With the unprecedented national deficit, our government’s enormous amount of unfunded liabilities, exponential growth of entitlement programs, staggering retirees’ health care cost, wild swings is the markets, it’s clear that the world today is much different than it was even a few decades ago.
What will all of this mean for people’s future retirement? My bet is many will see a fairly dramatic decline in their standard of living compared to what retirees in the past enjoyed.
My logic is that a greater percentage of our population will stop working as this giant baby boomer generation enters retirement. With insufficient savings in their 401(k)s, the baby boomers will have no option but to cut back their retirement spending to a bare minimum. Those still working will be taxed even more. With less of their paychecks remaining after taxes, people will have less to spend on cars, clothing, appliances, gadgets, toys and everything else we now spend our money on. Businesses that make these products will cut employment. There will be fewer people working to pay the taxes needed to support the spending the government requires, which means that those still working will in turn be taxed even more. They will have less to spend and consumption will drop further. It is a vicious cycle that is already in motion.
Neither we nor our political leaders seem to possess the wisdom or the will to break this cycle now and thus limit the suffering. So we all continue to sit back waiting for someone to do something while this cycle continues to spin out of control, until one day it will fracture by its own momentum.
In the process, we will all be forced to endure pain, but some will suffer far less than others.
Those who suffer least will be the ones who realize now that the future will be much different than the past. And because of this, they will be wise enough to adopt the new strategies that will be required to cope with these coming challenges. The strategies needed are those that marshal all of a person’s resources in ways that make those resources work harder to boost lifetime spendable income, while at the same time protecting those resources from volatile financial markets and higher taxes and inflation.
The old methods tell individuals and advisors that retirement will be built on the three-legged stool of Social Security, personal savings and pensions (now 401(k)s, IRAs, etc.). According to these methods, at age 65 people retire, claim their Social Security, and supplement this income as best they can by withdrawing first from any personal savings. Once this money is gone, they’ll replace it with distributions from their qualified plans.
Unfortunately, by doing this, they ultimately expose themselves to the potential to have their income hit with the highest possible taxation and risk. Not only are their qualified plan distributions taxable, but as much as 85 percent of their Social Security will be as well. To pay these taxes, many will be forced to withdraw even greater amounts from their taxable qualified plans in order to net the after-tax amount required to meet their spending needs. If these withdrawals are coming from a portfolio of stocks during a period when the market is down, they will lock in losses that can never be recovered.
This is not only risky, but for many it will also be very tax-inefficient as well.
Instead, by precisely combining the right Social Security claiming strategy, the judicial use of annuities within the qualified plan, a partial Roth conversions tactic, a properly-structured indexed universal life insurance policy (IUL) or whole life insurance policy and other financial instruments, a synergistic effect can be created that could minimize exposure to market risk, assure the continuation of tax efficient income, significantly increase the after-tax amounts received from Social Security and much more.
No present-day politician, whether a member of Congress, a member of the Senate, or the president can come close to doing this for your clients. Only one person can help these people: you. This is, of course, assuming that you are an advisor who clearly sees the coming challenges, who knows how to implement new-age strategies to meet them and who cares enough about your clients that you are willing to serve them regardless of what it does to your bottom line.
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