Brill's Mutual Funds Interactive(R) -- Funds 101

A Parable For Our Times

by Frank Armstrong
President, Investor Solutions, Inc.
www.InvestorSolutions.com

Frank Armstrong Ann and Marie joined Consolidated Widget Manufacturing on the same day thirty years ago. The pair enjoyed working together and became best friends. On and off the job they were inseparable.

Consolidated Widget offered their employees a 401(k) plan, and both girls signed up. Ann never seemed to have enough money. She had a taste for expensive clothes and insisted on eating out at least three times a week. So, she made the minimum contribution necessary to obtain employer matching. She kidded Marie about her clothes once in awhile, but Marie took it in stride.

Meanwhile Marie paid herself first. She dug into her pocket to maximize her total contributions at 15% each year. Because she never had the cash in her hands, she didn’t seem to miss it. Of course, the tax break helped. The after tax difference between Ann’s and Marie’s check is only $350 a month. She bought good clothes but made them last a little longer than Ann. She didn’t eat out as often, but enjoyed it more when she did. Other than that, they lived pretty much the same lifestyle.

Consolidated Widgets had a good run. But, when demand for widgets fell both women were “downsized”. (Nobody gets fired anymore!)

The girls don’t see each other as much any more. Ann’s $2000 annual contribution to the 401(k) plan had grown to $328, 988.05, a tidy sum. She was able to roll it over into an IRA when she started her new job.

Marie’s $7500 contribution had grown to $1,233,705 at the same rate of return. Right now she’s in Puerto Fino enjoying Italy’s finest wines and gourmet meals. She sends notes and photographs by email to Ann, but the two girls don’t seem to have as much in common any more. Marie’s considering going back to work after a few years. But, right now she is enjoying her “work optional” lifestyle.

The moral, of course, is that little differences in savings can add up to big differences in wealth over a reasonable time frame. Tax advantages help reduce the net cost and reinforce the discipline of systematic accumulation. Maximize your pension benefits. Remember, a tax advantage is a terrible thing to waste.

Frank Armstrong, CFP, is the author of Investment Strategies for the 21st Century, published here, President of Investor Solutions, Inc., a fee-only Registered Investment Advisor, and Chief Investment Strategist of DirectAdvice.com.

Note: The featured writer is solely responsible for the content of this article. The opinions expressed herein are not necessarily those of MFI or BES, Inc.

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