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THE WONDER OF THE PARABOLIC GROWTH CURVE: Introduction: Every individual is born to become a consumer but in order to sustain consumption everyone needs to have a source of income in order to pay for the things they buy or use. Our parents see to it that we have what we need (and not infrequently more than that) during the early part of our life, but there comes a time when we must provide for ourselves. When we begin to attend school and start the process of learning how to read, do arithmetic, study history, learn about civics, experiment with scientific principles, we soon gain an understanding of some of the elements of those economic forces that make it possible to improve and sustain that consumption. Each one of us creates (or fails to create) the intellectual and physical capabilities to produce something of value. That value, whether physical or intellectual is then exchanged within commercial transactions to acquire basic needs for sustenance and desirable wants for comfort and entertainment. There are three basic economic phases life: 1.) Preparation or the gaining of knowledge, 2.) Application of that knowledge for personal benefit or the benefit of others, and 3.) Disposition or transfer of wealth for personal satisfaction and or the benefit of others. It is the purpose of this treatise to examine how to be successful in connecting those phases thus building a bridge to a platform for the enjoyment of financial security and independence during the retirement years of life. Preparation: 1. The development of senses begins at birth and in large part is automatic but such development requires the nurturing of a parent who supervises the trial and error behavior of an infant trying to experience life. In this phase, we begin to learn what is right (acceptable) and what is wrong (disapproved). We begin to learn the consequences of our own actions. 2. As we observe and try to interact with our environment and with those people in or near to us, we begin to receive information that is stored for future use. We begin to learn that there are limits to what we are able to do and what we are allowed to do. We also begin to learn how to motivate the behavior of others in order to receive something we want or to influence others to do something for us. 3. After a few years, we enter an organized educational system that is structured over successive periods of twelve high school and four years of college to provide a disciplined way to receive information and exercise analysis and logic regarding numeric, linguistic or philosophical problems. We are given wide latitude regarding a course of study designed to enable us to learn how to live, understand and communicate with others. We learn what is necessary to live in community and to be

governed by representatives of and for that community. We learn how to exchange property, our physical skill and intellectual competence for compensation in a currency. We learn how to defer consumption via the transfer of compensation to savings. We learn how to exchange compensation/savings for goods and services we deem useful or essential. We also learn economic principles that enable us to invest a portion of our savings in entities that produce and sell goods and service in exchange for an interest in the income generated thereby as well as any enhancement of value for that interest in the enterprise. Application: 1. After gaining a recognized level of knowledge, physical and intellectual processing skills, we seek positions in business enterprises or political activities where we will offer that knowledge, physical and intellectual processing skill for compensation. We in effect offer manual or intellectual work in exchange for compensation and in exchange for assuming a position committed 100% to and for the benefit and welfare of the enterprise or activity that has employed us. We enter into a verbal or written contract to work for an hourly rate or off the clock for a fixed salary plus benefits. This sets in motion the beginning of a process that produces a cash flow that, subject to withholding taxes, social security taxes and other small deductions, makes available a predictable amount of currency to pay for the lifestyle that the individual pursues. 2. After several years of working in a way that applies educational and training resources, the individual will begin to generate increasing productivity for the compensation being received. At this time, either voluntarily or through negotiations, the employer will increase the base level or variable rate of compensation paid to the employee and may even add certain perks to effectively recognize that the economic benefits resulting from the work being done by the worker is increasing relative to the amount of compensation being paid. 3. Over time the actual or potential value of the worker's experience, intellectual or physical capabilities may rise to a point where the cash flow from employment may be so far above their cost of living that the worker savings will become significant. He will begin to recognize that via certain government sponsored tax deferred provisions of the tax code, he can place a portion of his cash flow into a tax deferred investment account and defer the tax liability on those earnings to a time after retirement. 4. As a rule, one should try to save approximately 15% of the gross income they receive from their employment each year. This can be invested in a bank savings account, an IRA or a 401K investment plan of his employer. After earnings rise above a given level, there will be a cap or limit to the amount that the worker may place in a tax deferred retirement account and this rule will result in a portion of the 15% mandated savings and investment portion of income to be subject to federal and state income tax liability. It should make no difference that the worker has to pay income taxes on this

portion of income and he should set it aside in a regular investment account either via a mutual fund or brokerage account holding individual securities. 5. In the Application phase of life, the principal contributor to investment results is "time". By contributing 15% to savings investment each year, the worker slowly begins to build an asset base that with the magic of compound growth rates will appreciate in a curved line that is shaped like a parabolic curve. The reason for this is the fact that even though the worker's annual income from wages earned from exchanging physical or intellectual skills might rise at a steady pace each year representing enhanced value of his work, the benefit of compound growth can only come from saving and reinvesting the income from savings generated each year. We will consume that portion of earnings that we do not save to provide for and support our lifestyle needs. However, that which we acquire through such consumption is thereafter gone or in a depreciating state. But the cash flow we have saved and invested each year is earning an accelerating rate of growth by a compounding of return on the aggregate dollars we have not spent on consumption. This is the secret of creating wealth! The compounding of investment returns on our investment capital.

6. If we assume that the Preparation period for one's life work is completed by the age of 25-30, then you will have 40 or more years to create the financial basis for your life in retirement. This puts the age of retirement at 65-70 which is consistent with most people's expectation. The chart above reflects how starting with an assumed salary of $50,000 per annum and an initial contribution of 15% ($7500) of that to a tax free retirement account if one's annual earnings rise 10% per annum this yearly contribution and consistent savings to an investment account will result in the dynamic growth of the worker/investor's retirement account. The worker can choose to retire when their retirement accounts and other investments are large enough to generate the cash flow

necessary to sustain their chosen life style or reasonable standard of living without serious depletion of the market value of their assets. Therefore one's lifestyle in retirement will be determined by the consistency and dollar amounts that they place into the investment/savings account during their working years. This is dogma. Over a period of years this compounding affect will result in earnings many times greater than the original amounts placed in the investment account. (The ultimate benefit from the intellectual, physical and work habits one creates to generate income, therefore, will make a huge difference in the final amount of wealth created) Compounding earnings will produce a long term result the largest part of which will come in those later years of employment. It is critical therefore that the system of savings be maintained and maybe enhanced by trying to limit the pace of raising the level of ones current standard of living. It is counterproductive to increase consumption at a pace above that at which income is produced. To do so will diminish the investment pool and cause a shortfall in the investment base one will need for transitioning from a work environment into retirement. Consumption, disposition and transfer of accumulated wealth: 1. So now you are retired from active employment or as a partner or sole proprietor in a business. How do you manage the retirement account in order to meet the IRS regulations regarding the rate of withdrawal and life expectancy? It is important to set a priority for making distributions from one's retirement accounts before consuming other assets in their estate. The reason for this is the fact that the deferral of income tax on distributions carry over to the next beneficiary even though those assets are subject to estate taxes in the deceased's estate. I recommend that a percentage of market value approach be established so that at the beginning of each distribution period (monthly or quarterly) a calculation is made and the percentage of value is distributed to the retiree. 2. You may have assets outside your Retirement account that have been generated by various investments you have made with excess cash income, the sale of real estate or other assets. How do you manage the ultimate transition over the remaining years of your life? What do you do about arranging your estate so that your spouse and your minor children are taken care of in the event of your early demise? How should you provide for disposition of personal or real property to your heirs? Is there an inherent obligation for the wealthy to give a portion of their estate to charitable organizations, or university endowments trusts, etc.? What considerations should be made to use charitable unitrusts or annuity trusts as a part of your estate disposition plan? What other consideration should you make relative to the disposition of your personal estate? 3 It is never too early for individuals who have started a family and may have children to start doing some estate planning. The use of term insurance can be a sound economic way for a few years to provide for the possibility of death of one parent. This form of wealth creation is quite reasonable for people in their thirties and forties. As the estate grows, this wealth creation insurance method can be canceled as the rising cost of the premium begins to no longer be economic relative to the needs for the benefit.

4. One important consideration to take care of even before retirement is the benefit of establishing a fund that will be available to assure that your grandchildren will have the opportunity to get a college education and attend graduate school if their chosen vocation requires that. By starting this fund at their birth, a small annual regular contribution will in aggregate result in a vary large pool of assets that can be exchanged for the cash necessary to provide their tuition, books and other general support etc. I personally recommend the use of a trust that will distribute at a later time after they complete their formal education. These residual funds will come in handy for the purchase of a home, starting a business, etc. The best part of doing this is that these assets are allowed to generate income and capital gains outside the grantor's estate and if the trust drafted correctly, are also not subject to estate taxes upon the demise of the grantor. 5. Continuous estate planning and trust modification to meet changes in circumstances are very important. As children grow up and become financially independent, as family composition change, divorces take place, etc. It is essential that one's documents are properly written for the circumstances. A good professional investment manager and professional estate attorney will be worth their weight in gold. Conclusion: In today's fast changing world and the pace of life, many families feel the need to step up their standard of living or reach for a better life style by borrowing from the future. The cost of a home in preferred neighborhoods can consume an ever increasing portion of one's gross income. The rise in property tax rates is perpetual and when a homeowner has taken on a large mortgage to acquire a better home in a desirable neighborhood, this interest cost, along with property taxes and other fees, rising utility charges, etc., will steadily erode the discretionary income cash flow available after taxes and after the contribution to a retirement investment fund. This along with natural changes occurring from becoming parents will put terrific pressure on a family to stop or reduce the amount they are contributing to their retirement account. Those who make this decision are destroying the wealth building power of compounding interest and the cost will be significant down the road. Those who are able to maintain the discipline required to voluntarily forgo some of the pleasure associated with early excess consumption can expect to achieve their goal of becoming independently wealthy or at least financially secure in retirement. It requires discipline and a will to succeed to make the parabolic curve work for you. Do you have what it takes???? One Man's Opinion- Remember: "Y.W.B.A.Y.T.Y.A"-"D.S.T.S.S"

Bud Brewer

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