Americans are starting to see the impact of increasing prices at the supermarket and the start of inflation. Also, clothing at retail stores is depleting as manufacturing has halted, creating demand for products ordinarily accessible.
Today’s economic conditions are much worse than coming out of the Great Depression. During periods of economic recovery, the U.S. experienced historical debt and tax levels, paid for by the American people when tax rates were above 40% for over 40 years (1940-1981). Many older Americans recall the high-interest rates, high prices, and people displacing from the weak economy.
While the CARES Act provided a one-time payment to individuals and for business stimulus, it will not solve our country’s future economic problems. Government-funded recovery will likely lead to higher taxes, and the debt will be collected from U.S. taxpayers to decrease the Federal deficit.
What has changed since The Great Depression is the debt the U.S. carries, now close to $24.2 Trillion with a 106% Debt/GDP Ratio (Gross Domestic Product). Our debt to GDP ratio indicates that the U.S. owes more than it produces and consumes domestically, or exports. How do economies recover? By producing and selling more than its expenditures or by raising the prices of their products. How do government coffers improve? Through tax collection. Both create problems for everyone, but especially for those nearing or in retirement.
In any market, investors must always consider the five risks that can sideline their financial future:
Inflation Risk- Investments are not optimally positioned to address the rising costs of goods and services will deplete a portfolio.
Taxes Risk- Increased taxes erode the investment capital; the investment type and timing are critical.
Longevity Risk- Investment capital is not enough for supporting longer lives and long-term care needs.
Survivorship Risk- Unexpected loss of a life-partner leading to lower investment capital.
Market Risk- Loss of principal value can decrease investment capital.
For example one solution to addressing inflation risk and tax risk is by increasing the allocation of principal-protected products. The benefits of fixed-indexed annuity products address all five significant dangers:
Inflation Risk- Allocation to these products allow asset allocation strategies to address inflation.
Taxes Risk- Leveraging tax-free investment strategies increases investment capital.
Longevity Risk- Utilizing “income for life” features address longevity risk and long-term care risk.
Survivorship Risk- “Death Benefits” provide tax-advantaged mitigant against untimely death.
Market Risk- Principal protection provides a buffer against stock market fluctuations.
In conclusion, the impact of inflation and taxes due to COVID-19 will continue making it critical that you consider your retirement portfolio’s allocation and prepare for your financial future. In addition, if you are nearing retirement, make sure you prepare for higher taxes and discuss tax-saving strategies at our next meeting.
Disclosure: Guarantees are backed by the financial strength and claims-paying ability of the issuing company. This article is designed to provide general information on the subjects covered. Pursuant to IRS Circular 230, it is not intended to provide specific legal or tax advice and cannot be used to avoid penalties or to promote, market, or recommend any tax plan or arrangement. You are encouraged to consult your personal tax advisor or attorney.
As a retirement income specialist and 38-year veteran of the financial services industry, August H. Velten understands what his clients need in order to enjoy a comfortable retirement. Augie is a former instructor for the Life Underwriter Training Council. In addition, he once occupied the legislative seat for the Maine Association of Life Insurers. At August H Velten & Associates, we know that it is your retirement, and you should have control over it. We offer our experience and knowledge to help you design a custom strategy for financial independence. In addition, contact us today to schedule an introductory meeting!