According to the Social Security Administration, the average monthly benefit for retired workers of 65 years of age is $1,300 per month, or $15,600 per year. Median family income in the United States is currently $54,000. With roughly 20 percent of people near 65 years old having saved zero for retirement, how can these folks live anywhere near their current standard of living? The most these families can hope to live on is $31,000 per year, and that only occurs if two adults qualify. In other words, millions of families with new retirees may need to live on a fraction of the income that they had previously lived on.
It actually may be worse. The Employee Benefit Research Institute’s 2013 Retirement Confidence Survey found that 57 percent of households have less than $25,000 in retirement savings. The implication? The 20 percent of people with zero savings grossly underestimates how little the majority of families have. Can the “57%-ers” live 20 to 25 more years on six months of income and existing Social Security benefits? Probably not.
It is not like U.S. government representatives can feign ignorance about the difficulties ahead. It’s not like the citizenry can afford to keep its collective head in the sand either.
Americans should expect a dramatic increase in benefits in the near future. Representatives in Congress will approve it, a president will sign it, and a variety of “classes” will foot the tax bill. If you are employed, a larger chunk of your income will be taxed away to pay for the new legislation. What if you are considered rich? Then you will see your dollars redistributed as well. And if you simply did what you were supposed to do by saving diligently for your future retirement? One way or another, some of what you have will be given to someone else.
Leaders might prescribe something other than redistributing the billions in confiscated money. Perhaps the central government will force companies to maintain a certain percentage of 65-plus workers on their payrolls. Companies are often leery of hiring elderly workers, however, and there are typically loopholes in laws of this nature. What’s more, to the extent that the public sector picks up the slack, taxation/redistribution of income still covers the tab.
By definition, if you have money to invest for your retirement, you’re going to be a target. And while pre-tax plans build wealth (especially when matching is involved) – laws requiring larger minimum distributions or earlier distributions may mean higher taxation of that wealth. Roths? One act of Congress will change the nature of which portion remains a “tax-free” withdrawal. In other words, you may not be able to seek shelter in account types alone.
What can you do to keep more of what you make or made? Minimize the taxes from typical scenarios, such-as short-term trades and taxable interest income.
For example, the RBS (US Large Cap Trendpilot ETN (NYSE:TRND)) tracks the RBS US Large Cap Trendpilot Index — an index that offers the S&P 500® Total Return Index in a long-term technical uptrend or the yield on U.S. 3-Month bills in a stock downtrend. In essence, one has exposure to the S&P 500 when the price of the S&P 500 Total Return Index closes above a 200-day moving average for five consecutive sessions. If the price closes below the 200-day for five sessions, exposure moves into cash via T-bills.
What’s important to recognize here is that, while trend-following is often easy to implement by one’s self using SPDR S&P 500 (SPY) and Vanguard Short-Term Bond (ARCA:BSV) (BSV), moves could incur trading fees, taxes and potential penalties. In contrast, TRND is an exchange-traded note; TRND does not actually hold the underlying stock securities, so there are no tax liabilities for the shift from stocks to cash. While the strategy of trend-following is not for everyone, one can see how TRND avoided capital gains taxes in the 2011 euro-zone crisis when the ETF called for a shift to short-term Treasuries.
Whereas TRND is a tax saver on capital gains, muni bond ETFs are savers on cap gains as well as income. Consider a fund like Market Vectors Long-Term Muni (NYSE:MLN)) over the last six years. Investors have 54% in total returns, none of which are taxable until sold. And since only 1/3 of those gains are attributable to price growth, only 1/3 would be subject to long-term cap gains if the position were closed out.
There are other popular muni bond ETFs to consider. One of the premier year-over-year performers has been Market Vectors High Yield Muni (ARCA:HYD), chiming in with approximately 12.5%.
Disclaimer: Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. Gary Gordon, Pacific Park Financial, Inc, and/or its clients may hold positions in the ETFs, mutual funds, and/or any investment asset mentioned above. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. At times, issuers of exchange-traded products compensate Pacific Park Financial, Inc. or its subsidiaries for advertising at the ETF Expert web site. ETF Expert content is created independently of any advertising relationships.