(Special to the 4/6/2013 AZ Republic by Dr. Harold Wong)
It’s just a few days before the April 15, 2013 tax time. Most Americans are scrambling to finish their tax returns. However, this is a good time to also think about your overall financial strategies for 2013 and beyond.
- If you are really upset about paying taxes, create a side business to earn extra income as well as allow business deductions. With a properly structured and documented business, you can now deduct car, travel, entertainment, and equipment such as computers and video cameras. If you can earn a net profit of $10,000 per year, and save $5,000 in annual taxes, in 20 years the total will be $560,588 if you can earn a 5 percent rate of return. Note: when I gave an all-day seminar on taxes in the San Francisco area 30 years ago, hundreds of attendees indicated that the side business strategy would save them at least $5,000 taxes per year.
- Only invest in the stock market if you can emotionally handle the losses and stay in long enough to recover from any stock market collapse. One of Warren Buffett’s favorite sayings is “Be fearful when others are greedy and be greedy when others are fearful”. In other words, buy into the stock market when prices have collapsed and be wary of investing when prices are high. Warren Buffett is willing to go a year without making a major acquisition of a company.
Unfortunately, most investors are subject to wide emotional swings, often created by Wall Street insiders and their allies, the financial press. The well-known Dalbar research group in Canada looked at the results during 1986-2005, the 20-year greatest boom in U.S. stock market prices. Although the annual S&P 500 Index did increase by 11.9 percent, and mutual funds increased by 9.3 percent, the average investor only earned 3.9 percent. In comparison, inflation was 3.0 percent. The reason is that investors bought high and sold low, driven by major emotional mood swings.
- If you are retired or within 10 years of retirement, you cannot survive on what banks are paying today. If one looks at www.bankrate.com, in the Phoenix area, the largest banks pay 0.10 percent annual interest on a 1-year CD and average of 0.40 percent on a 5-year CD. This means that if one deposited $250,000, one would only receive $250 of annual interest from a 1-year CD or $1,000 from a 5-year CD. An alternative would be to look at a private pension fund concept. I recently met someone who was 65 and wanted a reliable cash flow in 5 years. If he deposited $250,000 in a private pension and waited 5 years to turn on his income, he would receive $20,722 each year for the rest of his life. Caution: these programs are designed to be long-term, such as Social Security or a teachers’ pension. It is not designed to be totally liquid, where one can pull out $150,000 in 7 years to buy an expensive RV.
- Do not ignore the effects of future inflation. If you need $60,000 to cover all annual expenses, and the inflation rate increases to 5 percent, you would need $97,733 in 10 years; $124,735 in 15 years; $159,198 in 20 years; and $203,181 in 25 years to buy the same goods and services. These numbers are absolutely frightening if one is on a fixed income. Consider investing in real estate, where the asset price and rental income has historically increased by the inflation rate.
“Common-Sense Financial Strategies” is a seminar that will be offered free to the public April 11 and 13 at The Golden Corral in Mesa; and April 27 and 30 at The Golden Corral in Surprise. The times are 10 A.M. to 1 P.M. For registration details, go to www.DrWongInvestorGuide.com.
Category: Seniors & Money