Financial expert advises to spend, not save, that tax refund

Tim Grant

Mar. 31, 2011 (McClatchy-Tribune Regional News delivered by Newstex) -- Taxpayers on average will receive a refund this year of about $3,000 -- money that they could either save for a rainy day or blow on goods and services.

One financial expert says the smart thing to do is to go shopping.

John P. Strelecky, a business consultant with an MBA from Northwestern University's Kellogg Graduate School of Management, argues that the numbers support his position.

His hypothetical family gets a $5,000 tax refund and wants to follow its financial adviser's recommendation to invest the money in a diversified portfolio that earns 6.5 percent each year so that Mom and Dad will have $21,283 to enjoy when they turn 65.

Mr. Strelecky says that's bad advice.

He says the $5,000 tax return, adjusted for inflation, will be worth only $10,783 when 43-year-old Mom and Dad turn 65.

"Nobody was more shocked than I was when I looked at the numbers," said Mr. Strelecky, author of "How to Be Happy and Rich."

"If you are going to spend it on something that you won't remember 30 days from now, it's a waste," he said. "But if you are going to spend it on a Bucket List item that will be a lifelong experience of tremendous value, you are better off doing it now."

David O'Brien, an adviser for MassMutual Financial Group, Downtown, said he had a problem with that advice.

"If I have a client who has an appropriate amount of life and disability insurance, sufficient emergency cash reserves and is on target for retirement, then I say use the tax return to take a cruise.

"The majority of people are not in that position," Mr. O'Brien said. "For them, other options are more viable, such as paying down credit card debt and putting money in a Roth IRA, if eligible."

A recent tax survey by Capital One (NYSE:COF) Bank shows more than 37 percent of Americans plan to spend all or part of this year's tax refund, while 31 percent plan to save at least part of it and another 19 percent will use it to pay off debt.

Mr. Strelecky says the whole point of earning money is to create memories and enjoy great experiences, which is what most people fantasize about doing in retirement.

"Don't wait until age 65 to start spending money to live a rewarding life, because physically and energetically, cruising and everything else at 65 is a different experience than at 43," he said. "Plus sadly, there are no guarantees you'll make it to 65.

"If you were making this decision in January 2000 and you decided to put your $5,000 into retirement investments in the S&P 500 the odds are not looking good for your future weeklong cruise," Mr. Strelecky said. "Better plan for the five-day cruise instead of the seven-day because over the last 11 years, not only did your money not go up, it lost 20 percent of its value."

Tim Grant: tgrant@post-gazette.com or 412-263-1591.

Newstex ID: KRTB-0159-102205918