Ever ask a bunch of nine year old kids if they wanted some ice cream? Ever ask your 16 year old son if he wanted a new Mustang? Or my all time favorite — ever asked your wife if she wanted diamonds for Valentine’s Day? Did any of those questions need to be asked? Are the answers to those questions in doubt?
So I have a question for you. But before I ask it, let me tell you in advance that I’ve been surprised more than once by the answer. Unlike the three questions above, this one sometimes gets run through some pretty funky filters, leading to surprising answers. In the time I’ve been doing this for a living, I’ve learned much about how people think. And the phrase ‘you never know’ doesn’t begin to cover it. What the mind believes can so easily overpower not only reality, but can lead people to do things against their own best interest. People will believe some things in the face of overwhelming evidence to the contrary. Here’s an example.
Myth: Putting butter on a burn will ease the pain.
Reality: Immediately after receiving a burn, it is important to cool the skin in order to stop the burning process. Putting butter or other greasy ointments on a burn may actually make things worse, since the grease will slow the release of heat from the skin, allowing damage to the skin from the burn to continue. The best way to cool the skin after a burn is with coool water, not ice or ice water. An antibiotic ointment and a bandage will aid the healing process. According to doctors, leave the butter for your toast.
Most of us have heard about using butter as a burn remedy. My aunt once told me to hold a stick of butter on my fingers after a 4th of July sparkler burned them. But don’t we all know someone who would, in the face of overwhelming medical evidence, still put butter on a burn? They’ll do it and it will literally make their experience worse. But, since Grandma told them about it, and she heard it from her mom back before World War I, it must be true. Grandma, and the millions of folks who also believe this myth, can’t all be wrong, can they?
The great tragedy of Science — the slaying of a beautiful hyypothesis by an ugly fact. Thomas Henry Huxley
Here’s my question —
Would you rather retire with $45,000 a year for life, about $25,000 of which is taxable, living in your debt free home? OR Retire with $150,000 a year tax free and/or tax sheltered, living in the same home, but with $500,000 of debt at a 6% fixed rate? (About $36,000 a year in payments.)
Don’t rush. Take your time. It’s not a trick question. There are no facts left out.
So, which one would you choose?
CJ, Broker in L A, CA says:
I think your premise does needs another fact tossed in: What is the annual income tax bill due on the $25,000 of taxable income? Guessing a 33% tax rate, the annual income tax due would be about $8,200 — what are you calculating?
January 5, 2007 — 5:05 am
John says:
Is this a trick question 🙂 because obviously the second choice sounds better. You get more money per year in the end, which if you don’t spend, you can reinvest in more property.
January 5, 2007 — 8:38 am
Jeff Brown says:
CJ – For the sake of your question, let’s say the entire $45k is tax free, does it affect your choice?
January 5, 2007 — 9:38 am
Jeff Brown says:
John – True, if you want to keep using your Greek Island Cruise money on a Phoenix duplex. 🙂
January 5, 2007 — 9:46 am
NVmike says:
If that $150K/yr is secure and if I have no children, then scenario #2 is the best, by far.
If the $150K/yr may shrink to $50K a year in a down cycle, then I risk losing the entire house, so the security of that income is an issue.
What kind of income sources are you hinting at? And how secure are they?
January 5, 2007 — 10:18 am
CJ, Broker in NELA, CA says:
OK. So… the choices are $45,000 annually tax free with no debt service … or $150,000 annually tax free with a $36,000 annual debt service (net annual $114,000).
I guess the “trick” part of the question is: What exactly should you do to build that lifetime tax free income of $150,000 annually?
January 5, 2007 — 11:07 am
Jeff Brown says:
CJ – EXACTLY! Toward that end, you might go to bawldguy.com and start reading. 🙂
January 5, 2007 — 11:13 am
Jeff Brown says:
NVmike – GREAT questions!
What kind of income sources are you hinting at?
A) Very well located high-demand mini-warehouse storage facility. Very stable, and the cash flow is based on only 80% occumpancy.
B) Investment grade insurance with A or A+ company. This income source is literally a guaranteed no-loss vehicle. The income is based on an index that’s averaged somewhat over 8% for the last half century or so.
And how secure are they?
I think ‘B’ speaks for itself. The storage facility has proven over the last few decades to be pretty stable, especially if you’ve paid attention to location.
>If that $150K/yr is secure and if I have no children, then scenario #2 is the best, by far.
I assumed any children would most probably be grown, and out of the home by retirement. Though for sure I have a couple clients who’ve now retired with investment income, and their youngest is just now starting school!
>If the $150K/yr may shrink to $50K a year in a down cycle, then I risk losing the entire house, so the security of that income is an issue.
True enough. In this case I used most of the facts from an existing client. Though they started with me later in life, they’re now far more ‘comfortable’ than if they’d kept on the path on which they were taking. Their income sources are Social Security, storage, and investment grade insurance.
SS = $20k give or take
Storage = $50k or more – w/shelter to spare.
Insurance = $80k and all tax free for life.
Does that help?
January 5, 2007 — 2:20 pm
Brian Brady says:
Jeff:
Isn’t Donald Trump up to his eyeballs in debt?
That’s bad, right?
January 5, 2007 — 8:55 pm
Jeff Brown says:
Brian – Stop it, you’re killing me. I just sprayed the cat with Dr. Pepper. She’s not happy. 🙂
January 5, 2007 — 8:57 pm
Greg Swann says:
> I just sprayed the cat with Dr. Pepper. She’s not happy.
Yet another victim of the Vanilla Pepsi crisis…
January 5, 2007 — 9:03 pm
Jeff Brown says:
Which reminds me – we have to launch a combined effort to get him a last stash in order to ease his transition. 🙂
January 5, 2007 — 9:10 pm
Greg Swann says:
> Which reminds me – we have to launch a combined effort to get him a last stash in order to ease his transition.
We talked about it today at Brian’s soiree: Pepsi Vanilla is a long tail search term for Jay. He got a buyer from it. Let him buy is own damn soda pop.
January 5, 2007 — 9:23 pm
Jeff Brown says:
Does Pepsi get a finder’s fee?
January 7, 2007 — 1:33 pm
NVmike says:
Isn’t Donald Trump up to his eyeballs in debt?
Not now, but he was in ’91. That’s when he lost half the Taj to his creditors. In ’92 The Trump Tower filed for bankruptcy.
By ’94, Mr. Trump had eliminated about half his personal debt and about one-third his corporate debt and, as a result, his financial health improved markedly.
Donald Trump’s close calls serve to warn of the dangers of excessive debt; I’m not sure why you chose him as your example.
January 10, 2007 — 8:18 pm
Brian Brady says:
Mike:
To illustrate the difference between good debt and bad debt. What Jeff is suggesting is borrowing to buy appreciating assets. I think the Trump’s experiences taught us all something about excessive debt.
Now don’t jump on me about the “appreciating assets” comment..ask Jeff where they are. I am merely a purveyor of debt
January 11, 2007 — 12:49 am