Richard A. Lindsey, CPA

Lindsey & Waldo, LLC – Certified Public Accountants

  • Sep 21

    Didn’t you just love the Olympics? Seeing Gabby Douglas (who was, after all, only offered a “courtesy” invite to the trials, apparently) win the all-around women’s gymnastics gold medal… and smile all throughout.

    By the way, did you know that based on her winning two gold medals, she could owe as much as $17,972 in income taxes after her trip to London? Yeah, the American winners have to pay income tax on the prize money they win ($25,000 for gold, $15,000 for silver and $10,000 for bronze) and as well as the value of the medal they win. A gold medal is estimated to be worth $675 based on recent commodity prices. But I digress…

    Kids can be so much fun.

    And they can be a financial drain…

    Back in ancient history (1985) Franco Madigliana won the Nobel Prize for Economics by observing the simple technique that squirrels know intuitively from birth. You have to squirrel away some nuts during times of plenty so you can survive during times of scarcity.

    In doing so, Professor Madigliani looked at the income and expenses of typical people over their life span. He found that typical household income was more than enough to meet expenses during some times in the family’s life, while at other times, money was tight.

    So, it stood to reason, and still does, that preparation during these times of surplus will help families avoid going into debt during tougher times.

    Madigliana identified two phases of the family cycle which apply to younger families:

    1. Before having children there is often a surplus of income.
    2. While rearing and educating children, there is often a deficit when the family is spending more than they are earning.

    So, the obvious conclusion is: Before the children arrive, squirrel away some money.

    When you are starting out, don’t try to duplicate your parents’ lifestyle.

    Most of today’s college graduates are ill-prepared for the real world of financial responsibility. They never saw how their parents lived when they were first married and struggling. As a result, they often base their after-school expectations on upper-middle class lifestyle. My suggestion for parents? Repeatedly emphasize, and show, that success is earned from the bottom up.

    So, for example, if you are a young adult, you can’t afford more house than your budget will allow. If you spend 50% of your lifestyle expenses on housing, you will not be able to live proportionally on the rest of your income. Too much house is one of the most common mistakes young people make.

    It is almost as though we can’t feel successful without immediately enjoying the lifestyle of our parents at the height of their careers! So, help your children decide how much house is enough, and help them to calculate what they can buy for 30% of their standard of living.

    Encourage your children to save as much money as they can in their 20’s.

    Early in your career, when the cost of basic needs is small, income often covers expenses, allowing the surplus to be used for saving, investment or added consumption.

    Many young people assume they are doing so well financially that they can simply spend their extra money on more stuff. They don’t realize that these years of plenty won’t last.

    During this period, save and invest up to 50% of your disposable income for future expenses. Fully fund Roth accounts, and fund 401(k) plans to take advantage of any available employer match. Save 10% of your take-home pay for future large expenses. Put an additional 5 to 10% into long-term taxable savings.

    This advice is especially important for those who delay marriage until they are in their 30’s. Don’t waste a decade of prime savings and investing. You owe it to yourself and your family to store up those nuts now.

  • Sep 7

    Social Security benefits can represent a big stack of cash. A typical monthly benefit of $2,200 has a present value of well over $500,000! So, despite the fact that it seems like an easy decision, you need to consider all of your Social Security options carefully to avoid making a costly mistake.

    Like all government law, Social Security is not a single piece of simple legislation. Since the Social Security Act became law in 1935, hundreds of amendments have been piled onto it, and have thereby added to its complexity. So to make the best decision about how to file for it, you’ll need to consider at least four things:

    • Health,
    • Income before retirement,
    • Income during retirement, and
    • Taxes.

    Retirees cannot rely on conventional wisdom! Simplistic rules such as “Always file for early benefits” or “You need to stop working to receive benefits” are NOT always true. There are specific cases that break every rule of thumb. And these one-size-fits-all answers leave many retirees failing to maximize the benefits they have earned.

    At least four methods are used when electing how to take Social Security benefits. And if you’re married, the two of you can mix and match these in more than 16 different ways! Each choice results in a different cash flow. By using the cash flows and the time value of money, you can determine which method will offer you the best maximum value.

    These methods differ significantly. They depend on your historical earnings, marital status, continued work in retirement, life-longevity and rates of return. The choice alone could be worth $250,000 of income or more. Filing options include “filing early,” “standard filing,” “delayed filing,” “file and suspend,” and many combinations of these options for married couples. It is definitely worth careful study and analysis of each option. Yet a majority of Americans make their choice impulsively and emotionally.

    The decision is extremely crucial for women. For 42% of single women older than 62, Social Security is their sole source of income. Women on average outlive men. Thus, planning for retirement is usually much easier for men (who statistically tend to have more assets and die younger). Widows are twice as likely to live under the poverty line as men who have lost their wives. And the poverty rate for elderly single women is 23% compared to just 5% for retired couples.

    So couples must take their joint longevity into account before either one files for benefits. The person with the longer life expectancy will inherit either a wise or a foolish decision that will last a lifetime. Given that the husband’s benefits are often higher and the wife’s life expectancy longer, each case needs to be analyzed carefully.

    Unfortunately, many people file after considering only one or two options in isolation. Even worse— the Social Security Administration’s new online filing system enables quick decision-making. People can easily submit their request without any professional advice or planning.

    Before filing, get informed about all the options. To begin, you need to know your personal Social Security earnings and the projected benefits for both you and your spouse. You can request an estimate at www.ssa.gov/estimator and then print the results. Or call the Social Security Administration at 800-772-1213. You can also get a copy of “Retirement Benefits,” Publication No. 05-10035, online.

    Social Security planning is crucial for everyone. People with significant assets should carefully consider both the lifetime benefits and tax consequences of Social Security in light of their overall portfolio strategy. For the less well-off, Social Security benefits will dictate their retirement lifestyle. Proper planning could well determine what they can afford to eat.