The true speed of debt

January 14, 2020

My Dear Reader,

Early this morning, I was having a conversation with a client and he mentioned that he was sending a check to the IRS without writing the amount, but know that it was a good amount of money, it hit me that in the time it took him to say the phrase ” just sent_____ to the IRS, so that was fun”   the federal government had already spent that check. In fact, in the time it’s taken you to read this the federal government has already spent tens of thousands of dollars, just in interest. When do you think this bomb goes off? Is it when the guard changes and a politician attempts to implement Medicare for all? Is it another War? There’s so many options, and all of them seemingly inevitable. But a phrase I often use is one I’ve taken from French philosopher Voltaire. “We must tend to our garden.”  You and I may not be able to solve the political issues of our day, but that doesn’t mean we’ll just sit around and wait for them to devour us.

Of course the question is how does the financial industry respond? I believe most of us are taught to respond by focusing on the accumulation phase in one’s life. After all, one can only cut expenses so far and the only guaranteed way to raise the rate of return is by cutting debt. But with the rising national debt, comes debt service and with that service comes a greater need for taxation.

If we look at where money is accumulated, we can actually see a greater personal problem, that may be caused because of the macro problem. Perhaps the most popular tax-advantaged  strategy in the United States is the 401K provision. This provision allows money to be saved for retirement at a tax-deferred rate. It’s often advertised that taxes are saved when money is put into a 401k, put on the contrary every single one of those dollars still is up for taxation- just not today. For instance, if a doctor put $1 million into a 401(k) in 1981, when the plans first came out, he would have deferred the tax due on the $1 million for that year. But if he retired in 2020, under the new tax rates, he would have effectively deferred a $280,000 tax bill, to pay the federal government a tax bill of $370,000. That’s if his money never grew by another dime. We’re currently in a situation where the demographics are shifting in the sense that more and more Baby Boomers are retiring I’m beginning to draw money from these plans, which could have an effect on the market, but more importantly for the IRS a positive effect on the Government’s pocketbook. I’ll bring this to your attention just to let you know why the national debt matters in our civil discourse. I wish you Godspeed I’m fixing this personal burden. 

Until then, here’s to your creation and potential,

Kevin Prendiville