I am talking all about the fiscal health of our country. It may not seem like this should be such an important topic when talking about retirement planning. Why am I going to cover finance, debt, and those types of things? It is important that we talk about this topic because as you look forward to your retirement, it is going to be something that will affect your retirement years greatly.
The first question I have for you is, “Do you expect taxes to be higher or lower in the future?” I go across the country talking about this topic. In fact, I do a number of large webinars for CPA groups. Every time I do, we talk about this question ,and the main answer that we get back is the taxes will be higher.
Many people believe this will happen in a short of a period of time as 10 years from now, taxes could be substantially higher, maybe even double what they are now. If this is the case, if this is what we’re facing, are your retirement assets invested in the right place?
One of the other things that I’ve learned as I go across the country is that 95% of people have their retirement assets placed in tax deferred accounts. What are these tax deferred accounts? These are your IRA, your traditional IRA, your 401k defined benefit plans. These are plans that you’re putting together to allow you to get tax savings now, but then have to pay the taxes at some future time.
One of the important things that you need to understand about tax deferred investments is that is what they are. Many people, especially CPAs, and other professionals are trying to promote these as a tax deduction, similar to maybe a home mortgage expense, or property taxes where you can take these off your tax return, reduce the amount of tax you owe, and never have a future liability for the deductions that you’ve taken.
Retirement plans are not set up the same way if you get a deduction on your tax return.
For an IRA contribution, all you’re doing is deferring that tax to a future period of time. If you’re like me, or you’re like many of my friends, you believe that taxes could be even 1% higher than they are today, during a period of time where we have some of the lowest tax rates we’ve ever had in the history of America. In fact, there’s only been two other times the taxes have been lower than they are today, and we’re putting our money in the wrong place.
Let’s talk about math, and why math creates such a problem when we look at the future of taxes and we look at the future of our retirement. I’ll start by talking about the current national debt. This one’s a hard one because it’s going up so quickly, it’s hard to pinpoint where we’re exactly at. At the time I am writing this, the national debt is shown on the debt clock at $24.5 trillion. By the time you are ready this, it could be up to 25 trillion, maybe even higher than that if we’ve just recently added over 2 trillion.
It’s my belief that when we get done with all these economic situations that we’re facing as a result of the pandemic, that the amount could be as high as $6 trillion that we’re adding on to the national debt. We’ve got a bigger situation that’s brewing, that’s getting worse by the day, and getting compounded substantially.
Many people will say, but what about our GDP? If we were to look at debt to GDP? Are we really in that bad of a situation? Currently, we’re at 128%, that GDP ratio. If you look back at World War Two and right after that, we were at 121%. We pulled out of that period of time.
What is the problem that we have? Well, the problem that we have is that during the period of time after World War Two, we were accounting for all of our liabilities. Unfortunately, we’re not doing that now. The United States is not accounting for the fiscal gap we have.
What is this fiscal gap? This fiscal gap is the amount of money that we committed to, but we’re not putting on our books. Many other countries are required by law to report their fiscal gap liabilities, those that they’ve committed to, even though the time has not come for them to pay those. At this time, the United States does not require that. As a result, we’re showing somewhere around 24, 25 trillion, when in reality, most economists believe that number is closer to 200 trillion.
This is a huge number. We’ve got a situation where we made a lot of promises, that we’re not going to be able to keep. This is the situation because currently, we’re only bringing in as a country about four to four and a half trillion dollars each year, to be able to cover the cost that we have.
One of the things that’s often talked about is servicing of the national debt and how we’re handling that. Right now, it’s not been that big of an issue because we’ve been at historically low interest rate. Right now, we’re paying about $382 billion to service that debt, and the US government’s bringing in about $4 trillion a year. We’re paying less than 10%.
But what happens if interest rates were to double, or maybe even quadruple? What’s going to happen? Maybe the easiest way I can explain this is to go back to a house buying situation. Most of us, at some point in our lives, have bought a home, or we want to buy a home. When we do that, we usually have a budget regarding the amount of money that we can pay each month if we’re going to finance that home.
Today, interest rates are around 3.5%. If you had $2,000 a month that you could use to pay for principal and interest on a loan, not counting the taxes and the other fees that you may have, you could buy a home that totaled about $400,000 in value, which is a pretty good sized home for $2,000 a month. What happens if interest rates go up to where they were when I bought my first home, which is 7%. What if they were to double?
Well, if that were to happen, the payment you would have on that $400,000 home would go from $2,000 a month, up to $3,000 a month. You see in an individual family how big of a problem this can create, all of a sudden, you’re having to pay 50% more than you’d had to pay before. Now compound that with trillions of dollars. What you realize is the amount of debt service that we have could be substantially higher and a bigger problem as that that continues to grow as interest rates creep up at some point in the future.
When we talk about these topics, and when we talk about the fiscal health of the US government, one of the big things many people have an issue with is the pork barrel spending that happens. All those things where congressmen go back to their own state, they spend tons of money on parks or libraries or other things. Why are we spending so much money on these projects? Maybe it’s government contracts where people are getting paid way beyond what we think they should be. This is just a minor part of the problem.
This is where the majority of the issues lie when we look at the fiscal health of the government. In fact, if you were to look at the national debt clock, it’s going up by about a million dollars every 30 seconds. Most of these projects don’t cost much more than a million dollars. Some of them do, but many of them are under that amount. It’s just a fraction of the problem we have.
What we have are three other big issues, including the debt that we talked about. Another big issue that we have is Social Security. We have the majority of the baby boomers that are still coming and will be going on to Social Security roles. In addition to that, we’re all living longer.
When Social Security was brought about as part of the New Deal with America by President Roosevelt back in 1935, we had 42 people for every one person receiving benefits, and it was an insurance against living too long. Well, now fast forward to 2020, and we’ve got a situation where we only have three people working for every one person receiving benefits.
Instead of having a life expectancy of age 62, if you make it to 62, your life expectancy on average is supposed to be 85 years old. That is 23 years. That’s a fourth of your lifetime, and that’s average. So many people are living far longer than that. What we now have is an expensive retirement program instead of an insurance policy that helps people get through a couple of years, just in case they live longer than life expectancy.
As bad as that sounds and as problematic as that is if you talk to David Walker, who was the Comptroller General of the United States back during the Bush and Clinton era, you will find out that the biggest problem we have is Medicare. He says that Medicare is five times more expensive than Social Security. Why is Medicare so expensive? Because the rates for Medicare are outpacing inflation substantially. We’ve got all these retirees that are coming in, and they’re all living much longer. They’re also facing a number of health issues, so we’re having to spend lots of money to provide for their care for a long period of time. Then we have a situation where costs are outpacing inflation, and this is creating a substantial problem.
One of the biggest issues that this creates, though, is that we have a political dilemma, what politician out there wants to cut these benefits. In fact, people have tried. Many people have run on a platform where they’re going to reduce these benefits. The person who’s running against them, will run ads showing them push people off a cliff in a wheelchair. They’re basically saying, look, you can’t cut these benefits. Well, because no one wants their benefits cut, they are not allowing them to get into power, which then means that the benefits continue on, the problem continues to get bigger, and we end up with this substantial amount of debt.
One of the solutions that many people bring up is why don’t we just go borrow more money? Why don’t we go out there and find other people to borrow from? Well, part of the issue that we have, because if you look at it, a lot of the money that we currently borrowed is from the Social Security pot. Social Security’s out of money, and there is no more money to give another large portion that is being given or being borrowed by other countries. They’re getting to a point where they are uncertain whether or not the United States can pay the money back or not.
As a result, they’re not very excited to borrow money. If they do, they want to get a higher return on their investment. They don’t want to get to a point where basically, we don’t have enough money coming in to even be able to service the debt. That can happen. If you look forward, somewhere between 50 and 100 trillion dollars, we have a situation where we don’t have enough money under the current economic situation we have and the current tax structure to be able to service anything more than the national debt.
Another solution that’s often brought up is why don’t we just have the government print more money. They have big printing machines, so we can just print our way out of the problem. Well, the reason money is so valuable is because it’s scarce. There’s only so much of it.
What happens when we get to print trillions of additional dollars to help cover this? We create a situation of hyperinflation where our dollar is not going to last as long as it used to.
One of my favorite stories is about Zimbabwe. They went out and printed 100 trillion dollar banknotes. That sounds exciting—100 trillion dollars. Well guess what? That banknote is worth less than 50 cents because they’ve got such high inflation.
The other problem when you have inflation is it’s not like services cost less. The services that are being provided, such as Medicare, go up with the inflation. A doctor is not going to charge the same amount for products and services as they were before if we’ve got a situation where we have hyperinflation. Their money’s not going to go as far, therefore they’re going to need to charge more money. We have this ever compounding problem of trying to get out of our debt.
The third and final solution that’s often brought forward is why don’t we just cut our spending? AsI look at this situation, I often refer to it as that third rail of politics. What am I talking about? If any of you have ever ridden on a subway, you realize that the third rail is where all the power is. That’s not the realm that you want to touch. That’s the one you want to stay away from.
Politicians are realizing the same thing when it comes to dealing with this issue. As they try to deal with it, they’re not being able to get elected. We just keep pushing the ball down the road. We just continue to push everything further and further until the problem continues to get bigger and bigger until there will come a point when the government’s going to have to say we have no further option.
The option that I see as the most viable is that they’re going to have to increase taxes and increase them substantially.
Many of you may ask, can they really do that? Could we really go into a period of higher taxes? All we’ve got to do is look back at history and realize that yes, that is a viable option. In fact, as I mentioned before, we’re in a period of low taxes. The only time they’ve been lower is twice in our history. They’ve been as high as 94%. During the 1970s, the highest marginal tax rate was 70%. That was double what we’re paying now. The 70s wasn’t that long ago.
As we go through all this, I know it can sound pretty discouraging and can sound overwhelming with everything else we have going around us. However, what I want you to understand is that all of this is really good news. The reason it’s good news is because we know when taxes are going to go up, and we have time to prepare for that day. If you have retirement assets in this tax deferred bucket, you can know that on January 1 2026, taxes are going to be higher than they are now. We expect that after that time, taxes will just continually steadily get higher.
If that’s the case, we have over five years to help prepare ourselves for this time. There is a lot that can be done with your retirement to get yourself to a good position. You pay taxes now, under historically low tax rates, and then in the future, you open up the opportunity to have tax-free income. You take that risk out of your life.
What we realized is that if you can remove that risk out of your life in the future, your retirement savings are going to last anywhere from 10 to 12 years longer. However, with people living longer, this is something that most people want. 68% of America is concerned they’ll run out of money before they die. This has become one of the biggest concerns that people have is that they’re going to live too long. Who would have ever thought before it was we were afraid to die?
Now, we’re afraid that we’re going to live too long, and that we’ll run out of money. We’re afraid of the time in our lives when we can’t replace the money, and we will be put in a position that we never thought we would find ourselves. We might have to live with family or maybe find ourselves living in some type of home or unfortunately for some, living out on the street. You have an amazing opportunity ahead of you to be able to fix the problem. As we go throughout the upcoming shows. We’re going to share some cool things that you can do to help fix this problem in your own life, to be able to get yourself going down the path towards tax free retirement or what we call the power of zero paradigm.