Limit What’s Within the Taxman’s Reach… LEGALLY

Steve McDonald By Steve McDonald, Bond Strategist, The Oxford Club

Retirement Planning

When our parents taught us to be responsible with our money (work hard, save and always be prepared for a rainy day), they meant well. And in their lifetimes, they were right.

But I’m not sure that advice applies anymore.

I’m not sure because those of us who did the tough things – saved, invested and prepared – are also the ones who take it on the chin to pay for those who didn’t or couldn’t.

Here’s why…

Anyone who follows my work in Wealthy Retirement is aware of the problems the boomers are having and will continue to have in retirement.

Simply put, boomers are the worst-prepared generation for retirement – ever!

Depending on whose numbers you use, the average person over the age of 50 has between $47,000 and $67,000 saved.

That’s for retirement, emergencies, cash for big-ticket items… everything!

Even if you could withdraw 5% per year from the entire $67,000, that would add only about $279 a month to your retirement.

And between a quarter to a half of all boomers rely on Social Security as their primary or only source of income in retirement.


The average Social Security check is just $1,300 a month.

So with a 5% withdrawal, that’s $1,579 per month!

But the same boomers are carrying more debt into retirement than ever before – averaging $6,000 in credit card debt and about $250,000 in mortgages.

And many have been stuck with huge debt from student loans that they cosigned for their children and grandchildren.

When you do the math, even at the superlow mortgage rates offered today, the monthly nut on the debt alone eats up almost all of their income.

And the retirement funding problems we face today will appear minuscule when the Social Security trust fund runs out of money come 2032.

Keep in mind that this country is not going to tell anyone to eat cake. Someone will pay the bills, and the buck will stop with the producers, doers and savers: you and me.

Despite all the gloomy news we hear about Social Security, it is not going away. Those who have little or nothing will not be left to starve. And that means…

  • Reduced benefits are likely. If you have managed to put aside a sizable amount of money, you will probably receive reduced, limited or no Social Security benefits.
  • Payroll and income taxes will have to be increased to pay for the shortfall. I am looking for the maximum taxable income for Social Security to be raised from the current $127,200 to the $250,000 to $500,000 levels.
  • New ways of taxing income from savings, investments and retirement accounts are a certainty. If your net worth is more than some magic number, my gut tells me that you will pay higher taxes on dividends and interest from savings and retirement accounts.

The whole situation stinks, and the bottom line is this…

For those of us who have managed to save and invest, more so than ever before, our retirements will be the primary targets of the “tax and spend” monster in D.C.

Bank on it!

It will take an all-out effort to amass enough to pay the boomers’ bills. Look for massive changes to taxes and the Social Security deductions as we get closer to the 2032 deadline.

The only way to protect yourself from what is certain to be an orchestrated effort to give your money to someone else is to assume a defensive position. That means legally limiting how much of what you have is within the taxman’s reach.

And I know of only one legal way to do that safely…

Stick It to the Taxman

Since interest rates dropped to record lows, there hasn’t been much discussion about tax-free bonds, or munis.

They were paying so little that they weren’t worth the effort, but that’s changing.

Taxable equivalent yields of 5% and 6% are available now from some issuers and at safety levels rivaled only by Treasurys.

The 40-year default rate of rated munis, BBB- and higher, is around 0.01%.

They are liquid, easy to buy and are so reliable and secure that investors rarely sell them before maturity.

But perhaps the most important aspect of munis is that the income they produce is tax-free. Washington – and in many cases, your state and local governments – can’t touch them.

This is where the muni magic starts to work in our favor…

In the past, I recommended tax-free bonds because they were safe and they didn’t add to your tax bill. But as the boomer retirement situation worsens, the fact that no one can attack any part of the income they produce may outweigh all of the other reasons for owning them.

They will become the defensive investor’s go-to vehicle.

And rumors circulating about them losing their tax-free status in Trump’s tax plan are completely false.

Cities, counties and states could never afford to fund their infrastructures or services without the tax benefit munis give their investors.

For income investors in higher tax brackets and, in some cases, the lower ones too, they are as close to the perfect investment as it gets.

Every part of me is 100% certain that the savers, the doers and the folks who listened to their parents so many years ago will be the ones funding the retirement shortfall.

Don’t wait for the new tax bills to come in before you do something about it. Start protecting what you have and will earn now.

Good investing,

Steve