs will be Coverdell ESAs for my children, and I would like for them to each $100,000+ when they are ready for college. I think I could easily do this. My oldest will not be in that ballpark for at least ten years, and my middle child will be there in about twelve. My youngest has a ways to go at seventeen years. I think I could get by with a pretty small amount of capital to invest in the accounts, and then purchase two to three real estate rentals for each account.
The other two IRAs will be Roth IRAs for myself and my wife. We have 34 years until we could withdrawal funds from those, and I would like to have their value be near $1,000,000 each by that time. I think that this could easily be done with real estate properties, and we could have about 5-7 residential properties in each account that could get to that value. However, I think I would like to have a couple of commercial properties and a couple residential properties. Those will not really need to be that aggressive, as I feel $1,000,000 is fairly conservative for 34 years.
On the personal front I would like to have about $1,000,000 in value in a real estate LLC in about ten years. I think it is highly doable. I would need a greater number of properties to pull this off as I would not have much time for appreciation and building equity. And hopefully, I could have about $10,000 in cash flow from this, per month, within the next five years.
I have always been a little bit concerned with the potential conflicts of interest between banking institutions and their customers. The customers want to create a lot of value, and the banks want to keep it. Sure, they will help you get going in the direction that you would like... but they are going to make more than you, if they have their way.
I have a three pronged approach to handling my retirement. First of all, I want to make sure my kids' education is covered, and that is vital to my retirement because I cannot live by either paying loans for their education, or worse, having them live with me forever ;). Next, slow and steady growth in tax-free Roth IRAs. I hope to have a high net worth by the time I retire, and I still hope to be bringing in a lot of money. I think having tax free money, as opposed to tax-deferred money, is the way to go in my situation. Third, I have a power packed, aggressive approach for the ability to "retire" early. Sure, I will never really retire, but I want that flexibility.
Posted by: Dus10 | February 10, 2006 at 02:09 PM
From what I gather from the above comment, the US retirement investment system is in the stoneage compared to australia.
For example in Australia, employers are REQUIRED to pay employee's 9% pa into a retirement account, the employee has no obligation to make an contributions themselves,
Also if planned out properly, when you convert your retirement account into an income stream, that income stream can potentially be enjoyed tax free, all capital gains in the retirement account are also tax free, so potentially you maybe in a situation where you account grows faster that your rate of drawdown.
come on America step up and fix your outdated retirement investment system, otherwise your social security system will crash if it's not already near doing so.
Posted by: BigBuddha | February 10, 2007 at 06:44 PM