Before I begin, please remember that these thoughts are meant as a compliment to your good sense, not a replacement for it. Nor are they meant to replace the indispensable advice of your CPA or any other relevant professional.
In his prescient book “The Power of Zero”, David McKnight says out loud what we all know: our government is addicted to debt and spending, and no party is on track to fix that problem. As it pertains to investors, many of us have heard recited to us the conventional wisdom that “you’ll be making less in retirement”, and that’s been the justification why you should supposedly find all the tax advantages now that you can (pre-tax 401k contributions, IRAs, etc). Allow me to borrow McKnight’s common sense to challenge both the premise and the environment in which this is often repeated.
Claim #1: “You’ll spend less in retirement”. This cart-before-the-horse thinking is often based on a history of Americans who didn’t save enough and were therefore forced to spend less money in retirement. For many of our clients, they have saved enough that they will not be forced to make that decision. Furthermore, when kids leave the house and the mortgage is paid off (two oft-repeated reasons you’re assumed to spend less later), you lose child tax credits, dependent care deductions and 529 contribution deductions, and you still have to pay taxes, utilities and maintenance on that home, all of which have been inflating while your mortgage payment stayed constant. So our encouragement is to question whether indeed you will spend less in retirement.
Claim #2: “You’ll be in a lower tax rate in retirement”: For some of our clients this is true because their businesses are thriving right now. But all of us in America share this in common: our legislators have proven themselves to have an addiction to deficit spending. We thought it was bad when TARP was passed in 2008, until the “Affordable Care Act” and subsequent spending dwarfed the record. Now, the ACA seems like pocket change compared to the spending enacted in just a few months by both parties of congress, all by using money they don’t have, and knowing (whether admitting it or not) that it will have to come from future taxes. So for many of us, the tax rates we’re seeing today may be the lowest tax rates we ever see in our lives.
There are a lot of reasons why your accountant may encourage you to take deductions now, and we encourage you to consider their advice carefully. But we also encourage in our clients a healthy skepticism of “conventional wisdom” when the underlying assumptions of that wisdom may be flawed.
Any opinions are those of Tim Weddle and not necessarily those of Raymond James. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Past performance does not guarantee future results. Raymond James and its advisors do not offer tax or legal advice. You should discuss any tax or legal matters with the appropriate professional. Raymond James is not affiliated and does not endorse David Mcknight.
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