Sunday, September 29, 2013

New Retirement Concepts of Taxation

I figured when I retired, I’d have my home paid off, 300k in the bank and $1,200 in Social Security in monthly income.  Part of my retirement was going to be from my nest egg of 300K.  I had figured that I should be able to get about 8 to 10 percent on my invested savings; figure about $2,000 to $3,000 per month.  I accomplished my goals, but that 300K in the bank now only generates about $400 per month.  So basically, I’m not retiring.  I like my present standard of living and I still have my health.

The government has two ways of taxing; the obvious one, earnings and the not so obvious, savings. There are two basic categories of voters; those with savings and those with none.  If you have nothing, you are only taxed when you earn a paycheck or buy something taxable.  These people have support life-lines like Social Security, food stamps, health care and supplemental SSI---any wonder why they vote Democrat?

Inflation is a despicable invisible tax on savings.  Every "debt ceiling" dollar printed today over time, will make your hard earned savings put away today, worth a lot less in the future.  Notice that if the government wants to borrow money, they have to borrow from people who have money.  That sounds obviously simple, but it escapes most people; if you have nothing, they can’t borrow from you.  Now there is also a third method of taxation that involves controlling the interest rates on bonds.  Bond rates are normally a function of risk.  The more risk, the higher the rate.  But if the government comes in and takes the risk out of the market by guaranteeing the loans and printing as many dollars as necessary to do it, they can keep interest rates extremely low. And no, they are not giving the banksters free money, they are just making good on the bad loans made to Joe Six-pack.  In essence Joe Six-pack borrowed your money in the bank and spent it on a house and now can’t pay it back. All the government did was pay off his non-performing loan and keep the bank from collapsing due to gross incompetence and mismanagement.

By controlling the interest rates in this new fashion, many silver foxes can’t retire because of the lack of generated interest income.  Instead of 30K interest on their nest egg of 300K, they get 5K.  Any way you look at it, the retiree is losing 25K a year.  I think this is why the investment in housing rentals has skyrocketed.  300K invested in the housing market should return more than 5K a year and 24K wouldn’t seem unreasonable.  The only trouble I see with this, the home is not easily convertible to cash if circumstances of old age dictate it (waiting for the market to come back might not be an option).  Notice however, if you give the house to your kids in a trust with the rent payable to you for life, future rest home expenses couldn’t claw back on the principle invested in the home that was given to the kids.

This present administration's new approach to economics and finance, has one problem, the economy is not reacting as anticipated.  Retirees have a lot less money to spend and students have a lot more (As long as they’re students).  There are few high paying jobs, the kids are moving back home and rentals go unrented. New cars are selling at a good clip, nothing down and you pay the sales tax of 10% before you drive out. Try and sell a used car; find someone with $2000 in the bank to purchase one.  People are trading in their old cars because they can’t afford to get them repaired.  Do the math, $1,800 for a new transmission or $800 “drive out” for a new car? Rumor has it you can get a free cell phone when you sign up for food stamps. In the 1930's they didn't have food stamps, they had soup kitchens--but I digress.

So, to tie up the loose ends, what happens next?  The government has taken away my independence by robbing me of the interest I anticipated in retirement.  Of course they will blame it on “Wall Street and the Banksters” who are just as abstract as the name “Uncle Sam”—these imaginary individuals offer us a focal point for our anger and are not people you can grab by the neck and choke some sense into.  In the coming weeks Congress has to face the budget bill, the national debt ceiling and a President with a super-sized ego that refuses any compromise. The President wants to tax the rich; you know, the people like you and me, who saved $100 a month for 40 years.  The neat thing if the government comes to a stop, they can’t spend any more of what they don’t have. And that sounds very weird. Plus, if you think about it, whatever they were spending, really wasn't theirs to spend anyways.

Obama kind of reminds me of the guy rowing a boat as fast as he can. Someone asked him where he was going and he said “I’m not sure, but we are making very good time!”


Anonymous said...

Owning a home will always make you liable to property taxes (which will escalate to very high levels because financially troubled local governments will be hunting for money from every possible source). 300k is not enough principle to retire on these days. You'll never get ahead working a job as an employee with payroll taxes. You have to have your own business activity and be self-employed (using a corporation for tax advantages) and you have to invest your money and get a minimal return of 10% and reinvest those profits to build up your investment capital as long as you are working in your own business. You should pull the equity out of your house and be investing that too for a profit from the spread (borrow for 4% and invest it for 10-12%). You could also get out of expensive California and go to the middle corridor of the US where the economy is going to be the best and where housing is much cheaper. Every change that diminishes your living expenses is VERY needed because it adds up on a cumulative basis towards a major advantage. I believe we all will need to step outside of our comfort zone in order to put ourselves in a condition that will be able to weather the coming storm.

Joseph Oppenheim said...

Gosh, long ago I ran the numbers and it was obvious having a job made no sense. The investor class gets low tax rates and b/c the US is a capitalist nation (yes, the top one, proved by investment money continually pouring in from all over the world), gives all kinds of incentives to investors. With FDR, got insured savings and future SS, with LBJ got future Medicare, with Reagan got fabulously high interest rates on savings, with Carter - GW Bush got great home profits. With Obama, booming home, bonds and stocks. Bubbles are great times to make profits. Busts are great times to pick up bargains. Thanks, American government. W/O you I world have had to have a job after age 48.

Anonymous said...

"You could also get out of expensive California and go to the middle corridor"
I read something along these lines, related to the 80/20 rule:
"Those that spend 20% (of the average price of a home) derive 80% of the benefits"

In other words, my readings back up this suggestion.

Thanks for your wonderful blog,
Anon on a New Mexico Mountain (not to be confused with Anon on a Mountain.)
sent from my iphone

Anonymous said...

what makes you think you can dictate what interest rates should be? because you deemed 10% to be fair market value, the world owes you money?
low rates are good, it stops lazy people from sitting on a pile of cash and expecting a paycheck. it takes effort now to make money on your capital and it's a good thing.

Jim in San Marcos said...

Hi Anon 3:38

I don't see lazy people sitting on piles of cash. You have to work and save to have money in the bank.

Rates are extremely low for very unnatural reasons. Visa can charge you 26% interest on your credit card and at the same time you can buy a home with 7% financing.

With 2% interest offered by the banks to retirees, why even put your money in the bank? Loan it out to the relatives.

If I was to go into payday loans, I could get almost 400 percent interest per year on what I loaned. Realistically I might get about a 20% return because you get stiffed a lot.

All interest rates do, is reflect risk. Historically there has been a 3% difference between government T-bills and grade AAA paper and about a 12% difference between that and grade DDD junk bonds. Right now the spread is about 3% and the price of bonds can't go any higher, and the interest rates on them, can't go any lower.

Lower bond rates are a little like pushing a piano up a steep hill. It gets harder to push the higher you go. At some point you give up, and the piano doesn't.

Anonymous said...

There are many analysts who say that interest rates have to go up eventually. Do you agree and, if so, how many years do you think it would take to reach 5% again?

Jim in San Marcos said...

Hi Anon on a New Mexico Mountain

I think you are right. A lot of old people, my age, move away once they retire. It makes financial cents. Arizona offers a lot of what retirees want at 1/3 the price.

I myself think about Mexico along the coast for retirement ( I like to sail and my wife hates the sand). Not quite sure where we will end up.

Thank you for your compliments.

Take care

Jim in San Marcos said...

Hi Anon 7:15

Right now I would expect that we have an inflation rate of 8-12 percent.

So about the only thing we can conclude, is that the market is being manipulated to keep rates in a very low range.

AIM said...

If you are not making at least 10% on your money, you are losing money due to the hidden tax known as inflation (which is created by NOTHING other than the Federal Reserve Bank).

One can't be a passive or uneducated investor and make 10%+. One has to invest outside of conventional investment vehicles and also avoid taxation as much as possible.

The noose is being tightened as the government moves into Fascism. The governments have been usurped by the banks via debt. In their desperation they will continue to raise taxes and hunt your money down to feed the giant, insatiable maw of the international bankers.

People will have to become very smart and develop new strategies to keep as much of what they earn as possible.

Once we go to an electronic currency it will be all over. Every penny that goes back and forth between individuals will be tracked. At that point there will be nowhere to run (only some bartering actions and secret local currencies will circumvent the government).

Anonymous said...

"Once we go to an electronic currency it will be all over. Every penny that goes back and forth between individuals will be tracked. At that point there will be nowhere to run (only some bartering actions and secret local currencies will circumvent the government). "

I see this kind of stuff and think you need more dopamine. As we get older, our levels of hormones decrease and we become "grouchy" old people. But please don't let that affect your thinking and outlook.
We are doing fine as a country, regardless of the bs debt crisis, and those of you that don't see the REAL recovery and the fact that the us is the best place to live in the world, honestly need hormone replacement therapy. I completely understand the perspective but don't believe its founded in reality.
Yes we will switch to electronic currency one day but who know what will happen and it sure wont happen over night. I am willing bet that long after everyone is using electronic payment the country will still accept paper currency BECAUSE that's the way we do things in the u.s., just look at people watching tv with antenna's instead of cable!

Please relax and enjoy your life, we are living in the greatest country in the world...

AIM said...

anonymous 12:12

"We are doing fine as a country?
The bs debt crisis?
REAL recovery?
We are living in the greatest country in the world?"

I can't even respond to your post. We are both on different planets and don't speak the same language.

Anonymous said...

"I can't even respond to your post. We are both on different planets and don't speak the same language."

like i said, you need more dopamine or hormone injections.
Just look at Joseph Oppenheimer, he gets it and he is an old guy.

The debt crisis is all bs, as a country, the greatest in the world, we have taken REAL assets and in turn printed money to pay for it, so fucking what????
who on this earth is going to collect from "tony soparano" or the bully of the world?
debt is just some numbers on a paper, it is only as good as the ability to collect it!!! once your antiquated mind gets it, you'll understand why this country is the greatest in the world.
Just remember, currency valuations are relative, and sure the u.s. dollar may stink a bit but as long as it stinks the least, we are good!
these are big ideas for old timers who follow economic models that are antiquated but we live in a new world, wit knew rules.
Please try to adapt to the new times rather than deny its existence.
How many years are you "world is going to end" guys going to be wrong before you admit we are in a new paradigm.
I could say so much more to back my point but just don't have the time to. This is why you old timers need to follow joseph oppenheimer, he is one that gets the new system.

Just remember, for the 100th time, it's not gold that backs our currency, it's our lead in technology that does so. I rather have a 50 billion dollar aircraft carrier than 50 billion in gold at fort knox...

the new generation.

Darvinian said...

AIM, you just don't understand REAL wealth!!!!
You still think the king with all the gold rules the day but that king without security owns NOTHING!

you get it know?

Darvinian said...

by the way, no response necessary, I'm comfortable in my beliefs.

AIM said...

It appears that Anonymous 5:51 and Darvinian have been drinking the kool-aid ever since they were born. Well programmed.

Very disconnected and isolated from the fundamentals of economics.

No reason to continue this discussion or argument. Everyone is entitled to their own viewpoints.

It's only half-time. We'll see who the winners are at end of game.

Jim in San Marcos said...


I think you hit it on the nail, everyone is entitled to their opinion.

I do question the fact of why they would try to rattle our cage. They haven't offered any solutions to our presesnt problems. Just the statement that this is the greatest country in the world. Maybe it is if everything is free.

Joseph Oppenheim said...

Anon 551, new paradigm? Yes. Globalization has changed everything. Abt 2/3 of Silicon Valley companies were founded by immigrants. That's the secret. Great minds are coming here like never before, well maybe great minds before, but now with greater tools - the digital revolution is in hyperdrive. Plus, wouldn't be possible w/o WS, better regulated. That said, we do have a strong body of neo-Confederate insurrectionists trying to obstruct it all. That's the challenge. Fortunately, CA and NY get it, also MA. CA just passed Russia and is now the 9th largest economy in the world.

Anonymous said...

Oppenheim lives in an alternate universe.

The only hope for our nation is if the people could be taught the true definition of key words having to do with economics; have all of their false data and programming stripped away on economics and government; learn the basic laws and fundamentals of economics; and then start building a society based on true production, exchange, honesty, fairness, cooperation, intellect, innovation, prosperity and a view towards the future and the greatest good for our country.

AIM said...

When the asset bubbles pop... when the debt reaches unheard of levels... when confidence begins to drop... when interest rates start moving up...
when it becomes fully clear to the private sector that The Fed and Congress have caused most all of our economic woes, and that they haven't known and don't know what they are doing, and are now out of monetary tools... when the private sector realizes that government and multi-national corps and bankers have been acting in collusion... will be seen that the emperor has no clothes.

Loss of confidence, collapse, disruption, wealth destruction and the need to build a new system. That is our future agenda.

Jim in San Marcos said...


I agree, we are slowly getting to a collapse and I don't like it one bit.