You may have heard the new buzz word floating in certain circles – ‘Tax Diversification’… Thank goodness that the message we have been preaching on since the beginning of our practice, in fact one of the main reasons we established our practice is finally taking root and sprouting in main stream wealth management circles in the US. The more that are informed about what they were previously unaware they didn’t know, the better for all of those people and for that we are truly grateful.
As a tax attorney, this is frankly a topic that I could not be anymore passionate about and the largest singular reason I went to specialize in tax law, the reason I began my practice – to marry my love and passion for finance with my knowledge and expertise about what is coming in the area of taxes, and one of only two reasons I am writing my first book that is due to be released end of 2017 – if we can make the deadlines.
You see my friends, in 1981, America changed, by accident and never overnight. A tiny, obscure provision in some tax code began to be used in a way that wasn’t intended because it was designed to be a tax dodge for highly compensated executives. A benefits consultant – not even a CPA or attorney, decided that the code could instead be used to put away cash bonuses, without paying the tax, for retirement instead, and even though the company he pitched his new plan to didn’t implement it, his company and a few others did… leading to the birth and implementation of the 401k plan and ultimately the demise of America’s corporate pension system, for the most part.
At the time, the 401k made logistical sense. When President Ronald Reagan was sworn in, we only had $980Billion dollars of debt in January 1981 and our largest born organic population were only between the ages of 16 to 34 years of age. We did not have a debt problem and we did not have an exodus on our hands…
So the logic was birthed – put this money aside – and pay no tax now while you are in your high earnings working years. Instead, defer all this tax to the next period of your life, your retirement when you will not be earning an income, and pay the tax as you take it out then, because then you will be in a lower tax bracket. America bought in, hook, line, and sinker – yes save the tax today because we will pay less tax when we are retired… EXCEPT that equation REQUIRES that the tax law stay the same or very similar over three decades.
Fast forward now from 1981 to 2016, some 35 years later and take a look at America 2016… President Ronald Reagan passed massively tax reform and effectively lowered our taxes from a historical perspective to become the lowest in the these last 30 years since the 1920s. So we have the lowest taxes since the 20s but did we decrease our spending?.. NO, just the opposite – we spent more, winning the cold war, protecting the world, and all the other truly American things we do. So, now we have $19Trillion in debt to show for it.
And as the Baby Boomers begin to prepare for a mass exodus from the workforce roles, to the roles of Social Security and Medicare, we will have the largest demographic shift of our nation from work to our social programs – the foundational of which, Social Security, was written 10 years before, in 1935, the Boomer generation even began in 1945. It alone was not designed to handle such a generous population. In 1945, when the first Boomers were born, there were 42 people paying into Social Security for every 1 person on benefits. Now, in 2016, we are quickly approaching the 2 payors for every payee, although the government still tells us that will not happen until the last Boomer retires in 2030. We will see how long their math holds up – I suspect it will not be long now!
So now, we have a massive debt problem forming in one corner and the verging retirement of our largest generation swirling in the other, and when these factors begin to collide, this will form the P E R F E C T E C O N O M I C S T O R M for our great country the likes of which have never before been even imaginable. Although many say that 10,000 Boomers retire every day – this is actually not true. Approximately 70% of the Boomer population based on age will begin to retire in just 6 short years, beginning in 2022 and lasting some five to six years through 2028. This perfect storm will come fast and it will be a 7 on the scale of 5!
The government has done the math and they know where America has wealth now. There is over $20Trillion dollars of wealth as of 2015 now stored in pre-tax IRAs, 401ks, and all pensions plans combined. The government will have no choice but to get the money from where the money lives – in those pre-tax accounts.
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