Financial Planning magazine has an interesting article by Allen Roth. In it he examines the Obama’s finances based on the disclosures on their tax forms and makes some suggestions that can apply to others as well.
The view from 30,000 feet:
The Obamas earned $662,076 last year. Subtracting out their qualified plan deductions, itemized deductions, and exemptions, their taxable income was $335,026.
After being hit with the AMT, which is partially offset by a foreign tax credit, the Obamas paid $112,214 in Federal taxes. That equates to just over 18.4% of their adjusted gross income.
Getting into the details, he looks at their mortgage.
The Obamas paid $45,046 in mortgage interest in 2012, which appears from the disclosure statement to be at a 5.625% interest rate with Northern Trust. That suggests an outstanding principal balance of about $800,000.
On the other hand, the bulk of their investments are in Treasury notes. Based on the disclosures, I estimate they hold about $3 million in Treasury notes (also held by Northern Trust), yielding 0.71% if averaging a five-year maturity.
By selling some of those Treasuries and paying off the mortgage, they would effectively be getting five more percentage points on the amount; they would also be about $40,000 better off each year before taxes. …
The Obamas would pay more in taxes but make much more after taxes — especially since they aren’t getting the full deduction anyway, thanks to the AMT. That’s more money going to the U.S. Treasury and more money for them; Northern Trust would be the loser.
Changing their asset allocation to better use their tax-loss carry forward.
A good planner may also want to investigate the $115,516 tax-loss carry-forward in schedule D. While this could have come from many sources, these typically come when investors buy at the top of the market and then panic and sell after the plunge. But regardless of where it came from, it would take almost 40 years to utilize this loss carry-forward at the annual limit of $3,000 a year.
To increase the value from this loss by creating more taxable capital gains, the Obamas need to reverse their asset location. They currently own Treasuries in their taxable account and Vanguard S&P 500 index funds in their retirement accounts. By reversing the location, they continue to invest in U.S. capitalism, but get a much better chance of gains.
I would also suggest that rather than only invest in the large-cap companies of the S&P 500, they should consider a total U.S. stock index fund that would also invest in mid and small-cap companies — a move that, additionally, would provide some political benefit by showing the Obamas’ support for small businesses. (While I also believe in international investing, this might not sit as well politically.)
Their overall asset allocation also seems a bit skewed. While holding about $3 million in Treasuries, they have only about $400,000 in the stock index funds. Treasuries are unlikely to keep up with inflation, so taking a bit more risk is in order. With markets near an all-time high, perhaps they should consider dollar cost averaging.
Some of the Obama’s investment choices may be based on the political optics. Presidential pensions and speaking fees after leaving office will insure that no President will have much to worry about financially. However, the two issues addressed by Roth can well apply to millions of other people who make investment decisions that are not in their best interest. Professional advice can help most people manage their finances better than they can on their own.