The “Fiscal Cliff” could have profound implications on the economy. Dick and Eric examine the potential impact on retirees and how annuities might be utilized during this time.

**Guarantees, including optional benefits, are backed by the claims-paying ability of the issuer, and may contain limitations, including surrender charges, which may affect policy values. During this segment, Dick and Eric are referring to Fixed Annuities unless otherwise specified.

Highlights (or Low-lights) of the Fiscal Cliff

What is the “Fiscal Cliff”?

The “Fiscal Cliff” is the description economists have used that describes the potential situation at year-end 2012 when a number of U.S. tax and fiscal changes are scheduled to occur. This “perfect storm” of change includes the expiration of the Bush income tax cuts at the end of 2012, and starting in 2013 some new taxes and scheduled increases in income and estate taxes. Federal spending cuts are also scheduled to occur in 2013 as part of the “sequestration” results (an automatic form of spending cutbacks in Congress) from the Budget Control Act of 2011.

If lawmakers cannot agree on how to address the pending fiscal cliff issues, trillions of dollars of tax increases and spending cuts will go into effect beginning in January of 2013. Add to that an election year and the fact that all those changes are scheduled to happen at once, the concerns are that those changes could lead to a double-dip recession (a recession followed by a short recovery, then another recession) in 2013.

What is involved with the fiscal cliff?

There are many components to the fiscal cliff. 1. Automatic spending cuts are set to begin in 2013 in the following areas:

• Defense
• Non-defense areas such as education, food inspectors, air travel safety, etc.

2. The Bush tax cuts expiration includes:

• Income tax rate increases
• Capital gains rates increase
• Qualified dividend rates increase
• Child tax credit reduced
• American Opportunity Tax Credit expires
• Earned Income Tax Credit changes
• Marriage penalty relief changes
• Estate tax exemption decreases
• Gift tax lifetime exemption decreases
• Top estate (and gift) tax rate increases

3. Other tax changes include:

• An increase in employee payroll tax withholding
• Other tax extenders not enacted including the AMT patch
• A new 3.8% Medicare surtax
• A new .9% Medicare additional withholding

4. Miscellaneous changes include:

• Unemployment benefits extension expire
• The “Doc Fix” which is a cut in reimbursement rates that physicians receive for treating Medicare patients (which has never been implemented to date)

Information reported by a Major Annuity Underwriter this is not an exhaustive list.

Annuity Guys® Video Transcript:

Dick: Folks, it just seems like you can’t turn anywhere these days without seeing or hearing that we’re going to go off the fiscal cliff.

Eric: It’s doomsday, year 2000, 2000K, the bug; it’s going to swallow us up. The fiscal cliff is the end of the world.

Dick: I think that really when we consider that the economy and our current system with all of the entitlement **guarantees and all of that, the things we have to do to correct our system that we’re in today and the way that we need to cut our spending and bring that down, if we can’t go over the fiscal cliff, we’ve got some much larger problems coming in the future, because we have to make much larger cuts.

Eric: Right. Let’s start with the very basics. For those of you who have not seen or heard about the fiscal cliff and you’ve been living someplace, on another plant.

Dick: Right, under a rock.

Eric: What is exactly entailed in the fiscal cliff? It’s basically . . . I won’t call them Draconian Cuts, but it’s cuts in defense and some other non-defense, such as education, food inspections, air travel. Then the biggest thing is probably the end of the Bush Era tax cuts, which are increases in income tax, capital tax gains going up.

Dick: It really seems like . . . I hate to get too much into the politics of this.

Eric: It’s a political event.

Dick: It is a political event, yes. It does seem like the ball is really in the President’s court; it’s in his favor a little bit. If he wants to allow us to go over the fiscal cliff, he will get a lot of the cuts in military spending that he would like to have, he will get to increase the taxes to the rich, and then he can kind of benevolently appear to give money back to the middle class. It isn’t all bad for him to necessarily go over the fiscal cliff, and yet, it is possible that we’ll come to some kind of an agreement with the Republicans.

Eric: I was going to say, both of them are playing the ‘don’t blink’ game at this stage. We’ve just had the election. Each side campaigned for what they thought was the right answer. Ultimately, neither one wants to blink. We’ll either have a 12 hour broker deal . . .

Dick: Which may not be a good situation, when we force a deal.

Eric: . . . or we’ll get an extension of the current agreement. What does the impact . . . let’s assume the fiscal cliff is going to happen, we’re going over. What’s that mean for the economy? What’s that mean for savers, for retirees?

Dick: Even more so for annuities? Is it going to create a problem if you have an annuity and we go over the fiscal cliff?

Eric: If you already own an annuity you’re probably, actually, in a pretty good place, because it means that even if you’re in an indexed annuity, you’ve kind of taken those bumps out. If you’re in a variable annuity^# and the market tanks . . .

Dick: That could be a problem.

Eric: . . . your principal could be at risk. That could be a potential, but you’ve hopefully got some income riders that are going to protect. You’ve paid for that insurance and those riders usually to protect your dollars.

Dick: I would say that if you don’t have an annuity and you’re considering maybe getting an annuity, I wouldn’t do it just because the fiscal cliff. If you haven’t been thinking about this or planning on getting an annuity . . .

Eric: It’s not like a fire sale?

Dick: I wouldn’t run out for that reason alone and get an annuity. However, if you’ve really been thinking about an annuity and how it will give you more safety, security, retirement income, and you’re fairly close maybe in your planning or you’re thought processes, then the fiscal cliff could make a good reason to go ahead and go forward from the standpoint of avoiding some larger capital gains, taxes that are likely to come later if you were to cash out of some investment, and then put the money into annuities. There could be some good reasons to consider.

Eric: Here, we’re specifically talking about non-qualified dollars.

Dick: Non-qualified dollars, right.

Eric: Qualified dollars don’t really count.

Dick: Your IRAs and 401Ks, and this type of thing that you may want to transfer into it.

Eric: That really doesn’t come into play on what we’re talking about on that side.

Dick: I think really, Eric, the bigger concern does come back to not so much the hype that’s in the media and the fiscal cliff and how we solve that, it’s really what we’re going to do to get our spending under control overall, and get our government on sound financial footing. Just by watching these different gyrations of coming to agreements on budgets and agreeing how to avoid the fiscal cliff, it seems that we’re really in for a rough maybe decade or two of headwinds.

Eric: We know for a fact if Ben Bernake holds to his promise . . .

Dick: Which they just came out with today, saying that the rates are going to . . .

Eric: 2015, at the earliest.

Dick: Until they see unemployment rates drop below 6.5%, they’re going to continue to depress interest rates down to near-zero.

Eric: What’s that mean? If you’re a saver or you’re a retiree depending on that interest, and that’s exactly it. Where are you going to go find the places to park those dollars? That’s where annuities come into play, from a longevity standpoint. If you’ve got these next few years where you’re counting on income, then annuity is an option, and that’s where it does come into play with some of the headwinds that we’re facing.

Dick: You can structure an annuity so that you know from contractual **guarantees that you’re going to have a certain level of income, which is really a pretty good level of income that you can count on 5 years, 10 years 15 years from now, and then you know that once you turn that on, no matter how long you live, you’ve got that longevity insurance aspect that it’s going to keep paying.

Eric: Exactly. That’s where I think you can look at the different aspect of either laddering annuities or some strategies to really deal with the economic climate right now. Then also set some pieces out there so that when you have some flexibility in the future for when things hopefully change for the positive.

Dick: Exactly. Should anybody be worried right now about going off the fiscal cliff?

Eric: Here we go. I would say it’s already priced into the market, we already know it’s going to happen in a sense of that side; so, no.

Dick: Yeah, I agree with Eric, that it’s more of a political event. They will likely do something at the 11th, 12th or 13th hour, and we will go on to our next hurdle which is coming up with some type of budget, a national budget; imagine that.

Eric: We’ll see you on the other side of that fiscal cliff.

Dick: Thank you.