As the US Congress changes hands, there is one glaring issue into which no debate has ventured. A national debt that no other country in the world comes anywhere near, now running at a total of around $35.98 trillion. With a debt-to-GDP ratio of 122.84% and a recent hike in its interest expenses— now costing $1.133 trillion due to inflation and rising interest rates, the USA is spending 17% of its federal budget just to maintain its debt. This means that the country with the world's most potent military pays more on interest than it spends on defense, and is fast approaching its budgets for social security and Medicaid.
This is by no means a new issue. In 2007, US Comptroller General of the Government Accountability Office, David M. Walker compared the USA to the fall of the Roman Empire, undergoing a fiscal crisis built on a house of cards of unsustainable policies. In one year he would be proven right with the 2008 Financial Crisis.
The recent years' steep spike in national debt comes as a result of increased spending by 50% and tax cuts paired with simultaneous mass unemployment and reduced GDP per capita during the pandemic. The near-unimaginable amount of national debt is not some abstract figure, it is weighing down the nation. The Congressional Budget Office estimates that the government will run at a cumulative deficit of $22 trillion over the next decade. While the USA requires key reforms in its social infrastructure, being racked up in debt means it is less able to invest in its citizens and future, and Americans will have to expect still-rising rates of inflation and interest rates.
In fact, the only solution available on a national scale essentially amounts to austerity: raising taxes and cutting spending. "It is a survival situation. If this continues, we simply won't have a country anymore," states Charles Wareham, CEO, Registered Principal, and Financial Advisor of Vaylark Financial Services. With over 30 years of experience in financial planning, Charles is considered a seasoned expert in planning a tax-free retirement.
Despite the mounting fiscal burden on the shoulders of every American, Wareham notes, "The entire conversation on national debt is notably absent." He believes this to be a matter of financial literacy, or its lack thereof. According to the annual P-Fin Index survey, average financial literacy among US adults hovered at 50% between 2014 and 2022, falling to 48% in the last two years. The lack of formal education on financial literacy across the country leads to the absence of public discourse on fiscal policy, allowing the status quo to continue as is.
Wareham predicts that if the Tax Cuts and Jobs Act is extended past its original expiration date of late 2025, the growth of the economy by default will generate additional tax income. But, as Wareham notes, the improvement is not likely to last for long. "The real number we are worried about is 2030. According to David Walker, by then, tax rates will have to double, or else we will encounter a negative debt spiral."
Additionally, the canyon of financial knowledge can cause people to steer away from financial planning, something that would add to the detriment of national debt. "The world is drowning in debt and nobody knows how we're going to fix it without taxes raising the roof. Through the work I do, I may not be able to save the planet, but I can try to save one client at a time," he states.
For Wareham, the only way to counteract the consequences of national debt is to turn the opposite way of traditional retirement planning. It's common sense that no one wants to pay more in taxes than they absolutely have to, so individuals and families are trained to save and defer with 401(k)s, individual retirement accounts (IRAs), and tax deductions.
No matter how much citizens continue to defer, however, every individual will eventually have to pay the taxes (required minimum distribution) on their retirement accounts, whether at age 73 or age 75. That far into the future, if Wareham and other trusted leaders in the sector are accurate in their predictions, it's possible that tax rates will have at least doubled to keep up with federal spending and the national debt. "So, the question is: at what rate would you like to pay your taxes?" asks Wareham, because right now, Americans could make use of historically low tax rates.
Still, it stands true that paying higher taxes than required by one's current circumstances is extremely undesirable— the relentless struggle of delayed gratification. The solution that Wareham puts forward is to find what he calls 'the bleeding efficient frontier of taxation'.
First, run the math and do the research according to one's specific tax situation depending on the amount of taxable income. Then, determine the maximum amount one can bear to withdraw from their current retirement plans to transition into a more tax-efficient bucket. "You need to find the balance because I find that it's emotionally impossible for clients to get their brains around writing a sizable check to the IRS," quips Wareham.
Once that magic number of the bleeding edge of efficiency is settled upon, Wareham recommends that most transition their withdrawal into a Roth account as it is indefinitely tax-free and immediately accessible without penalty. However, there is a multiplicity of strategies to choose from, "Each one needs to be customized for each situation," he explains. Wareham advises a timeframe of 7 to 10 years from today to complete the transition before taxes rise in earnest.
However, this process requires a significant amount of time and research. Wareham's final piece of advice: "My message would be to find a financial expert that you trust, you believe in as a forward-thinker, and aligns with your thoughts. The only way to find that mythical figure is to do your due diligence, make sure they know their stuff."
To keep his own standard of care towards his client, Wareham and his team at Vaylark regularly engage with authors, academics, thought leaders, and consultants to understand any changes to the landscape. He concludes, "In the end, even if I can't turn the world around, I'm responsible for making sure my clients are successful and their financial stories are bulletproof. While not always possible, we strive for a scenario where clients can't lose money, they're exempt from market volatility, and their taxation is as efficient as possible."
