Americans are starting to experience 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 and American Recovery Act have provided payments 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 which 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.
One strategy 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 certain 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 a tax-advantaged mitigant against untimely death.
- Market Risk- Principal protection provides a buffer against stock market fluctuations.
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. If you are nearing retirement, make sure you prepare for higher taxes and discuss tax-saving strategies with your financial professional at your next meeting.
Have specific questions? Don't hesitate to reach out to me today
Wes Garner, CRPC
Principal Wealth Strategist
(281) 269-8669
wgarner@tdecu.org
Important Disclosures:
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial professional prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.
Inflation is the rate at which the general level of prices for goods and services is rising, and, subsequently, purchasing power is falling.
This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.
Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments.
Asset allocation does not ensure a profit or protect against a loss.
All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.
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