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Book Review of: Last Chance Millionaire
It's not too late to become wealthy
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Last Chance Millionaire, by Douglas R. Andrew (Hardcover, 2007)|
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Reviewer: Mark Lamendola, author of over 6,000 articles.
This book presents a seemingly compelling case for a particular investment strategy. However, it gives only a pro forma nod to the risks. I will address those risks, later in this review.
Regardless of any analysis of the author's recommendations, the issues he addresses are ones everyone should look into carefully. Even if you decide his investment strategy is not for you, this book is worth the read if it prompts you to look at how you are investing now. I agree with Andrew that most of us don't handle our money or our equity very well.
Andrew brings up many good points that can help people improve their personal balance sheets. In that sense, he does us all a service by offering this book. On the other hand, he takes the reader beyond that onto ice so thin I can hear it cracking as I read. If you can tell where the cracks start, you can make good use of this book and not fall into the abyss.
I caution the reader against assuming that because some of the author's conclusions and opinions are correct that all of them are. In this case, there are some notable exceptions. Let's look at three examples.
In the first paragraph on page 52, he claims the motivation for tax breaks derives from the government's understanding and desire for social good. I felt like leaving a quarter under his pillow when I read that. Tax policy has nothing to do with anything benevolent, except for bestowing goodies on the special interest groups who control the legislative body. Our federal income tax code runs something like 65,000 pages. Even after a century of tinkering with this code, Congress still hasn't come up with something that makes any sense.
The federal income tax is not needed for funding the government, and that's not its purpose. It is a tool for redistributing wealth to pay back campaign donors at the expense of the Treasury and those who are not in positions of influence. There is no wise wizard in Congress showering tax breaks on ordinary Americans to help create jobs or to reduce the cost of funding social programs, as Andrew appears to believe.
Here's how it does work. Federal politicians curry favor and make promises, so they can raise the millions of dollars needed to win an election. (Obama raised $80 million for a presidential election as of July, 2007, for the November, 2008 election). Once in office, they have to make good on those promises or face ruin (or worse). There's a reason the Demopublicans consistently present us with a slate of losers, incompetents, and the ethically bankrupt. By "electing" those folks, we an be assured the reigns of government remain firmly in the hands of special interest groups. This pattern is consistent all the way back to post Civil War Reconstruction.
One way to pay back special interest groups is to develop a hopelessly complex federal income tax code that gives these people millions of dollars in an indirect manner. If Congress were properly concerned about funding the cost of government, the first thing they would do is abolish the income tax. The federal income tax is not the main way the federal government feeds its spending habit. Many experts believe that the compliance costs, administrative costs, and costs of economic drag generated by this whacko system are greater than the revenue raised.
In a second example, when discussing how a (scissor) jack works, he claims a car weighs 2,000 lbs. That's light even for a small car. A 2007 Toyota Corolla weighs in at over 2600 lbs. Upgrade to a Camry, and you're at 3200 lbs. Go with the 2007 Nissan Maxima, and you're at 3600 lbs. Mini-cars, such as the Chevy Metro, Honda Insight, and Suzuki Swift do fall into the 2,000lb and under group. But even the Chevrolet Prism and Ford Escort exceed that weight. One could say, "Let's not quibble over numbers," but what is this book about?
The typical scissor jack is rated for 2,000 lbs, and that makes it sufficient for changing a tire. But it's not raising the whole car. It's merely tipping up one side of it, which means it's lifting far less than the weight of the car. This is an example of where he gets the basic facts wrong, but uses them to explain one of his key concepts. He's discussing leverage, so this makes me question his understanding of how leverage works.
A third example is his referring to transactions as "tax free." You pay 128 taxes on a single loaf of bread. Nothing in America is tax-free. As the late economist, Nobel Prize winning Dr. Milton Friedman, explained, your level of true taxation is equal to the amount spent by the government. We have federal, state, county, and city governments all spending like there's no tomorrow. The federal debt alone is some $9 trillion, and future obligations with no apparent source of funding are around $52 trillion. Yes, we can probably assume what he meant was "free from federal income tax." But that's not what he said, and what he said was wrong. When you're talking about using your home equity in a complicated investment strategy, getting even one "little" detail wrong can cause you to lose everything.
Andrew brushes off the risk involved in tax-based investment strategies by claiming that revenuers would be shooting themselves in the foot if they messed with these tax breaks. News flash. They do this all the time.
On page 288, he gives advice that makes me shudder. Basically, he's advocating calling a withdrawal a loan and then treating it that way for tax purposes. The IRS loves this kind of thing. This is called a "sham transaction for tax avoidance purposes" and IRS can come back on you at any time to nail you with more interest and penalties than you are capable of earning in a lifetime.
IRS has lots of fine print that allows them to ignore the Statute of Limitations and anything else you might mistakenly believe protects you from actions of theirs that might be illegal, immoral, unethical, unfair, unjust, illogical, unduly burdensome, or just plain crazy. There is no protection of that sort, period..
So you might be sailing along merrily for 20 or 30 years before suddenly finding yourself with no home, no assets, and no income. IRS does not have to notify you of an assessment. They merely need to assess (enter into their records) that you owe a tax and let that simmer while interests and penalties pile up. Then, after they seize your assets, you can spend several million dollars in tax court pretending the judge will care about what's right or will actually give evidence any weight. That's not how Tax Court works.
The way Tax Court works is the court tries to find some fine print somewhere justifying whatever IRS did. The taxpayer doesn't just have the burden of proving he isn't guilty, the taxpayer also has the burden of proving IRS hasn't got some loosely interpreted statute backing whatever action they've taken. Read Tax Court cases, and you'll see this.
IRS also has a history of welching on their written letters of approval, after people have strung out sufficient rope with which to hang themselves. This is one of the things that happened in the Hoyt Fiasco. Investors asked IRS for clarification, and they got it in writing--but IRS later recanted while leaving those folks who relied on IRS' word to twist in the breeze. IRS also told the Hoyt investors, in writing, to contact their Tax Matters Partner (Hoyt)--despite the fact IRS had known for 20 years proving Hoyt was defrauding both the investors and the U.S. Treasury. IRS employees just watched the whole thing, biding their time until they could destroy the very people who trusted them.
Yes, it may be possible to skate along with Andrew' investment strategy. But it seems doubtful. Any tax-favored investment strategy is basically a field of landmines. We can look at the Hoyt Fiasco or the AMCOR mess as prime examples. In the Hoyt Fiasco, 4300 people invested in a tax-favored business that allowed them to defer taxes and build wealth using OPM (Other People's Money, which Andrew refers to constantly).
People didn't just lose the money they had invested. They were on the hook for huge sums they could never pay back. When IRS is involved, you can expect all kinds of games to be played such that you have no recourse. If they decide to retroactively deny tax-favored status, for whatever reason, they will. The IRS answers to nobody, which is why they get away with these things.
So if the government approves of a tax-deferred or tax-favored investment strategy, the strategy makes sense on paper, and the person promoting it is very convincing, does that make it safe? Ask the 4300 victims of the Hoyt Fiasco what they think.
It is with this thought that I caution the reader against following Andrew the whole way. Before "thinking outside the box," learn why the box is there in the first place. Maybe those other financial advisors aren't stupid for recommending those "slow" investments.
Andrews may be right, and he may be crossing all of this T's and dotting all of his I's so that IRS is a happy camper. But IRS is also capricious. And when IRS changes its mind, for whatever reason (or no particular reason at all), the "gray area" that you thought was safe turns into the very definition of terror.
Until such time as the US replaces the federal income tax with a system that is fair, ethical, and logical, any investment that relies on tax-favored rules is highly risky. Andrews points to a prime example himself, when he talks about IRA's and 401(k)s. These tax-favored investments were not designed with the best interests of the investor in mind. Andrew does us a service by pointing this out quite clearly.
But then he goes on to recommend other tax-favored investments, but ones that he admits are complex and can trigger various undesirable results. I'm very uncomfortable with his treating a withdrawal as a loan. As they say, "Wishin' don't make it so." You may recall that Microsoft had to pay millions in employment taxes, penalties, and other payments after IRS told them that calling people contractors doesn't make them contractors. The fact Andrew recommends stepping out onto this particular plank should give anyone pause.
Your best be may be to read Chapters 1 through 5, and readjust your portfolio. Then, look at your spending patterns so you can keep more of what you earn. Finally, look at where you can add value using your talents and experience. Many people live quite nicely in retirement by running a small business and working part-time. This gives them a sense of purpose, plus that financial cushion and some modest tax breaks. What is it you enjoy doing?
About these reviews
You may be wondering why the reviews here are any different from the hundreds of "reviews" posted online. Notice the quotation marks?
I've been reviewing books for sites like Amazon for many years now, and it dismays me that Amazon found it necessary to post a minimum word count for reviews. It further dismays me that it's only 20 words. If that's all you have to say about a book, why bother?
And why waste everyone else's time with such drivel? As a reader of such reviews, I feel like I am being told that I do not matter. The flippancy of people who write these terse "reviews" is insulting to the authors also, I would suspect.
This sound bite blathering taking the place of any actual communication is increasingly a problem in our mindless, blog-posting Webosphere. Sadly, Google rewards such pointlessness as "content" so we just get more if this inanity.
My reviews, contrary to current (non) standards, actually tell you about the book. I always got an "A" on a book review I did as a kid (that's how I remember it anyhow, and it's my story so I'm sticking to it). A book review contains certain elements and has a logical structure. It informs the reader about the book.
A book review may also tell the reader whether the reviewer liked it, but revealing a reviewer's personal taste is not necessary for an informative book review.
About your reviewer
About reading style
No, I do not "speed read" through these. That said, I do read at a fast rate. But, in contrast to speed reading, I read everything when I read a book for review.
Speed reading is a specialized type of reading that requires skipping text as you go. Using this technique, I've been able to consistently "max out" a speed reading machine at 2080 words per minute with 80% comprehension. This method is great if you are out to show how fast you can read. But I didn't use it in graduate school and I don't use it now. I think it takes the joy out of reading, and that pleasure is a big part of why I read.