In the last column I indicated that my wife and I were off again. Here are some issues that came up when we were in Alexandria, Virginia visiting friends, and when we returned home.
As reported by the Washington Post, the Trump administration is considering changing the rules on the calculation of capital gains taxes by adjusting the cost of the asset for inflation between the time of its purchase and the time of its sale. As an example, if you purchased a stock for $10,000, and sold it years later for $20,000, the gain, adjusted for inflation, might be $9,000 rather than $10,000. It would be the same for other assets, like real estate or the family farm.
Because the bulk of capital gains taxes are being paid by the top 10 percent, the rates are lower than comparable income tax rates, and the government needs the revenue, it seems unlikely that it will be generally politically embraced, but it does seem to make a lot of sense. It is like the Alternative Minimum Tax. It was intended to apply to the wealthy, but now it can affect a married couple of two hardworking teachers in high-taxed states, because it was never indexed for inflation. As a result, it requires a Congressional fix every year.
Speaking of taxes, Michelle Singletary, in a recent Color of Money column, noted that it was time for everyone who has taxes withheld form their income to revisit their withholdings. There is only a little over four months left in the 2018 tax year to make any necessary adjustments. She asserts that the new withholding tables are biased in favor of the government, so that there may be more being withheld than necessary. She also reminds her readers, as we have discussed many times in this column, that they don’t want to over withhold and allow the government to use their hard earned money, rather than using it themselves during the tax year to meet their financial goals, like paying down high interest rate debt. She suggests that you should try to come within $500 of your tax liability, preferably so that you get a refund in that range. However, you also need to make sure that you have the necessary savings to pay the taxes if it turns out that you do under withhold.
Upon our return, we were hit with the projected back-to-school and college numbers for 2018, something we often make note of in this column. By the way, I have now become totally accustomed to the back-to-school specials beginning in early July. I just wonder if and when the day will come when we see them start in the middle of June, before the school year in the Northeast has even ended.
According to the National Retail Foundation, total spending for K-12 and college is projected to reach $82.8 billion, down from $83.6 billion last year. Interestingly, the primary reason is that students already have all of the electronics they need — laptops, pads, etc. This year college and graduate school spending is projected to be higher than ever before, totaling $55.3 billion. As you might expect, the largest expenditure will be for clothing.
In a recent column we reviewed some of the mistakes that overspending bankrupts often made in the 1990’s and early 2000’s. Upon my return from Virginia, there was a lot of press about the dramatic increase in bankruptcy filings by those 65 and older. Of course this is a serious situation, but what I really found interesting in the reporting is that so many of the causes that were mentioned are what we have consistently identified and advised against. So, more out of frustration than anything else, my reaction was – is this really a surprise?
First, here are the statistics. According to CBS News, bankruptcies filed by those 65 and older have increased 500 percent since 1991. About 100,000 of the 800,000 annual bankruptcy filings are from households headed by seniors, or about 12.2 percent of all filings. This promises to be an increasing problem, because by 2050, one quarter of the country will be 65 or older, compared with 15 percent currently.
Second, here are some of the causes put forth and the related advice. Much, if not all of which, should sound familiar.
1. Unlike in prior generations, there are fewer people retiring with defined benefit pension plans that provide a fixed monthly income, often indexed to inflation. Today, companies, if they provide any retirement benefits, have gone to 401(k) and profit sharing plans, where retirees have to depend on investment returns, which may be a problem in later year, as life expectancies increase. If that is your situation, you need to save more.
2. Again, unlike in prior generations, too many seniors are going into retirement with credit card, mortgage, home equity, and student loan debt. For example, CBS News reports that the biggest growth in student loan debt is for those over 55, which is for the most part incurred for children and grandchildren. The advice is obvious — avoid new debt and pay down existing debt as much as possible as you look ahead to retirement. Also, every time the issue comes up, think carefully about whether, based upon your own projected finances, you can actually financially help your children or grandchildren. It may be a difficult choice, but sometimes you have to put yourself first.
3. Work longer, if you can, both to save more, and to maximize your Social Security benefit, as the full retirement age increases, if you know that you will really be depending upon that benefit.
4. Embrace the obvious and save more — we are living longer and health care costs are increasing, even for Medicare premiums and copays. You will have more health costs in retirement, so prepare for it.
There are many other things that you can and should do as you prepare for retirement. We have talked about them in the past, and we will no doubt revisit them in the future. These are just the causes and advice that I heard this time in connection with the stories about the increased bankruptcy filings. What I do know is that I have never heard anyone in retirement say that they saved too much, or that they didn’t have enough debt.
John Ninfo is a retired bankruptcy judge and the founder of the National CARE Financial Literacy Program. Find his previous weekly columns at http://www.mpnnow.com/search?text=Ninfo or at http://www.monroecopost.com/search?text=Ninfo.