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Thank Abraham Lincoln for the three extra days you have to file your 2015 taxes.
Why is tax day April 18 this year?
By Jennifer Larino, NOLA.com | The Times-Picayune
April 07, 2016 at 9:02 AM
Tax Day is typically April 15. This year that date coincides with Emancipation Day, the Washington D.C. holiday that celebrates the end of slavery in the U.S. capital.
Emancipation Day is usually observed April 16, the date in 1862 when President Lincoln signed the Compensated Emancipation Act. The act freed the 3,100 slaves who lived in the capital.
But April 16 falls on a Saturday this year, So the local government in D.C. will shut down a day earlier to mark the holiday.
Federal government offices do not close during the holiday, but the Internal Revenue Service treats D.C. holidays the same as federal holidays when it comes to filing taxes. That pushes the official national deadline to the next business day, or in this case, Monday, April 18.
The Washington Post reports that residents in Maine and Massachusetts get an extra day, on top of the three-day extension, thanks to Patriots’ Day, the April 18 holiday marking the revolutionary battles of Lexington and Concord. Taxpayers in those states will have until April 19 to file.
The expression is a Proverb, “April showers bring May flowers”
1. April, traditionally a rainy period, gives way to May, when flowers will bloom because of the water provided to them by the April rains.
2. By extension, that a period of discomfort can provide the basis for a period of happiness and joy.
April showers bring May flowers,
That is what they say.
But if all the showers turned to flowers,
We’d have quite a colourful day!
There’d be bluebells and cockleshells,
Tulips red and green,
Daffodils and Chinese squill,
The brightest you’ve ever seen.
You’d see tiger lilies and water lilies,
Carnations pink and blue,
Forget-me-not and small sundrop
Glistening with the dew.
We’d have fireweed and milkweed
And many more different flowers.
Mexican star and shooting star,
Falling in the showers.
And if all the showers turned to flowers
On that rainy April day,
Would all the flowers turn to showers
In the sunny month of May?
The objective of the required minimum distribution rule is to ensure that the entire value of a traditional IRA or employer-sponsored qualified retirement plan account will be distributed over the IRA owner’s/retired employee’s life expectancy. When Must Required Minimum Distributions Begin?
In the case of traditional IRAs, required minimum distributions must begin no later than April 1 of the year following the year in which you reach age 70-1/2 and must continue each year thereafter.
In the case of employer-sponsored qualified retirement plans, required minimum distributions must begin by April 1 of the year that follows the later of (1) the calendar year in which you reach age 70-1/2 or (2) the calendar year in which you retire from employment with the employer maintaining the plan (unless the plan requires that you begin receiving distributions by April 1 of the year that follows the year in which you reach age 70-1/2).
If you wait until the year following the year in which you reach age 70-1/2 or, in the case of a qualified retirement plan, retire from employment, you must receive a minimum distribution on behalf of the previous year by April 1 of the current year, and a minimum distribution on behalf of the current year by December 31 of that year.
How Are Required Minimum Distribution Amounts Calculated?
IRS regulations regarding required minimum distributions include a “Uniform Lifetime Table” with “Distribution Period Factors.” The appropriate “Distribution Period Factor,” based on your age in the distribution year, is divided into your account balance as of the previous December 31 in order to determine your required minimum distribution for the current tax year.
What Happens if Minimum Distribution Requirements Are Not Met?
The difference between the required minimum distribution you should have received and the lower amount you actually received is subject to a penalty tax of 50%…an outcome to be avoided! Financial institutions report IRA distributions to the IRS on Form 5498 and are required to indicate if the IRA is subject to required minimum distributions.
May I Withdraw More Than the Required Minimum Distribution?
Yes, although minimizing qualified plan and IRA distributions may result in substantial tax savings. Consult your financial advisor for a more in-depth analysis.
*NOTE: The above discussion does not apply to non-deductible Roth IRAs, which are not subject to minimum distribution requirements.
Please contact my office, Contact@benefitci.com, or call 909-548-7444, if you would like additional information on required minimum distributions.
MESSAGES from the Masters…
WORDS by Zig Ziglar
Frequently, we become so pragmatic that we fail to be effective. Years ago the editor of the Dallas Morning News pointed out to the sportswriters that “Bill” was not a suitable substitute for “William,” and “Charlie” was not a suitable substitute for “Charles.”
Taking him literally, one of the sportswriters, in the heyday of Doak Walker of Southern Methodist University, wrote about an important game. In his story he pointed out that in the third quarter Doak Walker had left the game with a “Charles horse.” I think you’ll agree that the story lost some meaning with the use of “Charles.”
Perhaps the ultimate absurdity occurred in an article in a national publication when the writer set up the computer to analyze Lincoln’s Gettysburg Address. Incidentally, that address contains 362 words and 302 of them are one syllable. It’s simple and direct, but powerful and effective.
The computer, however, made some recommendations about how the speech really should have been given. For example, instead of saying, “Four score and seven years,” the computer deemed that approach too wordy and suggested, “Eighty-seven years.” The efficiency in the reduction is obvious, but the loss of effectiveness, power, drama, and passion is even more obvious.
When Lincoln said, “We are engaged in a great civil war,” the computer questioned whether the word great was justified. This despite the fact that our nation suffered 646,392 casualties, including 364,511 deaths. The computer stated that the sentences were too long, and it criticized the statement that we could never forget what happened at Gettysburg as being negative.
I think you’ll agree that eloquence and drama, combined with passion, logic, and common sense, are far more effective in inspiring people to do great things than technical correctness.
Think about it. Knowing their power, use your words carefully. You’ll be a greater contributor to humankind.
QUOTES from the Masters…
“I believe…that every human mind feels pleasure in doing good to another.” — Thomas Jefferson
“The world is my country, all mankind are my brethren, and to do good is my religion.” — Thomas Paine
“Too often we underestimate the power of a touch, a smile, a kind word, a listening ear, an honest compliment, or the smallest act of caring, all of which have the potential to turn a life around.” — Leo Buscaglia
“Because the soul has such deep roots in personal and social life and its values run so contrary to modern concerns, caring for the soul may well turn out to be a radical act, a challenge to accepted norms.” — Thomas Moore
“When you come to the edge of all the light you know, and are about to step off into the darkness of the unknown, faith is knowing one of two things will happen: there will be something solid to stand on, or you will be taught how to fly.” — Barbara J. Winter
“Certain thoughts are prayers. There are moments when, whatever be the attitude of the body, the soul is on its knees.” — Victor Hugo
“Spiritual values transcend the material artifacts that we can touch and see. They take us into the realm of beauty, inspiration and love.” — Nido Qubein
Monday, February 22nd, is George Washington’s birthday. He was the first President of the United States, one of the Founding Fathers of the United States, presided over the convention that drafted the current United States Constitution and during his lifetime was called the “father of his country”. Serving Two Terms, he was born in 1732, and died December 14, 1799 at age 67.
5 Great Quotes from George Washington:
“It is better to offer no excuse than a bad one.”
“Associate with men of good quality if you esteem your own reputation; for it is better to be alone than in bad company.”
“Human happiness and moral duty are inseparably connected.”
“Observe good faith and justice toward all nations. Cultivate peace and harmony with all.”
“Worry is the interest paid by those who borrow trouble.”
Mind These Tax Code Changes as You Prepare Your 2015 Returns
Tax season has now opened and we are discovering a whole new world of confusing regulations and complex forms. Manage your returns with this review of changes specific to the 2015 tax season.
Emancipation Day is an official holiday in the District of Colombia, ad this year Emancipation Day falls on April 15. Therefore, U.S. taxpayers in all 50 states will be granted an extra few days to complete their returns in 2015. April 18 is the official date by which all tax returns must be filed. Taxpayers in Maine and Massachusetts will have until April 19 to file their tax returns, as Patriot Day falls on April 18 in 2016.
Under the Affordable Care Act (ACA), most Americans must purchase health insurance or pay a penalty via their tax return. To calculate the penalty tax, first determine the amounts owed under the “flat-dollar amount” and “percentage of income,” and then take the higher of the two numbers. The flat-dollar penalty for 2015 is $325 per adult plus half the adult amount for each uninsured child under age 18. The total household penalty under the flat-dollar calculation is capped at three times the adult rate, or $975.
For the percentage of income calculation, take your taxable income and multiply by the percent assigned to the tax year (2015 is 2%). The percentage of income penalty is capped at the average cost of a bronze plan, which for 2015 is $2,484 for an individual and $12,240 for a family of five.
Tip: Go to the IRS website to learn more about what qualifies as health care coverage under the ACA.
The IRA contributions limits remain unchanged at $5,500 per person (individuals age 50 and older may contribute up to $6,500 to an IRA). If an individual’s income does not reach a certain threshold, you can contribute directly to a Roth IRA up until April 18, 2016 (see Table 1). For singles, the income threshold for 2015 Roth IRA contributions begins at $116,000 and ends at $131,000. For married couples filing jointly, the threshold begins at $183,000 and ends at $193,000.
|Table 1: Retirement Plan Contribution Limits|
|Retirement account||Income threshold for tax year 2015|
|Roth IRA contribution limit||$5,500|
|Roth IRA contribution limit if 50 or over||$6,500|
|Traditional IRA contribution limit||$5,500|
|Traditional IRA contribution limit if 50 or over||$6,500|
|Roth IRA income limits (single)||$116,000-$131,000|
|Roth IRA income limits (married)||$183,000-$193,000|
Tip: If your income exceeds the threshold for a Roth IRA, contribute to a Traditional IRA and then convert it to a Roth IRA, which can save you a lot of money over the long-term.
For tax year 2015, the personal exemption amount is $4,000. The personal exemption phase-out (PEP) thresholds for taxpayers with higher incomes are based on filing status as shown below in Table 2.
|Table 2: Personal Exemption Thresholds|
|Filing status||PEP threshold starts||PEP threshold ends|
|Married filing jointly||$309,900||$432,400|
|Married filing separately||$154,950||$216,200|
|Head of household||$284,050||$406,550|
Source: Tax Policy Center
The income threshold for the highest tax bracket increased for tax year 2015, benefiting those who fall in or just under the highest tax bracket. For the taxpayers in the 39.6% tax brackets, the taxable income threshold has risen, as shown below in Table 3.
|Table 3: Highest Tax Bracket Thresholds|
|Filing status||Tax year 2015|
|Married filing jointly||$464,850|
|Head of household||$439,000|
|Married filing separately||$232,425|
|Estates and trusts||$12,300|
Remember, there are two types of tax deductions: standard and itemized, but you can only claim one type of deduction on your tax return. If you do not itemize, the basic standard deduction depends on your filing status and is subtracted from the adjusted gross income to reduce your taxable income. In addition, blind taxpayers or those over age 65 can take an additional deduction.
|Table 4: 2015 Standard Deduction|
|Filing status||Tax year 2015|
|Married Filing Jointly||$12,600|
|Married Filing Separately||$6,300|
|Head of Household||$9,250|
|Dependent filing own return||$1,050|
|Blind or over 65||$1,250 additional deduction|
|Blind or over 65, unmarried or not a surviving spouse||$1,550 additional deduction|
Attempting to leverage the constantly evolving tax codes may be challenging for financial professionals, and can be terrifying and simply too time-consuming. Ensure you work with a tax professional when questions arise.
Debra Taylor, CPA/PFS, Esq., is the president of the Taylor Financial Group, LLC, a wealth management firm in Franklin Lakes, N.J. Debra has been recognized by her broker-dealer for her client service and has been named a member of LPL Financial’s Chairman’s Council, a recognition given to the top 2% of all advisors supported by LPL Financial.
Your economic situation is a matter of choice, not a matter of chance. Misguided and self-inflicted, it is centered on the lack of knowledge. Driven by fear, cautious of change and paralyzed by perceptions, financial decisions are made by default, without knowledge, unaware of unintended consequences. Today, the vast majority of people are troubled and confused about the economy. They have been bombarded by the media, bullied by sales people, and bewildered by the millions of things they feel they need to know. Over the past eight years, they have seen all the financial lessons they learned in the 1980s, 1990s and even recently, fail them. They know they can’t live on four and five percent rates of return, yet they are scared and hesitant to make crucial decisions necessary to survive in today’s economy. To make matters worse, right now, 90 million Americans are faced with the most critical investment challenges of their lives.
We are going to shed some light on this darkness. We will break this problem down and analyze it carefully. Then, you will have a clear view of choices open to you. You will feel more confident and prepared to make financial decisions. If something you thought to be true wasn’t true, when would you want to know about it? That defining moment in your financial world comes with the understanding of the efficiency of money. It is a simple yet effective method of uncovering and reducing transfers of your wealth that occur everyday, unknowingly and unnecessarily. The financial savings are staggering.
Setting The Stage
Traditionally, we have been taught that there is only one way to make money grow: To get a higher rate of return on the money. But who is the one at risk in this quest? You, or the one making the recommendation? There is another way to make your money grow, but it is often overlooked. It is called the Efficiency of Money. To get a better understanding of this, you must look deeper to get a clearer view of what is happening in your financial world. First, you must understand that there are only three types of money in your life . . . lifestyle, accumulated, and transferred money. Your lifestyle money is the money you spend to maintain your standard of living. Accumulated money is the money you try to save, and transferred money is the money that you spend and give away, sometimes unknowingly and unnecessarily. It is in transferred money where you lose most of your wealth. This is where your perceptions become greater than your knowledge.
There are many forms of transfers, but the largest by far is taxes. The average household hands out about 50% of its earned wealth for direct and indirect taxes. For whose benefit do we labor, ours, the banks’, or the government’s? Financial advice given by the government and the banks has created record profits for banks and record tax revenues collected by the government. It is no longer enough to simply invest money without understanding the unintended consequences that will confront you financially in the future. Understanding the changes that are going to occur in the near future could dramatically affect any financial planning that you may have considered. If several years ago someone would have given us warning signs that the market would be depressed, that we would be involved in a war, that the Twin Towers in New York would be attacked and destroyed, that thousands of people would die, that we would have terror alerts every day, that entire industries would be near financial collapse, that scandals would rock Enron, Kmart, Arthur Andersen, WorldCom and the airline industry, would we have made some changes? Having that information in advance could have eliminated huge personal financial losses.
Today we have uncovered some of the problems that we will have to confront in the near future. They could affect your personal finances tremendously. Given this information now could help you eliminate or reduce future financial trauma. This is not about the financial products you own, rather what you know about controlling your money. Without this knowledge, you may simply become the perfect taxpayer.
One of the problems we have is that we confuse assumed rates of return with facts. A fact is something we know is going to happen. In preparing your financial future you need more facts than estimated guesses. Wouldn’t you agree that having the facts would be a good place to start planning your financial future?
In 3000 days, about two-thirds of the now-working population will be 60 years old or older. This is a certainty! Unfortunately, this leaves one-third of the now-working population to pay for all the government social programs for a majority of retired citizens. To compound the problem, the costs of social programs such as Medicaid, Medicare, and Social Security increase every year. This leaves little doubt that increased taxation will be needed to maintain these programs. Increased life expectancy of retirees also adds to the cost of these programs. According to the 2000 U.S. Census, there was a 12% increase in people 65 years of age or older during that decade from 1990 to 2000. It is estimated that by 2040, the elderly population will represent 20.7% of the total population. The largest segment of the population that grew the fastest was people between the ages of 90 and 94, which increased 44.6% since 1990.2 Overall, the number of people between the ages of 80 and 94 increased 25.7% since 1990. A 65-year-old woman in the U.S. as of the year 2000 could expect to live another 19.2 years and a 65-year-old man could expect to live another 16.3 years. In 1900, the average life expectancy was 47.3 years.
This shift in the demographics creates other problems we must face. As elderly people retire, they have a tendency to shift their investments from stocks to more secure positions. Alan Greenspan addressed this issue in February 2002. Greenspan stated that because of the demographics of the country, it will be a real challenge to maintain the value of these retirement assets. He states, “This ever larger retired population will have to be fed, clothed, housed, and serviced by a workforce growing far less rapidly.
1. The retirees may have accumulated a large stock of retirement savings, but the goods and services needed to redeem those savings must be produced by an active workforce assisted by a stock of plant and equipment sufficiently productive to meet the needs both of retirees and a workforce expecting an ever increasing standard of living.”
2. He goes on to say that “. . . the focus of the economy as a whole, of necessity, must be on producing the real resources needed to redeem the financial assets.”
3. In that same speech, Greenspan goes on to state that “[i]f the Social Security Trust Fund is depleted, the law requires that benefits are paid only to the extent that they can be financed out of current payroll tax receipts.”4 Do you really think a politician will allow this to happen? No, but it will take increased taxation and less benefits to keep them in existence. If retirees move to more secure investments, it leaves only one-third of the now-working population to buy the stocks being sold off. The problem is, when there are more stocks to sell than buyers to buy them, prices fall. Future retirement accounts could plummet again. Compounding this problem is the fact that companies rely on stock revenues for future research and development. This loss of revenue could stifle future economic growth and profits. Relying only on stocks for retirement could result in unintended consequences, caused by taxation, unstable market conditions, and the inability to maintain the value in stocks as we now know them.
Along with shifting age demographics, the government itself plays a role in diminishing our future wealth. Over the last 30 years, the only thing the government has done consistently is overspend the amount of money it has taken in. The government’s central focus has become collecting revenues, a/k/a taxes. The government is very good at it, but the financial burdens are passed on to us. We are expected to follow the 47,000 pages of tax law under the threat of penalty or imprisonment. Another problem is that, in 3,000 days, there will be fewer workers to pay for the government’s increases in spending, along with the cost of social programs. This will leave an enormous cost burden for the workers to pay, along with the challenge of trying to improve their own standard of living. Diminishing benefits and increasing costs will leave no one satisfied.
To survive, the government will have to raise taxes. Let’s take a look at what the government has said they have done to help us. Recently they raised the amount of money you can put into the government qualified retirement plans. Why? Why? Why?
To secure your financial future, or theirs? It sounds like you will save on taxes but you most likely won’t. We have left it to them to decide at what rate they will tax this money in the future when we retire. Will it be lower, likely not! Just look at the dilemma they have created for themselves.
This is imperative: DO NOT BECOME THE PERFECT TAXPAYER.
If We Know Something For Certain Once again, why did the government recently increase the levels that an individual can contribute to 401(k) plans and IRAs? Was this change initiated because they were concerned about your financial future OR THEIRS? A 401(k) or IRA simply defers taxation to a later date. It would be a different story if the government would guarantee that you would be taxed at the same tax level you were at when you put the money into these plans. Will they ever do that? No! They need and want as much of that money as they can get.
I can still hear the words echoing in the halls of financial wisdom “You will probably retire to two-thirds of your income, and thus be in a lower tax bracket.” Don’t count on it! Many professional planners believe that you can retire to two-thirds of your current income. Be cautious of this thinking. They are telling you to retire with less money so you pay fewer taxes. Not a great solution. When you add the changing demographics, do you really think that, at any level, taxation is going to be lower in the future?
Now let’s look at government spending. To get current levels of the public debt, go to: http://www.treasurydirect.gov/NP/debt/current. There, the current public debt of the government is listed daily. Look for the years in which large government surpluses were proclaimed and look for payments against this debt. Can you find any?
Now do you think that with this increasing debt to be paid, and the changing demographics of the country, that future taxation will be lower?
People should be hesitant to put money into government-sponsored retirement plans (401(k)s and IRAs) at a 28% tax bracket, knowing that upon retirement the tax levels could be, at that time, 35% or higher. Is that a 7% increase in taxes? No, that’s almost a 30% increase in tax levels. One thing you do need to know for certain, taxes will be waiting for you in the future. There will be fewer workers and more retirees and possible increases in government social programs and spending.
Doctor, It Hurts When I Do This
If it hurts you, don’t do it. The government’s doctor says don’t worry about the pain (paying unnecessary taxes) keep doing it until you die. Even then, taxes will be due but at least you won’t feel the pain. Today, you need more knowledge so you are capable of making better financial decisions. The more you know the less pain you will suffer financially. The solutions to a rewarding financial future are not found just in the stock market. But that’s what most people believe. Why? Because that’s all they know. IT IS DIFFICULT TO GET THE RIGHT SOLUTION WHEN YOU START OUT WITH THE WRONG PREMISE.
Remember Who You Are
Not only must you invest wisely but you must learn about the Efficiency of Money and wealth transfers. Your investments must be intertwined with these lessons to maximize your wealth no matter what level of wealth you are at. REMEMBER: The government sees you as a taxpayer. The bank sees you as a borrower. Investment companies see you as a fee payer. If you don’t utilize the lessons of efficiency, these organizations, the government, the banks, and investment companies, will be first and foremost in your entire financial life. There will be no financial freedom until you can loosen the burdens in dealing with them.
The Last Picture Show
Imagine taking your spouse and kids to see a movie. You go into the theater, buy some popcorn and snacks. You find seats with no tall people in front of you and you start to relax. Looking around you notice an IRS agent that you’re acquainted with. His family is with him. You continue looking around the theater and you notice your banker and his family are also there. A few rows behind them are your investment broker and her family. What a small world! The lights dim and the movie begins. About five minutes into the movie an usher comes down the main aisle and the lights come up.
“Ladies and gentlemen we have a problem. There is a small fire in the lobby and we want everyone to leave calmly using the emergency exits.” You’re stunned. You look at your spouse and kids and say, “Don’t worry, everything will be okay. Wait right here for one minute.” You run over to the IRS agent and his family and help them out of the theater. Running back to your family you say “just one more minute,” and you run back to help your banker and his family to the exits. This time on your way back you don’t even stop at your family but simply give them that gesture with your index finger meaning you’ll be right back. You continue running to assist your investment broker and her kids out of harms way. Finally, you get back to your family to secure their safety. They have that dumbfounded look on their faces and you realize you may have lost a few votes for the Parent of the Year Award.
First, Not Last
This story may be irrational from a humane, loving standpoint. But from a financial standpoint, it is very true more times than not. The government, the banks, and investment companies have remedies to make sure that, in the event of something happening to you, they will still get paid…FIRST. Your family’s outcome is of little consequence to them. Sustaining their financial future is more important to them than yours is. You must learn financial concepts and ideas that will put you and your family and your financial goals first. You must develop liquidity, use, and control of your money. You must also learn about lost opportunity cost. These concepts will increase your wisdom in making financial decisions. Knowing this, the next time your family is faced with a crisis or even new opportunities they will be first, not last.
Nevertheless, we continue to load up 401(k)s and IRAs without any clue what future tax rates on these programs will be. The government is like a casino owner, they know they are going to win. You must learn the difference between government debt and government deficit. You must also learn and know how to plan for retirement besides using government-sponsored programs.
Handwriting On The Wall
The government knows it is between a rock and a hard place on the issue of Social Security. Greenspan’s comments are an “I told you so” type of statement. “In addressing the impending retirement of those born just after WWII, we will need to consider whether Social Security should better align itself with the funding provisions of our private pension and annuity system. Policy makers need to consider these issues now if we are to ensure a comfortable retirement for the post-war generation, while at the same time according due consideration to the needs of the later generations that now make up our work force.”
The problem is the politicians spend our Social Security revenues faster than they are collected. If they would create a Social Security system with a public investment option, the government would lose control of that money. Remember, they consider it their money, not yours.
They Do It Well
In recent years, the government has become obsessed with imposing and collecting taxes. The collection of taxes has become job one and they do their job well. We are now being taxed at the highest levels in our history. Yet, even after collecting historical amounts of revenue in the form of taxes, the government continues to outspend these revenues and posts record amounts of debt. Even with all the proclaimed surpluses of the 90’s, did taxes or government debt go down?
One could argue that we have experienced tremendous growth in our standard of living. However, those increased standards have been fueled by a record amount of personal debt. Personal bankruptcies are at all time highs along with credit card debt. For the last several years, the average household has saved at a negative rate. Any sustained economic downturns or lethargic stock market results, or both, will do serious damage to future savings.
Without understanding the demographics of our society, any attempt to financially plan our future will be doomed and filled with unintended consequences. My spelling of demographX with an “X” represents a missing factor. The “X” represents all the necessary changes that will have to be made by the government in order for it to survive. This will dramatically affect our personal retirement wealth. Demographics have been basically ignored in most financial planning. This will create major flaws in any future financial projections, and could leave us exposed to many financial hazards.
Not only will it be difficult to achieve the goal of preserving our own financial future, we must also provide for the government’s ever increasing financial future. Even with very clear warning signs, the government continues in its record levels of spending. The debt of the nation continues to spiral upward, out of control, for future generations to figure out. Let’s face it, the only power our Federal Representatives have is their ability to spend our money and we have given them a blank check to do it. If I could tell you the exact day that your retirement account will suffer its greatest losses, would you want to know that day? Then, in having that information, if you could do something now to prevent those losses, would you do it? You see, the day you retire and start receiving income from these accounts is the day your retirement accounts will suffer their greatest losses due to taxes. Another victim of the changing demographics could be the housing industry. The idea that the value of homes will always increase is wrong. People today often miscalculate the increased values of their homes. They don’t take into consideration the cost of maintenance, improvements, insurance, and taxes that are paid while they live there. The average homeowner may experience only a 2% or 3% growth rate of return, even though the value of their home may have increased by 40% in a ten year period. The numbers can be deceiving. As an example let’s take a couple who purchased a small starter home ten years ago. The purchase price of this home was $110,000. Today, ten years later, the home is valued at $150,000. Overall the couple believes that the value of their home increased over 30%. They would also agree that while they lived there they also spent another $5,000 on the home for improvements and maintenance. In reality the annual rate of retire in the growth of the value of their home for those ten years was 2.69%. Remember this doesn’t include the cost of the property taxes and insurance. The inflation rate alone generally averages between 2.5 – 3.0%. Yet this couple had been led to believe, by everyone, that buying their home would be one of their greatest investments.
After all, a 6,000 square foot home requires a lot of maintenance and upkeep, not to mention the increasing cost and upward-spiraling property taxes. If the aging population sells their larger homes and builders continue to build larger homes at a record pace . . . who will buy them? The younger generation? In 3,000 days, with two-thirds of the now working population being 60 years old or older, we will be dealing with a smaller number of new buyers. This young group of buyers will also want to build new homes for themselves. This will create an overabundance of larger homes in the marketplace. The rules of supply and demand may take over. Too much product and not enough buyers equal lower prices. The government and the banks will have to get more creative when it comes to buying a home. After all, this is a source of revenue for both of them. Having this information, it may not be in your best interest to pay your house off as fast as you can. This could cause major unintended consequences in the future. The key is to maintain liquidity, use and control of your money. Owning a home is the most misunderstood American dream. You should look at home ownership very carefully, and understand your options. If the experts giving you advice could be proven wrong, would you want to know about it?
Your dream home could be a financial nightmare.
These are a few of the many demographic changes that could affect your finances in the near future. Following a natural and logical course of events, these things we discussed will most likely happen. Their effect on your current financial planning could leave you exposed to financial loss. Your exposure to these losses is a matter of choice, not a matter of chance.