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Chapter: 12.05
(Section 12: If You had $100 Billion)
Copyright Michael Bronson 1997, 1999, and 2000
BibleHelp.org

Summary
Most missionaries have very little money or property when they retire. This chapter describes some very practical ways for missionaries to create a adequate retirement.

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A tribe, I believe in New Guinea, has an interesting way of insulting a person. The phrase, "I bet you even eat your yam seeds" is a big put down. In our culture it does not mean much, but in their culture it means a person is careless, gluttonous and irresponsible. Every year, yam seeds must be planted to produce a new crop of yams. If a person is careless and eats his yam seeds instead of planting them, he will go hungry the following year.

There are many types of seeds that can either be eaten or planted. If they are eaten, they can meet some immediate basic needs. If they are planted, however, the seeds can greatly multiply themselves and meet the needs of many. God chose to use the principle of multiplication in some of His miracles.

For example, when He fed the "5,000," the "4,000" and the "100," Jesus used the little the people had and multiplied it. When He turned the water into wine, He required them to first supply the water. When God provided food for the two widows, (2 Kings 4:1-7 and 1 Kings 17:14-15) He multiplied what they had. When Jesus paid the temple tax, He chose a unique way to produce the resources. He had Peter catch a fish and inside was the exact amount needed. When you look at the miracles of the Bible, you’ll find many of them are a multiplication of a person’s possessions or actions.

This principle of multiplication applies to our Christian giving also. The size of our gift is not nearly as important as our attitude and faithfulness. This is one of the reasons Jesus pointed out the small but sacrificial donation of the poor widow (Mark 12:42). The Bible doesn’t say, but God could have greatly multiplied her gift.

There is another aspect of "seed money" which may not appear as "spiritual," but in many ways it is just as important. This is especially true for missionaries. Historically, many missionaries have found their retirement years financially lean and difficult. Many barely have enough money for their current needs, let alone to save for retirement. Apart from the normal savings and pension plans, most Americans have built up substantial equity in their homes. Most missionaries, however, having lived in the jungle or rented most of their lives, have little accumulated assets. While the heavenly retirement plan for missionaries is fantastic, the earthly plan usually leaves much to be desired.

Fortunately, many missionary organizations have responded to this need by building retirement villages and even setting aside some of the missionary’s support for a pension. However, since many corporate pension plans in the secular world are inadequate, I have to assume that this applies to the pensions of most missionaries. Although most missionaries have limited financial resources, most have a large quantity of another resource: time. This is where "seed money" comes in. Missionaries should take advantage of their time and let it work for them.

Apart from the normal pension plan, many corporations now offer a supplemental retirement plan for their employees. Some of these plans are the 401(k), 403(b), and 457. These plans are similar to IRAs (Individual Retirements Accounts) except your maximum contributions are usually at least $7,500 a year versus the $2,000 for IRAs. These plans are ideal for people with limited resources, but lots of time. As you will see shortly, these funds grow rapidly. Eventually, the vast majority of the retirement savings is earned interest rather than the principle originally deposited.

There are three reasons why they grow so fast in comparison to conventional savings. First, you don’t pay Federal, state or local income tax on the money when you make the deposit. You pay it later when you withdraw it. (Note, you still pay Social Security tax.) The reason you have this special tax break is because the government recognizes the need for supplemental retirement. Since it is "retirement" money, there are restrictions on when you can have access to the money. Although there are some exceptions to the rule, the age is usually 59 ½.

The total income tax for many people adds up to about 32%. For them putting money in a retirement account is like getting an instant return of 32% on their investment. If a person deposits $1,000 into the account, their actual "out of pocket" loss is $680 because the other $320 normally would have been paid in taxes. Whereas in a conventional savings plan, after you pay taxes on your $1,000, you only have $680 to invest. Obviously, $1,000 will produce more income than $680.

The second reason it grows so fast is because you don’t pay taxes on the interest until you withdraw the money. As a result, all of the interest is compounded and the growth is increased substantially.

The third reason it grows so fast is because these retirement plans offer investments in mutual funds. Many of the mutual funds offered in a typical retirement plan currently have a 10-year average of at least 15%. In fact, many of the mutual funds in my 457 account at work have a 10-year average of 17%. Compared to CDs, bonds and savings accounts (which range from 3-8%), mutual funds are powerful investment engines.

The 10-year average of mutual funds is usually around 13 - 15%, but the incredibly healthy economy in the 1990s has produced above average returns. The April 13, 1994 Vanguard prospectus says that during the period between 1926 to 1993, stocks (as measured by the S&P Index) have produced an average rate of return of 12.3%. (Source: Mutual Funds for Dummies, page 75.) This includes down periods such as the Great Crash of 1929 and the following Great Depression.

One boring technical note, when you invest in these retirement plans, you are not directly investing in the mutual fund. You deposit money with the retirement firm, and they invest in the mutual funds you’ve specified. You could directly invest with these mutual funds, but you would not get the special tax break because the money would not be considered retirement money.

To demonstrate the power of time in a retirement account, we will look at Tom and Judy who are both 23 and have just became missionaries. Let’s say they put $360 a year ($30 a month) into an IRA for only 10 years. If they retire at 65, their retirement plan will have grown considerably. Depending on how well the mutual funds do, their retirement account will have grown to approximately:

       
Interest Amount Annual Interest
12% $298,000 $32,000
13% $423,000 $49,000
14% $600,000 $74,000
       

The "annual interest" on this chart is the interest earned that year. Depending on how much money you have in the account when you retire, you may be able to live on the interest alone. Also note, since the growth of mutual funds fluctuate from day to day, there is no accurate way of calculating its actual yield. Therefore, the figures provided in these tables are based on a flat interest rate.

To illustrate further the power of time, let’s say Tom and Judy put the same $3,600 into the IRA their first year and didn’t make any more contributions after that. Their IRA would have grown to:

       
Interest Amount Annual Interest
12% $470,000 $50,000
13% $690,000 $79,000
14% $1,007,000 $124,000
       

Refer to Table 1 to see a spreadsheet showing how the $3,600 grew. Study this spreadsheet and see how time can greatly increase a small investment. Please note that the effects of inflation have not been calculated into these amounts. The buying power of a dollar will be much less as a result of inflation. This must be taken into consideration when planning one’s retirement needs.

As you can see, giving the same amount of money more time to grow greatly increased their retirement. When my wife and I have children, we are going to put $2,000 into a retirement account for each of them. When the child is 60, the account will be worth:

       
Interest Amount Annual Interest
12% $3,543,000 $380,000
13% $6,371,000 $733,000
14% $11,396,000 $1,400,000
       

Anything heavily regulated by the government is usually encumbered with many complicated rules. Supplemental retirement plans are no exception. If you have too much money in these plans you will be penalized. For example, a 15% tax kicks in if you withdraw more than $160,000 in a year. I don't think that too many missionaries will have a problem with this tax, though. Plus, if your supplemental retirement account is "excessively" large when you die, a 15% excess-accumulation tax will be levied before the account is liquidated into your estate. The government has a complicated formula to define how much is too much, but to give you an example, anything over $1.2 million will be taxed for a person who dies at 70. (Source: US News & World Report, June 9, 1997)

There is a quick way to determine how fast a retirement investment will double. It is called the "rule of 72." Basically, you divide your interest rate into 72. For example, if you have money invested in an account that yields 6%, you would divide 6 into 72. The result is 12. Therefore, it will take 12 years for the investment to double. Remember this rule only applies to retirement accounts. Normal investments, where you pay annual income tax on the profits, grow much slower. Listed below is a chart showing how fast a retirement account will double at various rates:

       

Interest

Years to Double
3% 24.0
4% 18.0
5% 14.4
6% 12.0
7% 10.3
8% 9.0
9% 8.0
10% 7.2
11% 6.5
12% 6.0
13% 5.5
14% 5.1
15% 4.8
16% 4.5
17% 4.2
18% 4.0
19% 3.8
20% 3.6
       

I have included 2 more tables at the end of this chapter to show the growth potential at different rates (Table 4.2 and Table 4.3).  (Please look at the note at the end of this chapter concerning these tables.)  Table 4.2 shows the increase of a "one dollar" investment in a retirement account. It’s a very handy table because it shows you potential returns of investments over a variety of years and interest rates. It does not take into consideration the annual "administrative" fees which may be around $10- $20 a year. The larger the investment, the less the annual fees affect the investment. Table 4.3 shows the same thing except it takes inflation into account. This table assumes a steady rate of inflation of 3%. I have found the stock market adjusts up and down along with inflation. As a result there is some stability even with moderate fluctuating inflation.

I think it is important to explain some basics of supplemental retirement accounts (IRA, 401(k), 403(b), and 457). These accounts usually offer you a range of aggressiveness in investments. The main categories are:

-Guaranteed fixed rate

-CDs and Bonds

-Income mutual funds

-Growth and income mutual funds

-Growth mutual funds

-Aggressive growth mutual funds

This list is ordered from the lowest to highest in potential for producing income. It is also ordered from the lowest to the highest as far as its potential to "fluctuate" in its annual yield. The guaranteed fixed rate is usually around 5 or 6%, whereas the growth funds may fluctuate from -5 to +50% (with a 10-year average of around 13 to 17%). For long term retirement savings many people put most or all of their investments into growth and income and growth mutual funds.

As a person gets within a few years of retirement (or enters retirement) they may adjust their "mix" so there is less fluctuation (and usually less earned income). It all depends on how much money is in their account. If the account is large, consistency in annual yield is not nearly as important.

Some people insist on investing only in the guaranteed fixed rate because it is "safe." There are two reasons why this may not be the best choice. First, the word "guaranteed" actually means the company promises the interest rate will be consistent over a certain period of time. It is not guaranteed or insured by the Federal Government. Although it is rare, I have seen some investment companies have financial trouble and pay out a percentage rate much smaller than their promised rate. In fact, those in the same retirement plan who had money in mutual funds did extremely well while those in the "safe" guaranteed fixed rate earned only half of what was promised.

The second problem with the guaranteed fixed rate is when inflation is taken into consideration, the actual gain is quite small. If the fixed rate is at 6% and inflation is 3%, your net gain is 3%. You are barely keeping ahead of inflation. Using the rule of 72, it would take 24 years to double your buying power. As a result, if you want a large retirement savings, you would have to invest a tremendous amount of money.

How do you choose the best supplemental retirement plan for you? If your company offers one (i.e. 401(k), 403(b) or 457), the choice is already made. Otherwise, you can call different banks or brokerage houses to find a plan you like. Even if you are already using your company’s plan, you can still invest in your own IRA or variable retirement annuity. In such situations, you lose the tax break on the original money you’ve deposited. You will, however, receive a tax break from that point on.

Once you choose your supplemental retirement plan, how do you choose the best mutual funds inside the plan? The choice is made pretty easy. The company operating the retirement account has already picked out one or two choices for each of the aggressiveness categories. As a result you don’t have to try to research the best mutual funds. Your retirement administration has already done that.

What are mutual funds? A mutual fund is basically a fund that an investment company has created. The assets in this fund are invested into a large number of companies, usually around 300 to 1,000. Currently there are over 5,000 different mutual funds, with more being added every day. The income produced by these funds varies from day to day, depending on the performance of the companies.

What is the main difference between investing in a retirement mutual fund and "playing the market?" When you play the market, you must continually study the trends of the market to know when to buy and sell. With retirement accounts you don’t need to know much about the market. Basically, after you make your original choices, you let it grow, making minor adjustments as the years progress. In fact, it’ll drive you nuts if you try to monitor your retirement mutual funds on a daily basis. Since most retirement plans allow you to switch funds only four times a year, watching the funds go up and down every day does you no good.

Investing in mutual funds is a lot different than investing in individual stocks. If you invest in individual stocks and the company goes under, you’ve lost everything. Yet, if the "risk" is spread out over 300 to 1,000 companies, your earnings may drop a little for the year, but you don’t lose everything.

A good case in point is my great grandfather. In the early 1900s, he was a millionaire. This was when most people’s annual salary was around $1,000. He was a smart businessman, but he made a large portion of his money in the stock market. When the market crashed in 1929, he lost most of his money. His investments were in individual stocks. When the individual companies went under, so did his money.

Mutual funds do not contain the same risks. However, mutual funds are not risk free. Mutual funds do not guarantee a specific return. Just because it has had a 10-year average of 17% does not mean the next 10 years will be the same. Mutual funds are not "insured" by the federal government.

The most vulnerable spot of a mutual fund is the actual investment firm operating the fund. If they go under, you can lose some or all of the money in the fund. Although this is not a problem like it is with individual stocks, you should be aware of the potential risk. To protect myself, I have invested in four or five mutual funds within my retirement plan. Since the Investment Company Act of 1940 was passed to regulate the mutual fund industry, no fund has ever gone under. You will also be interested to know that the specific bonds and stocks the mutual fund has bought are held at a custodian - a separate organization independent of the mutual fund company. The use of a custodian ensures that the fund management company can't embezzle your funds and use assets from a better performing fund to subsidize a poor performer. (Source: Mutual Funds for Dummies, IDG Books, page 38.)

The other vulnerable spot in your supplemental retirement plan is the actual company managing the retirement plan. A few years ago a Catholic Church lost a large portion of the money they invested for their retirement. As it turned out, one of the employees of the investment company was not investing the money being deposited. Instead, he was pocketing the money. If the priests had carefully reviewed their statements to verify the money was being deposited, they could have greatly reduced or eliminated all of their losses. Choosing a financially sound and reputable investment firm is probably the most important decision you’ll have to make in your retirement planning. If you choose a sound company and carefully review your statements, you can avoid most pitfalls.

I have invested in several different supplemental retirement plans to provide myself some extra protection. Since each retirement plan charges $10 -$20 a year for administration costs, this is probably an overkill. There is, however, safety in numbers.

Here are some final words of advice. If possible, it is always a good idea to consult a financial advisor before investing money. Talking to banks and brokerage houses can be very informative. Understand, however, their advice may be somewhat biased and self-serving. Don’t assume they are telling you the complete story. Do your homework and ask a lot of questions. One final note, never invest more than you can afford. Of course, if you start out when you are young, $30 a month (or whatever you choose) is not that much.

Important information when reading the following tables

Please understand the figures in the following tables are for reference only and do not reflect the returns of an actual IRA account. This is because mutual funds, by their very nature, fluctuate in their growth instead of growing steady like a CD with a fixed rate of return. As a result of this fluctuation, only ball park averages can be provided. Please carefully read this chapter for more information.

It is also important to understand many retirement plans charge an "administration" fee of about $10 - 20. The impact of this fee is almost negligible when the account is large. However, when the account is very small (such as when the yearly earned interest is under $500), this fee will have an impact, and thus impact your future earnings. Therefore, you might want to add an additional $10 - 20 a year for the first few years to compensate for this fee.

 

Table 1    The Growth of a Single Investment of $3,600

Table 2    The Value of a 1 Dollar investment

Table 3    The Value of a 1 Dollar Investment -Inflation accounted for


Other Chapters in this Section

Home
If you had $100 Billion
Although I don't have $100 billion, I do have 500 billion
The Ways Missionaries Gain and Lose Support
What I would do with the Money
Now it's your Turn
Seed Money
Roth IRA



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