Advisor Today - September/October 2012 - (Page 17)

practice specialties FINANCIAL PLANNING | By Kate Warne, Ph.D., CFA Will We Avoid the Fiscal Cliff at the End of 2012? These tips will help your clients manage through unknown tax increases in the future. Y ou may have heard discussions regarding the U.S. approaching a “fiscal cliff” at the end of this year. If Congress doesn’t act, taxes will rise and government spending will shrink. These austerity policies could push the U.S. economy into recession in 2013, following Europe’s path. Although no one knows what Congress will do to address these issues, there are actions to take today to prepare your clients for the possibility of rising taxes in the future. Federal Reserve Chairman, Ben Bernanke, has used the term “fiscal cliff” to refer to the dramatic changes in federal taxes and spending (fiscal policy) that will occur at the end of 2012 if Congress doesn’t act. Although we expect Congress will act to delay or reduce the size of the cliff to a series of bumps, you should prepare your clients for the possibility of higher taxes in the future by taking advantage of tax-advantaged investments and diversifying their tax and investment positions before the end of 2012. Make sure portfolios are broadly diversified and built to handle many types of terrains, including fiscal bumps and cliffs. spending cuts are implemented, the estimated $600 billion impact would put the economy into at least a mild recession in 2013. The stock market, which usually anticipates changes in the economy, would likely drop sharply in response. But these short-term responses also are not the end of the story. The stock market and the economy have experienced numerous past recessions—and undoubtedly will suffer through them in the future as well—whether or not the next one is in 2013. Financial advisors should remind clients that historically, after each recession, both stocks and the economy have resumed their longterm upward climbs1. After they absorb the impacts of any tax and spending policy changes at the end of 2012, we expect they would move back onto that upward path, just as they have in the past (although past performance of the markets is no guarantee of what will happen in the future). No solution expected before November Because Congress created these deadlines, only Congress can change them. Congress could reduce the size of the cliff by extending some of the tax cuts and delaying some of the spending cuts before the end of the year; no major decisions are likely until after the elections. Either way, financial advisors should begin to prepare their clients now for the uncertainty to continue until the end of the year to help minimize anxiety as the year closes. Most investors expect their taxes to rise over time regardless of the outcome of the 2012 elections, particularly as today’s rates are below their long-term average. The composition of possible tax increases, and their amounts, is uncertain. However, financial advisors can prepare clients for higher taxes, as well as the potential year-end market volatility. Emotions will likely play a role in the discussions advisors have with clients in the coming months, and those who help clients manage through that anxiety may be doing more to aid their clients’ portfolios than any new investment suggestions can. Tax diversification is an important part of early preparation. A solid strategy will address the uncertainty about taxes in the future through an appropriate mix of investments in a variety of accounts with different tax treatments. A few considerations include: ■ Fully funding tax-deferred investments such as IRAs, 401(k) plans and education savings plans September/October 2012 | ADVISOR TODAY 17 Automatic austerity in 2013? Many believe this year’s elections could shape the direction of tax policy and government spending for future years; so the tax debates are likely to escalate. For clients who are worried the U.S. cannot continue to run high deficits indefinitely, the fiscal cliff might be welcomed despite its extremely aggressive shift toward deficit reduction. However, such abrupt changes almost certainly will have large negative impacts on the economy and the markets, although almost everyone agrees that the deficit must be reduced over time. If Congress takes no action and the automatic tax increases and http://www.advisortoday.com

Table of Contents for the Digital Edition of Advisor Today - September/October 2012

From The Editor
Viewpoint
Making the Transition
Will We Avoid the Fiscal Cliff at the End of 2012?
Boosting Retirement Plan Participation
Protecting Younger Workers’ Greatest Asset
From Term to Perm
Demystifying Life Insurance
Four Under Forty
My Best Sales Ideas
NAIFA Government Relations
NAIFA News
Insuring People in the World of Sports
Advertiser Index
Back Page

Advisor Today - September/October 2012

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