Making Sense of America’s Debt Ceiling Talk

Making Sense of America’s Debt Ceiling Talk

Today I’m taking a little detour from the “Financial Fiction” series I began last week. We’ll reconvene with that topic next week.

Unless you’ve been living under a rock, you are aware that intense negotiations are going up on Capitol Hill and in the White House about America’s “debt ceiling” – whether to raise it or not? That’s pretty much the only news these days.

Okay, what exactly is this debt ceiling?

It's the legal amount of debt that the federal government can borrow. That cap is implemented by Congress. This nation’s current debt, which includes money owed to anyone who owns U.S. government bonds, as well as money borrowed from the Social Security and Medicare trust funds, among others.

So, what’s all this back-and-forth about?

The current debt ceiling is $14.3 TRILIION. The problem is that our debt hit that $14.3 TRILLION cap back on May 16 of this year. So unless Congress raises this ceiling, the federal government cannot borrow any more money – that’s pretty much it!

Some argue that if this ceiling is not raised, the world as we know it will literally grind to a halt. On the other hand, there are those who believe that assessment is baloney because nothing is going to happen. Personally, I’d say that no one can really predict what will happen, but it’s probably not going to be good, either way.

I don’t know about you, but I’m baffled by the fact that the same politicians who are 100 percent responsible for today’s debt ceiling are complaining about America having “too much debt.” Who exactly approved the current $14.3 trillion to begin with?

Is the solution to this issue that difficult?

That’s a good question. This is how I see it: America is in debt up to her eyeballs for only one reason – for decades, we’ve been spending way more money than we collect in revenue. If you think about it, what other reason could have caused our need to borrow money? That said, I can think of only three possibilities for fixing our debt problem:

1. Reduce spending by cutting programs, including Social Security, Medicare, and Medicaid – my dear seniors, please don’t judge me until after you read my entire thought.
2. Increase revenue by taxing people and corporations more.
3. Some combination of numbers 1 and 2 above.

This is it folks – there’s no other solution that will appear from anywhere! I understand that our elected officials are spending a lot of time on this. Well, maybe it really is very difficult – BUT regardless of how long it takes to get there, the solution they’ll end up with MUST be one of the three possibilities I mentioned above. 

Has this whole drama got anything to do with you?

The straight-forward answer is, “You bet!” and here’s why: Of the 3 possible solutions I identified, #3 is the most likely and practical solution. HOWEVER, I must caution you that Congress (and the federal government) has been working on “spending cuts” for as far back as I can remember. The thing is that after all that effort, our federal spending has been steadily increasing. I’m not being sarcastic, here; I’m just saying that Washington, D.C. cannot control spending, period!

That takes any credible spending cuts out of the equation. We are therefore left with one logical option – increase taxes! Raising taxes has nothing to do with Democrats or Republicans; it has everything to do with the fact that politicians see less damage in raising taxes than in cutting spending. I mean whose Social Security, Medicare, or other program are they going to cut? Not the programs of the people who elect them. As far as raising taxes goes, D.C. can easily stick it to “the rich,” which, when you think about it, is an arbitrary distinction.

Here’s something that may surprise many Americans who think that Republicans are opposed to all tax increases. What I hear the Republicans saying is, “Now is not a good time to raise taxes.” I hope you can read between the lines!

If you have money tucked away in a yet-to-be-taxed 401(k) or IRA, you MUST seriously reexamine your overall retirement strategy. Did you know there are relatively simple changes you may make in your retirement planning that could legally insulate you from looming tax hikes? You need to be talking to a savvy, out-of-the-box financial professional.

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Contact Laser Financial Group today to schedule your appointment with a financial professional who will show you legal, ethical tax-free retirement planning options you may not have known about. 301.949.4449 or LaserFG.com.

Financial FICTION #1: When You Retire, You’ll Be in a Lower Tax Bracket Because Your Total Income Will Be Lower Than It Was When You Were Working

Financial FICTION #1: When you retire, you’ll be in a lower tax bracket because your total income will be lower than it was when you were working.

As promised in my June 27 post, in the weeks ahead, I’ll dispel each of the 12 myths I identified in that post. I’m beginning today with the one which, in my opinion, happens to be the most critical and widespread.

Just like all the other myths on that list, this viewpoint sounds believable – even logical – doesn’t it? Unfortunately, though, it’s DEAD WRONG. This theory assumes that the income tax we pay is based solely on the income we earn. You see, under U.S. tax law, we pay taxes on the portion of our income that is taxable. The IRS calls that portion “taxable income,” because not all income is taxable. Just because Mr. A made $200,000 in a given year doesn’t mean that he’ll pay more in taxes than Ms. B, who made only $80,000 that year. That’s pretty interesting, isn’t it?

Let’s look at a hypothetical example:

Mary and her 10-year-old son, Shaun, live in Baltimore. Last year, from her $60,000 income she paid $9,600 in deductible mortgage interest and also made pre-tax contributions of $6,000 into her 401(k). To keep things very simple, let’s hold everything else constant as we look into Mary’s tax situation.

• Mary’s “total income” was $60,000. This amount will appear on line 22 of tax Form 1040. BUT the key here is that Mary (and everyone else in America) is not taxed on the $60,000. She gets to reduce that amount by her deductions and exemptions.    
• In this case, those deductions add up to $22,900 (the $6,000 in 401(k) contributions, plus, the $9,600 she paid in mortgage interest, plus, an exemption of $3,650 each for herself and Shaun, as her dependent).
• Therefore, Mary’s “taxable income” will be only $37,100 ($60,000 less the $22,900). That amount can be found on line 43 of Form 1040. In essence, that is the important number on everyone’s tax return – because that’s the number upon which our final tax payments are based.

This Whole Lower-Income Thing

Now we accept the argument that when Mary retires somewhere down the road, she’ll only need 80 percent of her current income, or $48,000 – but will that definitely lead to lower taxes? It had better. Otherwise, this whole lower-income theory falls apart. 

Let’s see what the numbers say.

Mary’s “total income” from line 22 of Form 1040 is $48,000. HOWEVER, just like most American retirees, her deductions and exemptions will be significantly diminished from when she was employed.

• First of all, she’ll no longer be funding her 401(k) – Mary’s now retired, so it’s harvest time instead.
• Secondly, Shaun will be a grown man and therefore “claim” his own exemption on his own Form 1040.
• What about Mary’s mortgage interest deduction? That’s gone too, because she paid off her house a few years back. In fact, that’s the very reason her financial advisor estimated that she’d need only 80 percent of her pre-retirement income.
• There’s some good news though: Mary still has her own personal exemption of $3,650, plus an additional $1,450 for being age 65 or older, as well as, another $5,800 standard deduction.

Now, please brace yourself for the kicker as we figure the portion of Mary’s $48,000 income that will be subject to income tax.

• From $48,000 we subtract $3,650, less $1,450, less $5,800, which equals $37,100. 

Do you realize Mary’s “taxable income” did not change by even a cent, in spite of the fact that her “total income” decreased by a whopping 20 percent? Perhaps you can now understand my choice of the word FICTION in the title to this post.

Ask Yourself a Few Questions

• Could you (comfortably) live the retirement lifestyle you desire on an income that is significantly lower?
• Have you ever wondered why most American retirees complain about being taxed up the wazoo?
• Does your financial advisor – or the person on whose advice you are planning your retirement – have real-life retired clients? If so, how are they doing, tax-wise? (Remember, just because you see someone on TV or hear them on the radio doesn’t mean they have real-life retired clients; more than likely, they may be using actors to run a show.)

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Contact a financial professional at Laser Financial Group TODAY to begin a conversation about what will happen to your taxable income after you retire. 301.949.4449 or LaserFG.com

If you’re focused on saving money for retirement, your focus is on the WRONG thing!

If you’re focused on saving money for retirement, your focus is on the WRONG thing!

The most unfortunate and expensive mistake anyone can make in planning for their retirement is thinking their focus needs to be on saving money. Yes, I’m quite serious about this! I’d understand if you were a bit perplexed about my rigid insistence on this, because it does run completely counter to the advice of most financial advisors. “All you have to do is save, save, save the heck out of your income!” Once you do that, you will be set for retirement, right? WRONG!

I sincerely hope you will take the necessary action after reading this column to separate yourself from the masses who are plagued by the inadvertent cycle of poverty this erroneous save-save-savings advice creates.

Let me direct your attention to a very interesting dilemma. Wouldn’t you agree that almost everyone saves money toward retirement? I mean, that’s what American workers are trained to do. Yet somehow, only a tiny percentage of people are able to achieve a comfortable retirement – financially speaking – which means that the majority miss the mark. While various reasons may account for this unfortunate situation, I maintain, from my years as an eyewitness into people’s retirement decisions and motivations, that saving too little money is NOT one of them.

You see, the key many future retirees are missing is that the most important thing is not that you save money, but WHERE you save it. Think about it this way: If the container into which you are saving has a leak, most of your savings will eventually drain out. In other words, someone else putting their savings into a container with no leaks will keep all of their savings and likely end up with much more than you, in spite of the fact that you might have “saved” a lot more money.

READ MY LIPS:
It’s all about WHERE
you’re putting those savings!

Let me use this hypothetical scenario to prove this point which continues to elude so many, including so-called financial advisors. Assume it is January 01, 2007, and your investment account has a balance of  $100,000. Let’s also say that you’re investing the traditional way, whereby you can make unlimited gains or losses. Let’s call this Strategy X. Let’s also assume that the S&P 500 Index is where you placed your investment. What actually happened is that the S&P 500 gained 3.53% in 2007; lost 38.5% in 2008; gained 23.5% in 2009; and again gained 12.8% in 2010. So your investment made gains three out of the past four years. In spite of those gains, your account’s balance at the end of 2010 would have been just $88, 699.

Here’s how that math works out:

• The beginning $100,000 gained 3.53%, growing to $103,530 in 2007.
• Then it lost 38.5% and ended 2008 with a balance of $63, 671.
• Then it gained 23.5% and rose to $78, 634 in 2009.
• It again rose in 2010 by 12.8% to $88, 699.

Isn’t this exactly how nine out of 10 Americans are investing their hard-earned money?

Now let’s turn our attention to a little-known yet incredibly powerful approach which we will call Strategy Y. Under this strategy, instead of putting your money directly into the stock market, you will link it to the growth in the same S&P 500 index that Strategy X invested in. However, we are going to cap your gains at 10%, but you will be guaranteed a minimum interest of 0% , so when the S&P 500 plunges, you won’t lose anything. To prove my point beyond all doubt, let us start by funding Strategy Y with $80, 000, a full $20,000 less than the $100, 000 with which Strategy X began their investment. Keep in mind, this is not a “fair” start, because Strategy Y has 25% less money to start with! 

Now pay very close attention to this mathematical breakdown. This $80,000:

·          

• In 2007, you will gain 3.53%, increasing to $82, 824.
•  In 2008, since the S&P 500 lost money, you’d earn 0%, but keeping the same $82, 824 balance.
• In 2009, your gain is capped at 10% (although the index earned 23.5%), leaving you with an ending balance of $91, 106.
• You’ll gain another 10% in 2010 (out of the index’s 12.8% actual gain) and end at $100, 216.

At this point, I don’t need to say much, do I? If I had told you earlier that $80,000 in an account with gains capped at 10% would overtake a traditional account with $100,000, you might have thought I was nuts. 

There may be some who will try to argue that I used only the past four years in my analogy (January, 2007-December 2010), and should have used a much longer time period for my example. The problem with that argument is that it fails to recognize the fact that it takes only ONE dip to ruin everything, when it comes to investing. Here’s my challenge for those who hold this view: Why don’t you crunch the numbers between these 2 strategies over whichever time period you deem reasonable – and get ready for the surprise of your life.

So WHERE is your nest egg saved? Is the container that’s holding your life savings reliable? Please don’t take a chance with your retirement!

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Contact a financial professional from Laser Financial Group today to schedule your complimentary consultation. Find out NOW whether your retirement fund container is sprouting leaks, and what you can begin doing today to fix it! 301.949.4449 or LaserFG.com.

Is It Expensive or Does It Cost More?

Is It Expensive or Does It Cost More? 

Who doesn’t want a deal? Most of us are constantly looking for an opportunity to pay the least amount of money possible for whatever product or service we’re purchasing. 

However, over the years, I have noticed that some folks (including some so-called financial advisors) seem to completely miss the point that there’s a very sharp – and we’re talking huge – difference between something costing more and it being expensive. You see, just because a product or service costs more doesn’t mean that it’s expensive. On the other hand, something may cost less in absolute dollar terms but actually turn out to be very expensive.

Let me illustrate my point with this scenario, which I’m guessing will resonate well with the ladies – sorry, men. I promise, though, you’ll enjoy it, too. Let’s say you go shopping and end up in a Louis Vuitton shop. One thing leads to another, and you find yourself really, really liking the Sistina handbag, with a price tag of $2,200. You decide to splurge and purchase it – hey, you work hard! Then, come Monday morning, you go to the office and see a colleague with what’s supposed to be an “identical” Louis Vuitton Sistina handbag she purchased from a street vendor in New York City over the weekend for just fifty bucks, as in $50. Do I need to mention that hers is not authentic?

Let’s say the “leather” on your friend’s “identical” handbag begins to flake, and the interior suffers a tear after she’s had the bag less than a week. Here’s the million-dollar question. Would you say that your handbag was expensive? Of course not! But why? Because although they may appear to be so, yours and your colleague’s bags are NOT the same. Therefore, your handbag must, should, and does cost more.

You see, we often get sidetracked by what I term emotional tactics, so we wind up making unintelligent, irrational financial decisions. Am I saying that there aren’t any financial products that are legitimately expensive? Of course there are! What I’m saying is that instead of simply evaluating your alternatives based on absolute dollar amounts only, you’ll need to do exactly the opposite of that:

• Begin by assessing and quantifying the output or value (i.e., what you’ll get out of an investment/product) at the end of the day.
• Then, and only then, will you be able to rationally and intelligently evaluate the associated costs.

Generally speaking, all things being equal, most of us would expect an alternative that provides more value to cost more. But you wouldn’t (and shouldn’t) interpret this to mean that it’s expensive! Here’s something I find very interesting: Most of us unknowingly agree and even act on this principle; we like to buy stuff for next to nothing – not that there’s anything wrong with that. But then we want others to compliment us because the items in question are top notch (and, by implication, expensive). I don’t know many people who’d appreciate someone telling them their item is cheap and/or low-quality. 

Keep in mind that “expensive” and “costs more” mean different things when it comes to financial products.

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Call Laser Financial Group today to schedule a complimentary session with a financial professional who understands the difference between "costs more" and "expensive." LaserFG.com or 301.949.4449.