The January 1998 article, "Finding Savings in Debt Management" appears flawed in its premise and contains errors in its application.
The authors suggest that we can borrow more money at a higher rate of interest and increase our wealth at the same time. This quickly reminds me of our government`s promise to cut taxes, increase spending and balance the budget.
First of all, the authors indicated that after restructuring debt, the remaining loan payment to the practice would be $886 per month or $10,632 per year. However, the summary indicates only an annual debt service of $5,792 per year. Furthermore, the authors suggest borrowing $20,000 per year for five years, yet the summary makes no provision for repayment of this $100,000 in new borrowing plus approximately $29,000 in interest over the life of the five new equipment loans.
Finally, the article correctly identifies the tax savings in contributing to a pension plan, yet conveniently fails to mention the deferred tax buildup ascribed to the accumulation in that pension. Accumulating some $900,000 in the pension plan will result in $250,000 or more in income taxes due.
Also, it would appear that the practitioner who practices fiscal restraint is not being given credit for additional propensity to save as very short-term debts are paid off.
I have recalculated the two scenarios year by year over the entire 15 years and have arrived at the comparison shown below.
While there certainly are slight variations to the above, based on different assumptions and tax rates, clearly the benefits identified by the authors would appear suspect.
David Bernardi, CPA
Rochester, NY
Before Restructuring After Restructuring
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Total personal savings $815,530 $254,140
Total pension savings 0 953,174
Less total debt 0 (247,823)
Less deferred tax on pension @ 28% 0 (266,889)
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Net wealth $815,530 $ 692,602
