Edging Closer to the Fiscal Cliff

If you’re like most investors, you’ve undoubtedly been hearing more and more whispers (and some shouts) about the 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. These policies include 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”).  

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.

What does this all mean for you?

If Congress does nothing to resolve these issues, most economists agree that we should expect an immediate reduction of Gross Domestic Product (GDP) of 4 to 5%. This would likely put our economy into a deep double-dip recession and trigger another 2008 like stock market slide. 

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. 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. If you’re current advisor tells you that they don’t specialize in that area, then find a new advisor. 

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 a Spousal Lifetime Access Trust (SLAT) which could allow you to take 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.