Terry Savage: How to financially manage the fiscal cliff-hanger
BY TERRY SAVAGE November 11, 2012 7:04PM
Obama Delivers Statement At White House On Economy And Deficit
Updated: May 3, 2013 12:15PM
Relax. The headlines tell you that there’s a fiscal Armageddon ahead — and right now, there’s nothing you can do about it. You’ve had your chance to speak by voting. Now, hopefully our representatives will listen.
Despite all the headlines, and the political posturing, your financial life will go on. And there’s nothing you can do now about tax rates or tax breaks that will apply to next year. Any changes in the tax code will have an impact on our collective behavior in the year ahead. You can be sure of that. But for the year 2012, which is about to go into the record books, your options are limited. Stick with your plan.
So here are some financial things to think about as we head into the year’s end. These are steps you can take to move your life forward, without waiting to see what Congress does next to place roadblocks — or give you an assist — toward your goal of financial independence.
† KEEP SAVING: It doesn’t matter what the tax rates will be on dividends or capital gains. In fact, higher taxes mean you need to save even more to build your future. So, make sure you’ve taken advantage of all opportunities. Check with your employer to make sure you’ve maxed out your 40l(k) contributions — or at least up to the employer match. Now is the time to make arrangements to have more taken out before the end of December. And if you qualify for a Roth IRA (adjusted gross income under $125,000 on a single return, or $183,000 on a joint return) make a contribution to grow tax-free for retirement (up to $5,000, or $6,000 if age 50 or older).
† KEEP INVESTING: Yes, there are dozens of reasons for the stock market to decline — and most of them center around Washington and the possibility of an economic slowdown. But every summer for the past four years, there have been predictions of another recession around the corner. And predictions of a stock-market decline. Don’t follow the crowd; stick with your regular monthly contribution to your retirement plan, whatever the level of stock prices.
† CONSIDER 2012 TAXES: The rates won’t change for your earnings this year. And don’t assume they’ll go up next year, either. A Capitol Hill deal could actually result in lower tax rates — but the closing of popular loopholes to raise needed revenue. So, only plan for what you know you can impact by taking steps such as making tax-deductible retirement plan contributions and charitable contributions now. You also might want to “bunch” your deductions into this year — if you happen to have enough medical expenses to top 7.5 percent of your adjusted gross income. Fearing higher tax rates next year, many corporations are declaring special dividends in December and advancing bonus payments into 2012, so shareholders and employees can take advantage of presumed lower tax rates this year. Similarly, you can sell stocks with profits to take advantage of the current low capital gains tax rates, offsetting the gains against any losses. Don’t wait for the year-end rush to adjust your portfolio.
And that’s about it. Sure, wealthy people are scrambling to give away millions of dollars to their heirs before the $5 million estate and gift tax break expires. But likely, you don’t have that problem. If you’re one of the millions of Americans just worried about having enough money to cover your basic expenses, feed your family, send your kids to college, or live above the poverty level in retirement, you can stop stressing out. Because worrying won’t help.
Yes, those problems remain — but the only thing you can do now is control your own budget, try to avoid debt and search for a second job in a world of high unemployment. And don’t give up.
We live in an era of instant communication — and ongoing angst. But nothing else has changed. We just know more daily news about our financial doom because of modern communications.
Yes, we have record debt levels at the federal government level — but not as high as when we came out of World War II, and we managed to grow our way out of that trouble. Yes, we have ongoing high unemployment — but not as bad as during the Depression, and we managed to grow our way out of those troubles. We’ve even survived much higher interest rates — a 21 percent prime rate — and managed to grow our way out of that situation.
There’s no denying our problems. But presumably we’ve elected competent people in Washington, and we pay them to worry for us. I’m not singing that old ’80s song “Don’t Worry, Be Happy.” It’s just that it’s a shame to waste our moments and our energy on something we can’t impact.
The election is over. Relax. Go about your daily life. Set a good example for your children. Be positive. Contribute your time and energy to your community. Make a difference where you can. Aim high, for yourself and for your family. I think we’ll all be amazed at how much we can do with a positive view of the future. And that’s The Savage Truth.
Terry Savage is the Chicago Sun-Times’ nationally syndicated financial columnist, and a registered investment adviser.