Fiscal Cliff Imminent – Are Your Retirement Savings Protected?

Everywhere we turn we hear the warnings of the coming fiscal cliff. It’s the top story in the news. The financial world is on fire. Wall Street is holding its breath. Businesses are scrambling to protect their assets from the “imminent” fiscal cliff.

What exactly is this “fiscal cliff”? Is it just a bunch of media and political hype? Or should you be concerned and trying to protect your retirement savings from financial disaster?

The “fiscal cliff” is a term used to describe the uncertain financial situation that the country will itself in when the terms of the Budget Control Act of 2011 go into effect after December 31, 2012. The Bush era tax cuts will expire and spending cuts of up to $2.3 trillion over the next ten years will automatically kick in. This was the “compromise deal” struck between Democrats and Republicans in order to resolve the debt ceiling debate and once again raise the debt ceiling.

So, what does this mean for you and your retirement savings?

If you rely on dividends as part of your income or retirement plan, buckle up because the current tax rate of 15% on dividends could rise to as much as 39.6% if Congress fails to reach a deal in the lame duck session. Major companies including Wal-Mart Stores Inc., Costco Wholesale Corp., Dillard’s Inc., and Las Vegas Sands Corp. have all announced “special” dividend payouts to investors this year in order to get ahead of the expected tax increase on dividends. While that great news for investors this year, what will they do in coming years?

Those relying on capital gains as part of their income will feel the pinch as well with capital gains taxes expected to jump from 15% to 20%.

With all of the gloom and doom scenarios flying around, the bottom line question remains – how can we protect our assets from the looming fiscal cliff? Rick Kahler of Financial Awakenings suggests taking profits and dividends in 2012 to avoid the higher tax rates. Sandra Smith of FBN (Fox Business Network) suggests maxing out your 401k contributions and increasing your charitable donations to reduce your taxable income for 2012. This is all sound advice except for a couple of problems.

Taking profits and dividends this year is a short term solution. Increasing your charitable donations is well and good, but it only reduces your taxable income for that year and does nothing to protect your assets. Maxing out your 401k contributions is a great idea as long as the stock market is healthy. Most 401k plans are invested in the stock market and if you were one of the millions who saw their 401k savings obliterated in 2009, you may conclude that a 401k is not the best place to protect your assets.

A lesser known solution for safeguarding your retirement savings is in fixed index annuities. An annuity is an insurance product that pays out income and is a popular choice for those that desire a steady income stream during retirement.

Unlike 401Ks and IRAs, you can make unlimited contributions to your annuity and the growth is tax-deferred. Regarding the fiscal cliff, one of the most attractive features of a fixed index annuity is that your gains are locked in and your principal is 100% protected against stock market losses.

Matt Redding of AnnuityWatchUSA.com had this to say about the market crash of 2009 and the current fiscal cliff crisis.

“2009 was a tragedy for individuals with 401K plans invested in the stock market. The current fiscal cliff the country now faces has the potential to be much worse. Fortunately, investors have learned from past lessons and have made the wise choice to move some of their retirement savings into annuities. Despite the stock market rollercoaster over the last eleven years, our annuity clients have not lost a dime of principal or any gains their annuities have made. It only makes sense to protect yourself in today’s economic climate.”

On MarketWatch.com, Robert Powell had this to say about fixed index annuities.

“In a world where pre-retirees and retirees are struggling to preserve their principal while earning a decent return, the perfect product might seem to be what’s called a fixed index annuity, or FIA. An index annuity is a fixed annuity, which means that principal and credited interest are protected from market risk, according to Jack Marrion, one of the nation’s foremost authorities on index annuities.”

The fiscal cliff is a very real economic threat, and yes, you should be concerned. Your window for taking the precautions to protect your retirement assets is closing rapidly; December 31^st is right around the corner.

I’ll leave you with a few words of caution – I would strongly urge you to consult with a seasoned and trustworthy retirement income specialist before making these all-important decisions that could well affect how you live the rest of your life.