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Nearsightedness likely to cost you big time in long run

It happens all the time. A client will come in to meet with me on their retirement plan. They’re anxious to meet and they show up early. I know what we’re meeting about before I even walk through the conference room door.

We’re not meeting about their retirement plan; we’re meeting about some other plan they have.

We may be talking about their plan to buy a new car, their plan to pay off their credit cards or their plan to take a family vacation, but we are certainly not talking about their retirement plan. At least not in the way I would like to discuss it.

We are discussing how the client can get their money from their retirement plan. By the time they have called me to set up a meeting, they have already spent the money in their mind and it’s a futile effort to try and talk them out of it; nevertheless, my conscience requires that I try.

The temptation grows

If you support your retirement plan for enough years, it becomes this big pot of money sitting in an account with your name on it, but you never get to spend it. The bigger it gets, the more painful it is to see the balance each month in the same mail with all those credit card bills or car payment notices.

So, you start thinking about what you could do with that money if you could just get your hands on it.

You could have a fresh start. You could breathe again. If only you could get your hands on that money. Then one day you are talking to a friend and lamenting your problem when they say, “You can get that money. I got some of mine just last month. I needed to make a down payment on that RV I told you I was thinking about buying, and we got some of our money from our IRA. I wouldn’t have done it, but I couldn’t figure out any other way to pay for the RV.”

You ask, of course, “Why hasn’t my financial advisor told me I could get that money?”

Well, we didn’t tell you because we knew you would end up spending the money. And once you start using that money for current expenses, in most cases, you can kiss your retirement lifestyle good-bye. At least that has been my experience.

Adding it up

I was looking back over the clients I have had who started taking money from their IRAs, and most of them eventually went through it all. You have 60 days to put the money back without a penalty, and I have heard those promises for years. However, I can’t remember a single time that it actually happened. A 10% penalty and taxes on the withdrawal are just not enough of a penalty to stop most people.

It’s unfortunate, because that normally means that you have to sell almost twice as much as you need just to pay the taxes and penalties.

I’m not talking down to anyone about this. I did the same thing when I left my former job in 1985. I used my retirement money of $5,000 to pay off a note on my Jeep Wrangler, and I felt very good about my decision.

After I had been in the investment business a while, I decided to do the numbers and see, based on a reasonable rate of return, how much that money would have grown to by my retirement age. It came to just over $250,000. I was crushed to think that I had, in some odd way, paid $250,000 for a Jeep Wrangler.

A similar fate?

Why do we do it? Why won’t we listen to good advice? I don’t know the answer, but I know that it doesn’t help when the people you look up to are doing the same thing. Isn’t that what the Legislature has done with the tobacco money?

Before I go on a rant about this, I need to let you know the company I work for does handle money for the Mississippi Health Care Trust and my opinion could be biased.

In 1997, the Mississippi Legislature established the Mississippi Health Care Trust Fund. It was set up to protect the settlement money paid by the tobacco companies with only the earnings used to decrease health care costs in the state. That money was put into a trust so it would last forever, but after three years the Legislature couldn’t stand looking at all that money without getting a chance to use it and began to hijack the payments on their way to the trust.

They reasoned that they stayed true to their purpose because the money hadn’t reached the trust fund yet, so they really hadn’t taken it out.

Just four years later, the hundreds of millions taken from the trust had become expected and they needed even more, so they started taking money away from the trust itself with a plan that would end after five years. Just a year later, with the Health Care Trust as one of the only pools of money not yet depleted, the Senate has made a move to take out enough money to get the state through this year’s budget crunch.

Down and dwindling…

The original projections for the Health Care Trust Fund estimated that by year 2006 we would have had a balance of more than $2 billion, with dividends and interest of about $60 million to spend on healthcare.

Instead, we have closer to $500 million, and its going down, not up. The vision that our state had just eight years ago — a vision heralded throughout the nation as a model for other states to follow — has been blinded by those whose nearsightedness, coupled with a passionate vow not to raise taxes, may very well cost generations to come their best chance for a healthier life and send the Health Care Trust to the same fate of all those people who raided their IRA in order to pay off their truck.

Contact MBJ contributing columnist Scott Reed, CIMA, CWASM, AIF, of J.J.B. Hilliard Lyons, W.L. Lyons, Inc., member NYSE & SIPC, in Tupelo at mbj@msbusiness.com.

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