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Originally posted by prosequence
1. What happens when they baby boomers retire inthe next couple years? Won't ehy start taking their money out to spend and live on? Will htis not drop the growth and value of anyone else's investment in those compnaies?
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Interesting concept on the baby boomers, which I have read articles about in various journals. The theory that the all of the money sitting around in investments waiting to be sucked out when the mass influx of retiring baby boomers arrives is partially true, but it shouldn't have the effect that everyone thinks, if an at all.
First, take a look at what drives the stock markets - sales. Why does Microsoft, Nokia, General Electric, etc. stock go up? Because their sales have increased. (Of course there are other factors, but I am trying to keep things simple.) Sales increase when people spend money. When an individual retires, do they stop spending money? They may shift their spending, but they don't stop. You may see less spent on business related items (computers, business clothing, fast food lunches, etc.), but you will probably see an increase in other areas (healthcare, leisure activities, etc.). Some companies will decrease in value, while other increase - just the normal course of business.
Also, how often does a retiree take the entire amount they have invested out of stocks on the day they retire, and shift it into the coffee can buried in the back yard? They may draw down on their investments, but they don't go to zero in one shot. As they draw down their funds, keep in mind there are still people working to get to where they are at, so they are adding funds at larger pace.
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Originally posted by prosequence
2. If I understand this correctly, it's only good if you're making less money per year than you do now (when you put your money into it) because you pay a lower tax on your lower income. So isn't htis a plan to be broke?
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Keep in mind that the earnings on the investments are also tax deferred. Simple example:You have $10,000 earning 10% for 10 years. Your tax bracket is 25% before and after retirement. At the end of 10 years, in a tax free account the value would be $28,531. If you paid tax on the annual earnings, it would only be $22,156 - assuming you took the taxes out of the investment as they were due.
In any case, it is never a bad thing to save money. The key is to make "smart" investments and stay with a plan of action - you will hear very few stories of people making large sums on a wild guess, but you will hear the opposite.