Get House in Order NOW
We desperately need some good news at this period in life. I have good news for now through 2025 which I will comment on below! While I was already aware of the issues that I will discuss in this article, the need to act ASAP really hit me hard when I read The Power of Zero by David McKnight — I would strongly encourage you to read this book.
On the very first page of the first chapter, McKnight quotes David Walker, CPA, former Comptroller General (CPA for the United States), stating that unless future tax rates double, our country could go bankrupt. If you think that statement is bad, realize that this book was published in 2018. Let that sink in. Walker goes on to say that it has nothing to do with politics and has everything to do with math.
That was before the trillions paid in this year’s stimulus and the long-term effects of businesses that will take years to recover or not reopen at all. We have all read articles about the aging of the Baby Boomers and the significant impact on Social Security payments both now and in the future.
When Social Security began in 1935, it began paying at age 65, and the average life expectancy was 62. There were also 42 people working and putting money into the pot for every one person who took money out. Today, the ratio has fallen to 3 to 1, and in ten years, it’s going to be closer to 2 to 1. A person who starts drawing today at age 62 will keep drawing on average until age 85.*
Now, for some temporary good news. For 2020, and until the end of 2025, the current tax rates are likely the lowest you will see in your lifetime. The reality is that many of you reading this article have most of your retirement savings in accounts that are taxed in the year when distributions are taken. Again, let that sink in. If tax rates are higher in the future, you will have less to spend from the distributions that you take. Therefore, if you need more to pay your bills and enjoy life, you will be taking larger distributions and paying more in tax. Think about how that impact your savings.
According to the math that I was taught, if you take more money out of savings now, you will have less for withdrawals in future years. In addition, fixed rates in products that pay a guaranteed rate of interest are low. If you decide to have a greater allocation to equities, then you are increasing your potential for market volatility.
If you are young and have years for your retirement accounts to grow, market volatility is not much of a concern and can actually be positive. That picture changes completely when you are in your retirement years. If you are taking distributions, market volatility can have a significant negative impact on your future earnings.
In closing, there are some strategies that, implemented now through 2025, will lower future tax burdens. These need to be done in the context of what is appropriate for your specific needs and future planning. If what I am sharing is correct, developing clarity in your planning has never been more important. When you are told by a doctor that you have a health issue that can develop into a serious problem, but can be corrected and eliminated with medication and/or changes in lifestyle, how do you respond?
I’m not a doctor, but I am sharing information that I truly believe will impact your future. Talk with a professional who is trustworthy, one who sees the big picture. This is not about any specific product or investment. It is about looking at the reality of where you are and where you want to be. Then develop a strategy that is right for you.
Your financial health is impacted by the choices that you make. I’ll finish with a quote from Stephen Covey: “I am not a product of my circumstances. I am a product of my decisions.” We are impacted by the circumstance that I discussed, but the decisions you make will determine the product of your financial future.
*Information in this article was referenced from the book The Power of Zero by David McKnight on pages 1-4 in Chapter One.
