June 2011 - Posts - Kahler Financial
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Kahler Financial

June 2011 - Posts

  • What Is Rich?

    A few weeks ago, in this column, I asked those who’ve declared war on the rich to define "the rich." I gave four examples of people that might be viewed as rich. Some were high income earners with little net worth and others were low income earners with significant net worth.

    To answer who "the rich" are in this context, we must determine whether wealth is a function of income or net worth. While we could agree you are rich if you have a high income and a high net worth, are you rich if you only have a high income or because you have a high net worth?

    Most people give this distinction little thought. To many Americans, you are rich if you have either a high income or a high net worth. In a Gallup poll conducted in January 2003, the respondents defined "rich" as earning over $120,000 a year or having a net worth of over $1,000,000.

    Most financial professionals contend that becoming rich is not synonymous with having a high income, but is a function of acquiring assets. While having a high income can give a person more opportunity to acquire wealth, it’s not a prerequisite. It's what people do with their income that determines whether they will ever become rich. If they spend all they make and put nothing aside in savings or investments, they most likely will never be rich.

    Most of the time, those who suggest we need to increase taxes on "the rich" and make them pay "their fair share" are talking about taxing people and corporations with high incomes. Whether those high earners are dirt poor or are exceedingly rich isn’t the issue.

    I hear you wondering how someone with a high income could be dirt poor. You could earn $25,000 a year or $250,000 a year and spend every penny. Either way, you have a net worth of zero.

    Certainly, if you make $250,000 a year, you'll have a higher lifestyle, even if you spend every dime. Plus, you'll certainly have more opportunity to build wealth than if you make $25,000. You are "rich" if we define that as having an above average lifestyle rather than a high net worth.

    But again, I know many people worth millions of dollars who are very comfortable spending $50,000 a year. They don’t have even an affluent lifestyle, and in many cases, their investments (like ranch land) don’t produce high income. I also know people who earn millions from their professions and have nothing to show for it. No investments, no real estate, no savings. Again I ask, who is rich? I contend it’s the person with the net worth and not the high income.

    So, let’s be clear. Those who call for increasing taxes on "the rich" are using the wrong words. We need to refer to increasing taxes on "high income earners." They may or may not be rich.

    Not everyone has the ability or opportunity to earn a high income. Not everyone who earns a high income has the financial health and skills to become rich. Having a high income is no guarantee one will become rich, just as having a lower income is no guarantee a person is poor. There are people at all income levels who have the financial skills and discipline to manage their income so they do become rich.

    We can choose to vilify and penalize high income earners. Or we can choose to return to an America where becoming rich is seen as a desirable goal and one potential reward of education, risk-taking, and hard work.

    Rick Kahler, Certified Financial Planner®, MS, ChFC, CCIM, founded Kahler Financial Group, and became South Dakota’s first fee-only financial planner in 1983. In 2009, Wealth Manager named Kahler Financial Group as the largest financial planning firm in a seven-state area. A pioneer in the evolution of integrating financial psychology with traditional financial planning profession, Rick is co-founder and co-facilitator of the five-day intensive Healing Money Issues Workshop offered by Onsite Workshops of Nashville, Tennessee. He is one of only a handful of planners nationwide who partner with professional coaches and financial therapists to deliver financial coaching and therapy to his clients. Visit KahlerFinancial.com today!

  • A Difference of Opinion

    I didn't think it was personal, until last week.

    Driving to an appointment, I was listening to Dave Ramsey's radio talk show. He began talking about people who criticize him and how that used to bother him, but no more. He said, "After selling over three million books, I've decided if you criticize something I've written, you are the moron (laughing and giggling). I mean, what have you done?"

    I almost drove off the road.

    Most of Ramsey's advice on cash flow and debt reduction is very good and extremely helpful to those that follow it. Unfortunately, following his advice on investments and withdrawal rates could be very harmful financially. In the past few years, I've pointed that out more than once.

    On May 9th, I published a column showing Dave Ramsey's assertion that a person can earn 12% compounded annually in "good growth mutual funds" is inaccurate. As a fellow financial planner, Thomas De Jong, clearly showed, Ramsey bases his 12% compounded return on a misunderstanding of the difference between an arithmetic mean return and a compounded return.

    The New York Times picked up the story and ran it on May 13th on its Bucks blog. The Times tried to contact Ramsey for comment, and his team said that he was unavailable because he was working on a new book.

    As usual, I received some criticism from Ramsey followers about my article.

    Regarding Ramsey's claim of 12% returns, one person wrote, "He doesn't teach that anymore. You need to go to his 13 week course and get your facts straight."

    Two days later, one of my readers sent me an email citing a new blog post where Ramsey said if a person invested $144,000 in growth mutual funds it would grow to $1,000,000 in 17 years. While he didn't specify a rate of return, some simple math shows he used 12%. So much for the belief that he isn't teaching the 12% return myth anymore.

    There are two reasons Ramsey's 12% figure is dangerous. One is that even getting close to a 12% compounded annual return would require having everything invested in stocks. Most professionals would consider that allocation far too risky for most investors. They also know that over a long period of time (80 years) stocks have returned closer to a 9% compounded return.

    The second dangerous assumption based on a 12% return is that a person can expect to withdraw 8% of an investment portfolio every year without ever spending the principal. Since a realistic long-term return for a properly diversified portfolio is 6% to 7%, withdrawing 8% means you will eventually run out of money.

    Until now, I thought those of us who challenged Ramsey's investment advice were trying to help educate a fellow professional. Financial planners who focus on their clients' best interests are always learning and refining their knowledge and strategies.

    Ramsey's remark on his show made it clear that for him, this is a personal attack. Apparently he isn't secure enough to admit that he has been using inaccurate information. He seems to care more about being seen as "right" than about whether his advice is in the best interests of his followers.

    That's sad. It's discouraging that someone who holds the trust and respect of a great many people isn't willing to keep learning and to correct his own mistakes.

    If you have a financial advisor who refuses to consider new ideas or take in new information, it may be wise to look for someone else. Don't trust your retirement security to any advisor whose ego is more important than your financial well-being.

    Rick Kahler, Certified Financial Planner®, MS, ChFC, CCIM, founded Kahler Financial Group, and became South Dakota’s first fee-only financial planner in 1983. In 2009, Wealth Manager named Kahler Financial Group as the largest financial planning firm in a seven-state area. A pioneer in the evolution of integrating financial psychology with traditional financial planning profession, Rick is co-founder and co-facilitator of the five-day intensive Healing Money Issues Workshop offered by Onsite Workshops of Nashville, Tennessee. He is one of only a handful of planners nationwide who partner with professional coaches and financial therapists to deliver financial coaching and therapy to his clients. Visit KahlerFinancial.com today!

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