How should future projections affect your retirement portfolio?
After watching a preview for the movie I.O.U.S.A. and reading the book Fewer I am really beginning to think the problems facing the United States are much more serious than anyone previously thought.
According to the projections in I.O.U.S.A. the government will need to double taxes to cover budget deficits caused by overspending, social security, and medicare/medicaid. On top of that, according to Ben Wattenberg, the author of Fewer, the population of the United States is shrinking due to a birthrate below the replacement rate. With a lower tax base, maybe the tax increase projections made by the I.O.U.S.A. team are actually optimistic.
How does this affect you? The biggest change I see coming is increasing tax rates, which may influence what type of retirement account you choose. Typically a worker will choose an IRA for a tax break now so they can pay taxes later, when they are in a lower income tax bracket. On the other hand, a Roth IRA is popular for someone who wants to pay taxes now so their retirement income is tax-free. I’m thinking right now that a Roth IRA might be the better deal, at least for now while taxes are relatively low, and especially as a supplement to a tax advantages 401(k) if you have one.
As far as asset allocation goes, I think global assets are more important than ever to own, although that’s still a tough call due to the high positive correlation between U.S. and global stock markets. I think domestic stocks are not going to achieve the returns they have returned historically, and domestic bonds are also going to be challenged by a difficult interest rate environment. Commodities like gold and silver may be a good choice for diversification.
Overall I think that diversification is going to be more important now than ever. Your exposure to any one asset class, including domestic stock, foreign stock, domestic or foreign bonds, commodities, or real estate (through REITs) should remain balanced compared to anything else.
Speaking of exposure and balance, when was the last time you checked your portfolio to see how it was doing? Have you analyzed what you did right and what you could improve? If you haven’t done it lately, now is the time to check.
