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Fiscal Cliff Shouldn't Change Your Financial Plans

Philip Moeller

The government's impending fiscal cliff is being widely portrayed as a looming financial crisis that could send the nation back into a recession. Coming so soon after the national elections and Hurricane Sandy, perhaps we've just been sensitized to think of this issue as yet another epic event with enormous consequences.

For people trying to save and prepare for retirement, the fiscal cliff certainly may seem like yet another plague sent to ruin their lives. Yet financial experts say this is precisely the time when individual investors should stay the course and not deviate from their financial plan.

It's easy to have a plan when times are good. It's much harder to stick to it when times get tough. If your plans are subject to regular shifts in response to current events, then perhaps they aren't really plans at all.

If Congress and the White House do nothing by the end of the year, here's how tough things might get:

1. Bush-era tax cuts would be rescinded, raising tax rates on income, dividends, and capital gains.

2. Federal spending would be automatically cut by nearly $1 trillion a year over the next decade, with fully half of the cuts occurring in defense spending.

3. The 2-percentage point reduction in Social Security payroll taxes, in effect for two years, would end.

4. Extended jobless benefits would run out.

5. The Alternative Minimum Tax, if not adjusted by Congress for inflation, would sock nearly 33 million taxpayers with higher taxes.

If you want to add some other adverse financial events, you can include:

6. Higher taxes on wealthier Americans to help pay for Obamacare, including higher Medicare taxes and a 3.8 percent tax on investment earnings.

7. The end of generous estate and gift taxes, to be replaced by a smaller estate exemption (to $1 million from more than $5 million) and higher tax rates on taxable estates and gifts.

It's unlikely all of these bad things will happen or stay in effect for an extended time. Pundits have been calling it the fiscal slope instead of a cliff. There is also rising support for junking the entire "fiscal" approach as confusing and renaming it the austerity crisis or bomb.

Whatever the label, experts stress that all this potential bad news would take time to have an impact. True, but this reality will not prevent jittery investment markets from punishing investors. Uncertainty has already rattled Wall Street. It's also reportedly caused businesses to pull back from investments that would help the economy continue to recover from the recession.

What's an investor supposed to do in the face of all this dire potential news?

"You shouldn't be making long-term decisions based on what's happening in the short term," says Dan Keady, director of financial planning at TIAA-CREF, the enormous investment firm that has long dominated retirement planning and investment services at the nation's colleges and their related academic, research, medical, and cultural outlets. TIAA-CREF regularly studies consumer attitudes and finds, not surprisingly, that many consumers are confused about retirement in general and about how to build a personal retirement plan that works for them.

"We can get overwhelmed by what's going on," Keady says. But for most people, financial plans shouldn't change because of a fiscal cliff or other possible event. "Some of it really remains the same," he notes.

Most financial plans, for example, include setting aside some cash or cash-like investments that can be tapped quickly in an emergency. If markets temporarily turn lower because of fiscal-cliff worries, people with emergency funds can use them instead of being forced to raise money by selling retirement investments at a loss.

Also, it might be tempting to sell certain types of investments and buy others in anticipation of the fiscal cliff. But rather than trying to guess what markets might do, Keady says, it would be better to maintain the investment mix in your retirement portfolio. Once any fiscal-cliff impacts have been reflected in that portfolio, he suggests rebalancing holdings (selling winners and buying losing asset classes) and continuing on your way to a stable and predictable retirement future.

And for the many people who may not have a plan, Keady's advice is even clearer: Get one. Start with small steps. Ease of understanding is crucial to adopting a plan and sticking with it. Even if you can only set aside a modest amount in savings, make sure you do this regularly and develop good savings habits. "It's very important to create that savings habit," Keady says.

Having a specific plan that is tied to your individual needs and goals is also crucial. One of the big changes in financial advice in recent years, he says, has been people's understanding that general advice is not nearly as useful as tips relevant to their specific needs. People are inundated with general information these days, but perhaps not with the kinds of specifics that help produce tailored savings and investment plans. "When you give people very actionable advice," Keady says, "you get a higher percentage of people who take that advice."

Twitter: @PhilMoeller

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