From The Founder: Election Promises and Our Growing Debt

This month, I thought I would begin to share my thoughts on the upcoming election. No, I am going to predict who is going to win. I also won’t attempt to guess how bad the mud-slinging will get as the year progresses.

Instead, I will keep my ideas focused on you and your finances. Recently, I have seen some interesting figures related to our national debt, which got me thinking about debt and elections.

As you may know, our national debt has now crossed over the $34 trillion mark. This is an astounding number to me, as our debt only hit $10 trillion back in 2008 during the financial crisis.

One of the updates that got my attention was the Congressional Budget Office’s report that showed our federal government expects to spend $160 trillion between 2024 and 2040. The report estimated that during that time, our national debt would double. After releasing this report, the rating company even Fitch downgraded their U.S. credit rating.

I saw one writer call this situation a ‘slow-motion train wreck.’ I think that is a perfect description. The reason that politicians don’t have to do anything about the debt is because it harms us in a very slow way. It lulls Americans into believing everything will be fine…until it isn’t.

So, the useful question should be, how does this affect us, and what, if anything, should we do to plan or to protect ourselves and our loved ones?

From a planning perspective, I believe there are two things that we should consider. The first is not a new topic for us to cover, but I think providing you with a gentle reminder is beneficial. This year, as you listen to promises from politicians of all the wonderful things they plan to do for you, remember that those things have to be funded somehow. Every financial expert agrees that, at some point, taxes will need to go up due to our debt situation.

If taxes will be higher in the future, the wise action is to review how your nest egg will be taxed. Our advisor team loves the three-bucket approach of best-selling author David McKnight. Let’s review how much you have in each of the three following buckets:
1. Taxable: these are accounts that are taxed every year, such as bank accounts or brokerage accounts
2. Tax-deferred: these are accounts that are not taxed until you take the money out, such as 401k’s or IRAs
3. Tax-free: these are accounts that will not be taxed in the future under current law, such as Roth IRAs and Roth 401k’s

Once we see how much you have in each of these areas, our advisor team believes now is the time to consider if we can shift anything from the first two buckets into that tax-free bucket. The truth is that no one knows when tax rates will go up or by how much. I feel that in the years down the road, we will all be very thankful for every penny we get shifted into the tax-free bucket.

The second item that I believe we should consider is how our national debt might affect interest rates this year. You see, as our national debt has been ballooning over the last decade or two, interest rates have been at all-time lows. This means the interest cost hasn’t hurt nearly as much as it could have.

But interest rates, of course, have gone way up over the last two years. So, how will that affect the amount we spend on interest? As you can see from this chart, almost 1/3 of all of our national debt will mature this year.

While no one can predict the future, this chart is one of the reasons I’m so confident that the Fed will begin lowering interest rates this year. If they don’t, our national interest costs will skyrocket. That would be terribly inconvenient when the campaigning politicians make all their promises.

Therefore, if interest rates decrease this year, it may be a good time to lock in rates on safer accounts such as CDs and annuities. Also, as I mentioned in my video last month, we think decreasing interest rates could be very good for investments in real estate. Also, if you’re sitting on lots of money in a money market making a great interest rate, be prepared for changes. Banks and money market funds may be slow to raise their interest rates, but you can be sure that those rates will drop in the blink of an eye!

Of course, an election year brings a lot of unknowns. As always, know that we will be here to help you make sure that your plan is working for you and your loved ones, and if you’re wondering if we need adjustments, get in touch with your advisor.

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