Richard A. Lindsey, CPA

Lindsey & Waldo, LLC – Certified Public Accountants

  • Sep 19

    My in-laws seemed to typify what I think the WWII generation’s approach to retirement was. You saved, you scrimped, you paid off your mortgage and your credit cards, then, purchased your last car so that when you hit retirement you could relax. Your retirement income was used for putting bread on the table, gas in the car and healthcare. If there was any abundance then you could think about luxuries or travel. Retirement, when it first occurred, was not planned as a long-term stage of life. This was also the generation that experienced the great depression.

    Today’s retiring baby boomers, as a group, are not approaching retirement in the same manner as their parents. Despite vanishing pensions, increasingly low 401(k) balances and threats to Social Security and other welfare programs, retiring baby boomers seem to have little or no desire to give up their current lifestyles.

    The Securian Financial Group surveyed baby boomers and retirees in 2013. Just under half of the 526 retirees, 49% carried debt into retirement. Of those that carried debt into retirement, 59% carried mortgages; 59% carried credit card balances, and just over 30% carried car loans. That debt may carry well into their retirement. Twenty-two percent expected it would take longer than 10 years to pay off their debt.

    Based on the latest data available, the average US household owes $7,115 to credit card companies. However when we focus in on just the households with unpaid credit card balances stretching out over several months, then the average credit card debt skyrockets up to $15,252.

    Lately there been some financial planners suggesting that retirees continue to carry a mortgage into and throughout retirement. Reinvest the money from your home equity, they say, and suddenly that new income is making your golden years a little more golden. Brilliant strategy, right? Wrong!

    The idea behind this strategy is that your residence produces no income and your home equity is useless unless you borrow against it. Historically, in the long run, homes provide a rate of return below that of a properly diversified investment portfolio. Because home equity typically makes up a substantial portion of a retiree’s net worth, it can be argued that by trading the asset of the equity in home for a properly diversified portfolio asset you’ll make more money. Secondly, they say investments such as mutual funds or exchange traded funds are easily liquidated and can be sold piecemeal to meet extra spending needs. Lastly, it is argued that interest on a home loan is tax deductible. This can serve to minimize the cost of using this form of leverage, making it easier for your investments to outperform.

    Despite the rosy picture painted by its proponents, a mortgage is simply another form of leverage. With leverage, your risk is increased and your financial life becomes more complicated. Furthermore the income you get from your investment will likely fluctuate. Prolonged downward fluctuations like we saw in 2008 could erode your financial base, potentially jeopardizing your future stability and ability to keep up with the payment. This variability could affect your peace of mind. If you become frightened during swift downturns you may overreact by tapping into your portfolio in order to pay off the mortgage. Instead of reaping the benefits of market increases you may actually end up suffering from market losses.

    Although 30 year average returns for stock market or mutual fund investments run around 10 to 12%, short-term returns are never the same as long-term returns. The average retiree’s investment horizon is generally much less than the “long-term”. You can’t expect steady annual returns that resemble historical averages. In other words you can’t rely on average returns when thinking that you can invest your home equity and come out ahead. Unless you can invest in a vehicle with a guaranteed return that is at least 2% higher than your mortgage cost, then you’re fooling yourself. Your mortgage has a guaranteed rate you’re committed to pay. If you can’t guarantee a 2% margin (most banks have at least a 2% spread between the interest rates they charge and the interest rates they pay), then the risk is not worth the downside.

    Many of you may be skeptical about the value of paying off your mortgage because of all the hype about the value of the tax deduction related to owning a home. But it’s just a myth. And a myth I can easily discredit.

    Let’s assume you have a $200,000 mortgage with a 4% interest rate. That means you’re sending $8,000 to the mortgage company, excluding any principal. If you itemize your deductions, then you may get a tax benefit of between 15 and 35% of the interest paid. — Only about half of homeowners receive a tax benefit from their mortgage. — For sake of the conversation, let’s say 25%. That’s $2,000. So, for the “tax advantage” of your mortgage, you send at least $8,000 to the mortgage company in order to avoid sending Uncle Sam $2,000. Doesn’t sound like saving money to me.

    If you pay off your mortgage you’ll increase your cash flow, have less stress, fewer worries, and sleep better at night!

    Warning: Don’t pull money out of retirement accounts to pay off debt except in extremely rare circumstances. Done incorrectly, you can end up paying thousands of dollars in unnecessary taxes and penalties. Make sure you consult a tax advisor before making a withdrawal from a retirement plan.

  • Sep 5

    The tax code today is at least 73,954 pages long. Which is about 185 times longer than it was in 1913.

    I say this simply because some of my friends wonder why it is that I don’t just sip margaritas by the pool all summer. No, my work doesn’t end.

    There are two big reasons why we work so hard around here at Team Lindsey…

    1) The tax code is not only incredibly long and complicated — but it carries contradictory incentives for taxpayers. Sorting through all of them is indubitably not a task for a computer software program. It requires sitting down with an individual, a business owner, a family — and determining what they care about most, and how to plan for it properly.

    Really, that’s the only way to do it. Everything else is just ‘after the fact’ clean-up work.

    Which is why it’s so critical to meet with someone NOW to make sure that you’re set up to hold a tax position which represents the real picture of where you are going. This is the essence of tax planning. Some may say that this is overstating it — but after years of doing this, I’ve become convinced that it’s the truth. I’m in the business of helping you fulfill your dreams by helping you hold onto as much income/revenue as possible!

    2) The other big reason this job is no cupcake is what’s required to stay up to date with how the law *changes* … and it’s made much worse by what happens in Congress.

    Yes, the IRS as an institution has not grabbed great headlines this last year. That’s a problem. But it’s not the source.

    (By the way, there IS hope for this problem, especially for our clients.)

    Despite what certain voices would claim over the internet, the truth is that we don’t have the choice to “not file” or “not pay” what the tax laws say we owe. That’s why the IRS audits returns and has all sorts of mechanisms (liens, refund offsets) to encourage us to file by each April 15, and to do so correctly.

    But even with payroll deductions, etc. we U.S. taxpayers are trusted to fill out the forms, ensure the correct amount was withheld and let the IRS know what our true final bill was. That’s called tax filing. And if we discover that we owe the U.S. Treasury, then our system, as it stands now, relies on us to send in the necessary payments. This, of course, is what we spend much of our time on around here at Team Lindsey — helping YOU do this ethically, but ensuring you’re not overpaying.

    But Congress seems to encourage tax cheating.

    They do this — probably unintentionally — by tinkering with our tax laws so much. They change them, sometimes slightly, sometimes quite a bit, and they do so constantly. What’s worse is the annual rite of procrastination in the House and Senate. I see this all the time. As a regular course of business.

    And these delays in tax changes — or the decision to make some laws retroactive months later (extenders, estate tax, etc.) — totally screw up basic tax planning, sometimes negating options that could have been used to legally lower a tax bill.

    (Which, incidentally, is why I have to pay so much attention to what’s happening in the legislation NOW, during the offseason. I do this so you don’t have to!)

    So some people cheat. And, unfortunately, they feel justified in doing so.

    One recent example was the first-time homebuyer credit that was created back in 2008 … then revised … and revised again. Many homebuyers had to “pay back” a credit that was taken under existing law — then later cancelled.

    And, I know (from conversations) how many felt justified in finding ways to “skim back” (read: cheat) that $500 into their returns because they were annoyed by how Congress handled it.

    And there are plenty other tax laws with similar histories that tick off filers enough so that they look for ways of getting payback when they fill out their 1040s.

    Now I’m not AT ALL condoning these taxpayers’ decisions to “even up” the tax code where they may find it unfair. Life is unfair and taxes are a huge part of life.

    But Congress can do a lot to prevent such “they hurt me, so I’ll hurt the tax system right back” attitudes, by doing its tax-writing job in a more rational and professional manner.

    Until it does, then Capitol Hill is going to keep creating tax cheats.

    But here’s where the hope comes in…
    For my clients and readers, you can rest assured that we are paying attention … and will be on top of (even) the procrastinating legislators. We’ll do all we can to make sure you don’t make moves that you’ll regret after the fact.