Will the Tax Cuts and Jobs Act Take a Bite Out of Your Retirement?
By Don Schreiber, Jr. - WBI Founder and CEO
(Printable PDF available below)
Are you as surprised and disgusted about increased taxes for Americans in states with the highest income and property taxes as I am? High tax bracket payers really got the shaft under the recently passed Tax Cuts and Jobs Act. With deductions for state income tax, property tax, and mortgage interest all but eliminated, the vast majority of tax payers from east and west coast states are going to fork over more of their paychecks or retirement income to Uncle Sam. I’m delighted to pay more, aren’t you?
Every day I read another article about the retirement savings crisis in America. The solution widely promoted today is for investors to embrace a new vision for retirement: “The Work Forever Plan.” As a Boomer, I’m not willing to just throw away the promise of a fulfilling retirement. Still, the price of retirement funding has never been higher, and there is little to no room for mistakes. Boomers can’t afford to take excessive risks that lead to big losses in another bear market that looms large in our future.
Unfortunately, there are a lot of Boomers who have not saved enough for retirement and for whom the work forever plan will be a reality. There are also tens of millions of Boomer investors who have diligently saved and who have invested using a conventional “buy and hold” passive allocation process only to be whipsawed by successive bear markets in 2000 and 2008. And even if they bought and held — a rarity — they likely found that their rate of return has been dramatically lower than the targeted return they needed to fund retirement adequately. Taking large losses during your retirement while hoping the markets will bail you out is a fool’s errand. The vaunted S&P 500 Index declined 50% in the Dot Com bear market and 57% in the Financial Crisis bear market.1 These losses were significant enough to compromise capital and retirement income withdrawals.
The Tax Cuts and Jobs Act’s higher taxes are likely to reduce savings and spendable retirement income, reducing the probability of a decent retirement lifestyle for millions of Boomers. On top of that, today’s low relative yields on income-producing investments compound the retirement problem further. With aging population dynamics in the U.S. and the apparent thirst for yield in most developed nations, investors have been pushed to take more risk by chasing higher returns in junk bonds or risky high-yield stocks. Higher yielding investments historically provide more cash flow but dramatically increase the risk of losing capital - capital that can’t easily be replaced by older investors through another lifetime of work and saving.
As market conditions change, investors who were once optimistic can turn into pessimists and begin to sell as markets plunge. High-yield junk bonds continue to attract record flows even though they trade at the tightest spreads to risk-free treasury bonds in history - it’s scary. When you combine swelling national, business, and consumer debt with generationally low yields, we see dark clouds on the horizon for income investors.
With market volatility increasing and clearly indicating increased risk, investors who are retired or are approaching retirement need to have an effective plan to protect capital from another devastating bear market. Protecting capital from large losses is the most powerful thing you can do to improve your chances of sustaining retirement income. Investing for yield is important to generate portfolio cash flow to support income withdrawals, but care should be taken to balance yield and risk to capital. Dividends can provide an important source of inflation protection as companies increase dividend payouts over time, something that bonds do not.
At WBI, we have been actively managing retirement income strategies for thousands of clients for over 25 years. The hallmark of our success has been reducing losses in bear market cycles by using cash to mitigate risk and by investing in a combination of dividend-paying stocks and bonds to support income withdrawals. In our experience, passive approaches that track the S&P 500 or a balanced approach with 50% in the S&P 500 and 50% in Bloomberg Barclays Aggregate Bond Index have not been as successful. Large bear market losses have compromised capital and its ability to generate income, leaving many retired investors in a hopeless financial situation. Don’t let this happen to your clients. With market risk rising, it’s time for WBI’s active management process which is designed in an effort to Tame the Bear and Run With the Bull before it’s too late.
The views presented are those of Don Schreiber, Jr., and should not be construed as investment advice.
1 msnbc.com. "11 historic bear markets." 24 Jun. 2010. Web. 16 Apr. 2018.
Past performance does not guarantee future results. Don Schreiber, Jr. or clients of WBI may own stock discussed in this article. All economic and performance information is historical and not indicative of future results. This is not an oﬀer to buy or sell any security. No security or strategy, including those referred to directly or indirectly in this document, is suitable for all accounts or proﬁtable all of the time and there is always the possibility of loss. Moreover, you should not assume that any discussion or information provided here serves as the receipt of, or as a substitute for, personalized investment advice from WBI or from any other investment professional. To the extent that you have any questions regarding the applicability of any specific issue discussed to your individual situation, please consult with WBI or the professional advisor of your choosing. This information is compiled from sources believed to be reliable, accuracy cannot be guaranteed. Information pertaining to WBI’s advisory operations, services, and fees is set forth in WBI’s disclosure statement in Part 2A of Form ADV, a copy of which is available upon request.
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