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What Seniors Should Know About the Fiscal Cliff


On January 1, if Congress hasn't gotten its act together, the talk of the “fiscal cliff” becomes reality. It won't be pretty as federal spending falls and federal taxes rise. The impact will be gigantic – enough to send the country back intro recession so the thinking goes among many economists.

“The looming fiscal cliff would strain already-tight government revenues. In the long-run, this means that federal, state and local governments will need to find more ways to fund themselves. We all know what that means: increasing taxes and reducing benefits that will place a larger financial burden on working families, and particularly on retirees and those nearing retirement,” says Mitch Adel, a lawyer specializing in elder law and financial planner with Cooper Adel & Associates.

No doubt this will be bad news for everyone, it is especially so for those nearing retirement or already retired. What are smart moves they should be making “just in case”?

Keep your cool

For those nearing retirement and/or in retirement, do not make dramatic changes to investment assets and move to cash out of fear, cautions certified financial planner Roy Larsen of Larsen Wealth Management. “Any short term market reaction caused by Congress will be trumped by long term corporate earnings. Trying to time this next possible event's impact on the market will likely do more harm than good,” he says.

Be strategic

That said, that doesn't mean you should close your eyes, cross your fingers and hope for the best. Tweaks may be required.

Be realistic. “Whether it's January 1, or some time down the road, the financial problems in the U.S. today will need to be fixed, and the solution will have a negative impact on our economy. Retirees and those facing retirement need to invest with this mindset. They can't expect the markets to head upward indefinitely,” says Dan White, founder and president of Daniel A. White & Associates.

Ask your financial advisor what the prognosis is for your investments if there is another recession. “With the potential for a wider Eurozone crisis and a slowdown of the Chinese economy, the U.S. may find itself at a fiscal cliff, even if it's not of our own making,” says White.

Assess the safety of your investments. “Even bonds, for example, are often touted as a very conservative choice, but if interest rates rise, there may be many investors left holding bonds with less principal and extremely low rates. Often index annuities are a better fit,” says White.

Consider making some changes to portfolios based on what is doing well in this environment and what will likely do well if tax rates are increased. “Pre-retirees and retirees alike should consider from the traditional pool: tax free bonds, emerging market bonds, defensive equity sectors,” says Larsen.

Focus on reducing volatility. “This can be achieved in many cases with asset classes that have lower correlations to equities. Many alternative assets and strategies should be considered such as absolute return strategies, long/short funds, managed futures, non traded REITs and tactical or opportunistic allocation strategies,” says Larsen.

Furthermore, says Brenda Wenning, principal of Wenning Investments, “I recommend shifting stock holdings to more defensive positions such as money market or short term bond funds until the fiscal cliff outcome is know.”

While there is talk about recovery in the real estate market, another negative economic cycle may restrict the rebound. “Seniors should be very careful in thinking about real estate as an investment as they approach retirement, if the economy takes another negative turn,” says White.

Minimize your tax burden

“Take inventory of your overall situation and figure out what tax-efficient strategies you might be able to put in place if things play out worse vs. better,” says Simon Roy, president of Jemstep, a personal online investment guidance and management service.

For people looking to hedge against tax risk, one option they have is to maximize contributions to their Roth IRA. Even if tax rates were to drop slightly, the Roth IRA shines over the long term, says Tom Hegna, author of Paychecks and Playchecks: Retirement Solutions for Life. “Roth IRAs have no required minimum distributions and can allow the children and grandchildren to receive tax free income for life as well.”

Those with estates larger than $5 million should consider gifting and the possible benefits of doing it this year prior to the top estate tax rate increasing to 55% and the exemption reverting back to $1 million, points out Larsen.

Realize long term capital gains before the end of the year, while they are still taxed at 15%. In 2013 the rate could jump to 20%.

Conserve cash

Health care is an area of significant concern – a fast-growing part of the federal deficit – and seniors must be prepared for the rising costs of long-term care, says Adel. “The individual burden may become worse in the face of a fiscal cliff, so investigating long-term care insurance or using legal tools and strategies to protect assets from these costs is critical,” says Adel.

For investors still in the income taking stage, but close to retirement, reallocate your portfolio and increase your cash position. “You want 12 months of income in reserve,” says Steve Kolinsky of Kolinsky Wealth Management.

Lastly, says John Holodinski, a senior vice president with PNC Investments, “The most common mistake is panicking and making a quick decision. Always create a plan, understand where you want to go and understand the current financial landscape.”

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Paoli2   |     |   Comment #2
Sheryl:  This Fiscal Cliff info is concerning but I can't find how or if it will affect those already getting Social Security benefits.  Do you know if it goes through if it has any affect on people already receiving these SS benefits?  Thanks.
Kaight   |     |   Comment #3
Everything will depend on the outcome of the election, only two weeks away (plus a couple of days).  If Obama wins I'm buying more long term CDs.  If it's Romney, I'm more likely than not going to have to cash in my existing CDs early.  The country is pregnant for economic growth.  But the big growth is not going to happen with a redistributionist in office.  Smart people don't incur risk and work their butts off knowing in advance their hard won profits will be stolen from them by the government.
Paoli2   |     |   Comment #4
Kaight:  This is going to be the hardest election to make a choice, imo.  It all depends on where one's most important needs are.  With me it's healthcare and it seems Romney is not really offering anything for younger people with pre-existing medical problems who desperately need it.     Then again, I have the same concerns in the financial arena as you do with both of them.  I have no idea at this point how to pull the lever and I think I am not alone in my thinking this go round. Neither man would be my choice.
rosie43   |     |   Comment #5
Because I worked in a bank for 30 years I trust this president. I know what went on in banking and it needs to be cleaned up.  In the past you could trust your banker.  Customers need to be protected and they need to understand what they are getting into. People don't understand their mtgs. They are sold something that their banker gets a bigger commission on. The new 2 page mtg is a good start for the customer and getting it 3 days before closing and also having the paper work to compare with other banks or credit unions mtgs. When you get a checking account, savings account, CD, credit card the bankers are reaching their goals, not necessarily getting the best product for you. I argued with my boss about this. It was not always like this.   People go in to see their banker for a CD and come out with an annuity. Maybe people need to read David Stockman's (President Reagan's budget director)  recent article on Mitt Romney. Your banker right down to your teller is there to sell you a product, if you need it not, so that they will get a commission.  This has to change.  

lou   |     |   Comment #6
There are many issues to consider when making a choice for President, but one I don't think anyone here can argue is that Obama is bad for savers, and, with Romney, we at least have a chance of reversing the policies which have led to the zero interest rate policy.  Obama will either reappoint Bernanke or appoint someone just like him. Romney, on the other hand,  will appoint a Fed Chairman who will be less likely to print money like a drunken sailor. I also believe Romney will be much better with the deficits and will do a better job getting our economy to grow at levels that will generate jobs for the middle class. Obama had his chance and he blew it.
Paoli2   |     |   Comment #7
Lou:  Bernanke claims he will not run again after 2014 so whoever wins will have to get someone else.  But Romney has no healthcare policy per sea and he is ****ing up his chances with destroying Planned Parenthood and other Republican policies.  We can't win for losing in this election!
Paoli2   |     |   Comment #8
Rosie 43:  I have never done business with any bank where a "teller" tried to sell me or other customers I know of, any financial products.  In fact, not even the bank managers tried to sell me anything but what I asked for.  Now they have a financial rep who is the one they refer us to if we want something besides a CD and he will, of course, try to stear one into anything but a CD.  They even call us at home to push their products until I reported them to the bank manager and insisted the financial person not have access to any of my bank accounts.  They are the ones who make commissions on their products.  I had no idea other bank employees could even recommend products to a customer much less make commissions on them.

As for a customer going in for a CD and walking out with an annuity, that is the customer's fault for not researching products and standing their ground when the annuity is pushed on them.   We have to take responsibility for what we buy by being a knowledgeable customer. 
rosie43   |     |   Comment #10
Paoli2. Go into your bank and ask the teller, the desk person and your manager if they are paid any money for accounts sold or referred. I retired in 2008 and the big banks in my Midwest town all  paid commissions and or for goals reached. This amounted to several thousand dollars a year per employee. Even for checking accounts, credit cards, on line banking etc. The person registered to sell an annuity made several thousand dollars for each sold. Not sure what is done today but this was going on in some banks even  in the 1980's. Banks that are not the top 10 banks were also doing it in the town I lived in. We were even paid if a customer came in and asked for our car loan rates and we sent them to desk person to speak to them. If the desk person sold a loan to them then they would get paid even more. If a person opened a checking account for each thing that went with the account, on line bankng, debit card, savings account etc added even more money to our paychecks. We had call nights (which were unpaid and I refused to do it) to call customers on a list that was given to us, (called sorts)  that maybe had high balances in checking accounts and we tried to sell higher paying accounts to them. If they had mtgs we would try to sell HE loans to them. If they had old cars or our sorts said they had a car loan just paid off we would try to talk to them about current sales we were having on car loans or HE loans that might be tax deductable. We had practice time on fake telephones to hone our selling skills. Managers also had to do this. These sort lists could have name, addresses, place of work, income, number of children phone number etc on them. That is why you have privacy notices sent to you periodically. When banks hired outside companies to do this some of those people would sell information.  This is just some of the stuff that went on. Some call center peoples goals were to get 1 million a month in new money into the bank. Sometimes we were told when so and so comes in mention such and such of an account to them or if I am free tell them I would like to see them. Mangers had days they would go out to a business and try to sell accounts to them. The more they sold the bigger their bonus. They would talk to seniors at high schools, go to colleges on certain days and for every account opened the college and the bank employee made  even more money.
Paoli2   |     |   Comment #11
Rosie43:  I believe what you are posting because when I first moved to this city a lot of the bank employees had access to my account and were calling me.  I went in to the bank and let them know that NO one was allowed to look at my accounts and see balances unless they were directly working on them for me.  I also made it clear I was not to be called unless there was a problem on the account.  They marked my account and gave warning to employees and no one bothers me now.  However, I think they must check out accounts of customers with big balances and do try to make money on them.  Now I know why so many of them took such an interest in my accounts.  It wasn't to help me but to help themselves to making more money off of me.  What a world!

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