Nov 08

What is this Fiscal Cliff?

Congratulations to President Barack Obama for your second term re-election. With only 6-weeks to the end of the year, you and Congress must now focus on patching, resolving, compromising and restructuring the greatest threat to a continued recovery and avoid the $600 billion dollar looming “Fiscal Cliff”.

If you’re like most investors, you’ve undoubtedly been hearing more and more whispers (and some shouts) about this pending “Fiscal Cliff”. Like you, many of the clients at Secured Retirement Advisors have heard of this fiscal cliff, and by name assume that it can’t be such a good thing, but beyond that are not sure exactly what this cliff is or what to do to keep from falling off it.

The fiscal cliff refers to a predicted significant drop in the economy if a number of different policies are allowed to expire on January 1, 2013. In layman’s terms, a fiscal perfect storm.  Pending tax increases due to the expiration of the Tax Relief, the Unemployment Insurance Re-authorization, the Job Creation Act of 2010 and the first round of spending reductions under the Budget Control Act of 2011 (“Sequestration”) combine tax hikes with forced spending cuts, and according to the Congressional Budget Office, are likely to result in a 3-4% smearing of our GDP. Dire predictions conclude such a catastrophe will likely force the economy into a double dip recession. If you believe Sandy knocked us backwards, “you ain’t seen nothing yet!”

Each one of these policies on its own is big, but combined they could lead to an economic nightmare. In short, if the Fiscal Cliff comes to reality, consumers can expect:

  • The 2001 and 2003 (Bush) tax cuts to expire which will increase the tax liability of almost everyone.
  • The Alternative Minimum Tax (AMT) will affect more taxpayers increasing taxes by $132 Billion.
  • Payroll taxes to increase 2% by $120 Billion.
  • Domestic and defense spending to be reduced by $86 Billion.
  • Unemployment benefits will run out.
  • And the debt limit will max out again!

Meanwhile, a large number of smaller, miscellaneous items will be coming up, such as Medicare slashing reimbursements to doctors and hospitals by 25% and a number of corporate tax issues.

Unfortunately, few believe Congress will have time to fix any of these issues prior to the elections due to upcoming holidays, vacation days and time off for National Conventions. Post election posturing by both Republicans and Democrats has aready begun.  Some are hoping that there is still time for permanent year-end solutions to address these issues, others are left praying for a last-minute patch to get the economy into next year so that the new elected can have a shot at a long-term fix.  So as investors and consumers, we are in a wait and hope situation.

So what can you do now to reduce exposure to the Fiscal Cliff?

First, start with a comprehensive financial plan that coordinates your investments with your taxes and income plans. Get a risk score on your portfolio today and adjust if necessary. Don’t fall into the trap that you have to stay fully invested and ride out whatever the markets send our way.

Second, look into using current tax laws to place your plan into a statistically more beneficial position. Discuss different estate planning vehicles and techniques with your financial advisor and attorney, taking an especially close look at taking maximum advantage of the 2012 unified estate tax credits which provide a surprisingly flexible estate plan format.

Finally, consider contacting your local representatives in D.C. and remind them that their job is to represent you and our country’s best interest. Suggest that they work with both sides of the aisle to design a mutually agreeable solution to this potentially catastrophic issue.

Your best protection is to discover the good financial strategies that are available to you when you partner with a knowledgeable professional like those at Secured Retirement Advisors. In order to help you, we have recently updated our website and now offer many FREE down-loadable resources which can help answer many retirement questions. Feel free to visit us at www.securedretirements.com and help yourself to our educational materials.  If you would like a complementary “3 Step Review of your own retirement plan, call Secured Retirement Advisors at 952-460-3260.
Photo Courtesy of 1787Network.com

Leave a Reply