Happily, you should not have to hear urgent news regarding the debt ceiling again until early 2025. The last-minute deal suspended the ceiling for 19 months in exchange for modest new limits on spending, nearly averting a potential default on U.S. government debt. This solved the problem of the moment but served to once again highlight the concerning path of government deficits and ballooning debt. Eventually, fiscal discipline will be required; this will involve tough choices on government spending and possibly tax reform. Most of the current reduced tax rates from the Tax Cuts and Jobs Act of 2017 expire at the end of 2025.
One issue that will require attention soon is Social Security. Last year, this program represented 19% of total federal spending. Social Security reserves are projected to run out by 2034, which is particularly concerning when you consider that nearly half of U.S. households age 55 and over have no retirement savings. Rest assured, the government cannot and will not abandon this program. They will make changes to improve its sustainability. Those could include raising the retirement age (hopefully that will go better here than it did in France), extending payroll taxes on income over the current cap of $160,200, and/or raising the tax rate on earnings. The rate is now 12.4%, split evenly between the employer and the employee. The bottom line is that future workers will likely take home less of their earned income.
As we face these realities, what can you do to best prepare? We have a few ideas:
- Save proactively and sufficiently for retirement. Take advantage of the financial planning tools and guidance we offer if you want strategic help and reassurance that you will have a secure retirement. Start early!
- Don’t limit your savings to traditional (pre-tax) retirement plans only; save after-tax dollars as well. This will help hedge against future higher tax rates. Roth plans and personal savings accounts will be prized assets when income tax rates rise. Do you earn over the Roth contribution limit? We can work with your CPA to do Roth conversions in your lower tax years. Taxes will usurp an unknown percentage of your traditional retirement plan as you take withdrawals; after tax savings accounts are 100% yours.
- Deferring capital gains has long been a sound strategy for investors, but it may be time to modify this thinking. In many cases, paying long-term capital gains tax at the current low rates so you can better diversify or invest in higher-potential return assets is worth considering. We can help you weigh all the relevant considerations.