It doesn’t take an actuary to know today’s market is in a volatile tumble. The social distancing protocol of the COVID-19 pandemic has sent markets – and the economy – into a tailspin.
(You can watch my take on it all here.)
It’s easy for your clients to grasp the short-term impact of this market volatility – they can just look at their IRA or 401(k) balances. Nearly three years of market gains were wiped out in a few bad weeks.
But here’s what many people don’t realize.
If you track the S&P 500® total return from the beginning of this century (January 2000) to the beginning of this year (January 2020), the average annual return was 6.02%.
Not too bad.
But if you tracked the S&P 500® total return from the beginning of this century (January 2000) to last month (March 2020), the average annual return falls to 4.4%.
A few bad weeks in the market lowered the entire CENTURY’s average return by 1.5%.
My takeaway? Savers need diversification against market risk, and also the market’s impact on their ability to generate income in retirement.
But that’s likely advice you already know.
While the market is getting all the headlines, it’s not the only concern for your clients and prospects. And if you’re only focused on protecting their retirement assets from the market, you’ll miss the opportunity to help savers mitigate a HUGE long-term risk to their funds.
Here’s why: In response to COVID-19’s economic impact, Congress and the President got to work. They passed into law several bills dramatically expanding public welfare programs, delivering checks to low- and middle-income workers, and creating $2 TRILLION in new economic stimulus spending.
These efforts are aimed at our short-term economic crisis, but they have long-term impact.
$2 trillion in new spending dramatically increases the U.S. deficit. And one day, America will have to find a way to pay for it.
That day is apparently not today. A few weeks ago, U.S. Treasury Secretary Steve Mnuchin commented, “In different times, we’ll fix the deficit. This is not the time to worry about it.”
Well, Mr. Mnuchin, this may not be the time for our government to worry about it, but it’s sure the time for America’s savers to be concerned. After all, how will the government “worry” about the deficit when the time comes? The best way it knows how:
We already knew taxes were going up in 2026. That’s because the tax bracket reductions that were passed as part of the Trump tax law expire in 2025. Today, we’re in an artificially low tax environment.
But now, with trillions of dollars in new debt, the U.S. is even more likely to need higher taxes in the future. And if all your clients’ assets are in tax-deferred vehicles – like 401(k)s and IRAs – then they’re exposed to a tremendous amount of future tax risk.
My takeaway? While the nation may be focused on the market today, the most important thing you can do for your clients in the weeks ahead is help them manage their taxes for the future. And this means diversifying their retirement assets to include tax-free vehicles, like IUL.
By focusing on shorter-term market concerns and longer-term tax concerns, you can help prepare your clients for whatever the future brings.