Another “Good News” Gone Bad
So how can an article entitled “Federal government posts smallest deficit since 2007” be bad news? While it is true that a smaller federal deficit really is a step in the right direction, like many Americans, I have become desensitized to the word “Deficit”. A “Deficit” means that the Government will continue to spend more than they collected in taxes. This “Deficit” gets added each year to an ever growing and record breaking national debt. So yes, the Good news is we will add less debt to our “national embarrassment” than we did last year.
So where did this “Good News” Go Bad? About seven sentences in, the real story unfolds. In sentence seven it states “… long-term trends, driven by the continuing retirement of the baby Boom generation and its effect on benefit programs like Medicare and Social Security, will likely cause an eventual fiscal crisis...”
Let me translate. This “reduced deficit” is the calm before the storm! Congress knows it, Economists know it, and now you know it. The baby boomer generation is soon going to turn their economic engine in reverse and the detrimental economic effects are predictable and inevitable. And once again, the Congressional Office of the Budget (COB) warns us that it is “Eventual”! Not “Likely” or “Probable” or “Projected”… No they state emphatically…“an Eventual Fiscal Crisis”.
So what does this mean for us in The Next 3000 Days? As more and more baby boomers retire each and every day, our federal government will be thinking about “Ways to increase taxes” the way you and I think about “breathing” when our head is held under water… relentless and unashamed! Now I think we can all agree that the only way our federal and state governments deal with fiscal crises is to raise taxes. Their other option would be to “slash spending”, but as you can see in the rest of this article and recent behaviors in our congress and white house, “cost cutting” is the one thing that our politicians fight against more than they fight each other.
In our book, “Future Proof Investing” we start the book by asking four basic questions to begin your journey towards future proofing your life savings and investments. One of those questions is; “Do you think taxes will go up or down in the future”. If you say “Up” then putting your money in “Pre Tax and Delayed taxation” investments such as IRA’s, 403b’s and 401k’s is probably not the best choice. If you say “down” then I suggest you re-read the article above and possibly seek psychiatric care.
But wait, didn’t Wall Street and the IRS teach us that we should plan to retire on 2/3 of our income and therefore be in a lower tax bracket? First of all, if your planners are planning for you to “fail” down to only 2/3 of your present lifestyle then do yourself a favor and fire them immediately! Next, notice that this long standing Wall Street and IRS marketing slogan ignores the fact that a tax bracket and a tax percentage are two different things. Today a 25% tax bracket and a top rate of 39% may be the 35% bracket and a top rate of 59%. It also ignores the other obvious fact that during your earning years you most likely qualify for many tax deductions, reducing your effective tax rate. Yet during retirement you will probably not have that many deductions. Heck, today may be the lowest tax rate you’ll ever pay!
All in all, this crisis may not be your fault and it is definitely outside of your control, but if our elected officials raise taxes to meet the crisis then it will definitely have a dramatic effect on your retirement. Our advice is to take action now and stop putting your hard earned money into “Pre Tax and Delayed Taxation” investments. Instead look for Alternative Investments and savings vehicles that use after tax dollars with tax deferred growth. If you need help finding some, buy a copy of our book (Future Proof Investing) for two or three ideas, or log a question into our blog site here and we can gladly help you. And remember… the Baby Boomers start retiring in 2015 with a 10 year march towards a full economic reverse. At that time the “Fiscal Crisis” will be in full swing, tax rates will gradually be going up to ease the crisis, and possibly making today the lowest tax rate you will ever be in. Act accordingly! Act now! And don’t be a “Perfect Taxpayer” any longer.