Financial Decision Making

Most people are petrified by financial decisions – so much that they prefer to throw away money rather than think about what to do with it. The principal reason for choosing to have a financial adviser is seeking to avoid any need to make financial decisions themselves.

Unfortunately most financial advisers are mere mortals – incapable of coming up with superb financial decisions suitable for most of their clients who are wage earners, business owners and investors. Instead the product of their labours is very much substandard.

The clearest example of how deficient professional financial advisers are in rational economic decision making is illustrated by their inability to solve elementary investment problems in the realm of 401k.

For instance clients reach out to them for help with the simplest of investment analysis on 401k issues and How best to manage their money?

An elementary understanding of 401k basics is essential – something which the average worker is not ofey with. Therefore 401k clients are reliant on financial advisers to come up with the answers.

However from a multitude of recommendations and commentaries I have read published by financial planners holding professional credentials the industry seems split as to whether a 401k investor should borrow against their investment holdings.

Those using emotional arguments as to the wisdom for not borrowing can be dismissed instantly – it is not the role of financial advisers to prognosticate on emotive issues when financial analysis is required.

Rational economic analysis should be the criteria for 401k financial decisions.

Yet such recommendations to clients appear to be in the minority, evidenced by industry statistics showing that the average of workers’ Personal 401k Contributions is a low 7% of wage.

Here is a simple economic exercise where the problem to be is solved is to make rational 401k investment decisions – (split in to segments):

i) should a 401k investor ignore risk-free investment opportunities?

Every worker on average wages or higher is able to make guaranteed profit of $5,000 after tax simply by accepting the Generous concession from the IRS of 100% tax deductibility of a workers Personal 401k Contribution at maximum level – this year $19,500 is the permissible investment limit.

It is easy to calculate that a worker with marginal tax rate of 25% entitled to a fully tax deductible 401k investment of almost $20,000 will get a tax rebate of close to $5,000.

Should every financial adviser be recommending that workers Personal 401k Contribution be maximized – 50% of an average wage; not 7%?



If an adviser has prefaced their occupational status with the word “financial” on their business card – it is expected that they understand finance and planning – sufficiently well to know what leveraged investing is, and how money can be borrowed – at least $20,000 – without too much acrimony.

Following that strategy an average wage worker can max out their Personal 401k Contribution to be able to put 50% of their pre-tax wage in to their retirement account ($20,000). In which case retirement years can be looking good.

ii) Some Financial Planners and Accountants will try to wriggle out of (ir)responsibility by pulling out their calculators and a workers pay packet showing insufficient funds. Of course most workers do not have savings or enough disposable after tax funds to be able to make a Personal Contribution at maximum level. Thus an adviser might gloat thinking they have proved the impossibility of a 401k funding proposition of the maximum amount allowed by IRS.

If that is your financial adviser’s conclusion their stultified thinking limits your 401k contributions instead of maxing out at $19,500. They should be stripped of their spurs and run out of town on a rail.

While you are still working nominal discretionary income (what is left to spend after tax) might be close to two thirds of earnings – but alas living costs such as mortgage payments, car expenses, childrens’ education, family food and clothing bills leaves little to no disposable discretionary income.

By borrowing to put $20,000 in to your 401k each year you remain at work (say 25 years) the retirement nest egg on heading to the ranch could be half a million dollars – achievable with the above strategy. A lot more depending on your investment selection and underlying assets.

If you need more insight, assistance for implemention and ongoing management – that is available for the asking.

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