Tip Of The Iceberg: America’s Soaring Debt

On April 12, 1912, the crew on the Titanic was slow to react to warnings of an iceberg ahead. By the time the captain called for a drastic course change and reversed one engine to turn the ship, it was too late.

You can think of financial planning in the exact same way. As financial professionals, we look past the short-term noise of inflation, interest rates, and market volatility to prepare clients for what this means for their money in the long term. We help Americans construct portfolios that have the potential to generate lifetime income, carving out a clear and safe path to retirement.

Talking about the journey to retirement reminds me of a boat story that puts this analogy to great use.

The year was 2010 and I was about to embark on a private 11-day yacht trip on the Empress from San Diego, California, to the Columbia River, which acts as a border between Washington and Oregon. This was my first-ever opportunity to explore the Pacific Northwest, just like Lewis and Clark in 1805. I couldn’t wait to set my eyes on Astoria, Oregon, the beautiful scenery, and all the other landmarks penned during the Voyage of Discovery. This was about to be the opportunity of a lifetime.

As someone who had never set foot on a boat before, I convinced the Empress’ captain, a seasoned skipper, to let me on board the 74-foot yacht. I expressed that I would be a great addition to the small crew despite not knowing a single thing about boats. A bow, stern, hull, starboard, and port were all foreign words to me back then. I was able to convince the captain that my kitchen skills and my ability to make a French press coffee or cappuccino would be a valuable addition on this journey. He agreed, as he sipped his first cup of coffee.

On the first night on the Empress, I was told that I would be guiding the yacht up the Pacific Ocean. The moment that I heard him say that my watch shift went until six o’clock the next morning was the moment my heart started pounding. How was somebody who had never driven a yacht be expected to keep it afloat throughout the night? I quickly learned that everything that I needed to be successful in the endeavor was already being done for me—we were on auto pilot. It turns out that my real job was to watch the radar, which seemed simple enough. The radar would identify any real dangers and give the crew enough time to prepare for incoming danger. Well, it would be an understatement to say that the radar saved my life. Since I was set up for success with the autopilot feature, my first night of watch went perfectly. I was equipped with the tools I needed to have a great first night’s watch. This really makes me wonder how many more lives could have been saved if the Titanic had today’s radar technology and could have possibly had enough time to prepare for the iceberg and avoid hitting it altogether.

Today, I use the same radar skills that I acquired in 2010 to help financial advisors and their clients avoid potential icebergs. How are we using the information we have available at our fingertips right now to protect your client’s money in the future? A looming iceberg that has been on my radar for a while is the massive national debt that continues to pile up year after year after year. In fact, on January 30, 2022, the national debt reached $30,000,000,000, a figure that’s incomprehensible at the best of times.

What’s really alarming about this figure isn’t so much how big it has grown, but how fast it is accelerating. The national debt has doubled since 2012, and by 2026 it is expected to reach $52 trillion. For the first 231 years of the country’s history, we racked up $5 billion in debt. Over the last 12 years, we’ve grown it by another $17 trillion.

The national debt is a combination of annual government deficits, pandemic relief, bailouts, ballooning health care costs, defense spending and interest on the debt itself. This, though, is just the tip of the iceberg, and the part below the water is also something we need to take very seriously. Two leading inflationary indicators are on the rise, again. Oil hit $95/barrel and the 10-year-T-bill rate hit 2.05 percent. Mortgage rates are pushing four percent. The Social Security trust fund requires a lot of money to maintain and is expected to be depleted by 2036. Not to mention, the Russian and Ukraine crisis is putting a lot of pressure on the U.S. Federal Reserve to act. It is easy to understand why many people are starting to pay close attention to the national debt.

That’s why my radar is on high alert as the national debt continues to threaten American’s standards of living. For taxpayers, anyone who makes roughly $86,000 annually is considered to be in the top 25 percent of earners, and this group pays roughly 86 percent of all taxes collected. Any move by any administration to start addressing any of the issues on the radar in essence means that you and I will be taxed extra. By the stroke of a pen, the tax brackets will increase. What we don’t know is when and by how much. In addition, the rising national debt could impact Americans in the near future with higher interest rates, higher product prices, and lower investment returns.

Let’s next introduce a few prominent people in the industry. What do David Walker, Peter G. Peterson and Maya MacGuineas have in common? All three are using the analogy of a radar and are seeing the same impending doom that I am: The national debt is going to cause havoc on American taxpayers. The problem is simple to understand, but very difficult to tackle. The simple part would be to raise taxes and cut federal spending.

David Walker is former U.S. Comptroller General. The Comptroller General of the U.S. is the highest-ranking accounting position that oversees accounting policy. They are appointed for a 15-year term by the President of the United States. David resigned in 2008. Why do you think? In essence he said, “My new position will provide me with the ability and resources to more aggressively address a range of current and emerging challenges facing our country, including advocating specific policy solutions and courses of action. This move will enable me to sharpen my messages and bring focus and attention to the fiscal and other key sustainability challenges that I and others have been discussing during the past several years.” The challenges he mentions is national debt and the inability of the U.S. to spend within its budget. Think for a second, why would anyone leave such a great position to advocate for more awareness about the national debt?

Peter G. Peterson began his public service in 1971, when President Richard Nixon named him Assistant to the President for International Economic Affairs. One year later, he was named U.S. Secretary of Commerce. At that time he also assumed the chair of President Nixon’s National Commission on Productivity and was appointed U.S. Chairman of the U.S.—Soviet Commercial Commission. He again took on a public service role from 2000 to 2004, when he chaired the Federal Reserve Bank of New York. There is not one other person who has committed so many resources to bring the national debt to the forefront of every American. Why is that? Well, in his words, “In creating this foundation, I am giving back a lot of my resources and myself to try, in my very small way, to give my children’s and grandchildren’s generations the same opportunities to share in this American Dream.”

Maya MacGuiness, is president of the Committee for a Responsible Federal Budget. “The growing national debt threatens every American. We borrow so much from abroad and that means that those interest payments leave our economy. That’s one of the ways that our standard of living fails to grow as much as it otherwise would,” said MacGuineas, noting that “our standard of living is lower than it otherwise would have been.”

There are several ways to get involved. First, you can consider joining the Peter G Foundation, which will empower you with the facts and data so that you can write your state congressperson and make your voice heard! At the end of day, we need to stabilize the national debt to 50 percent or less, reduce spending to 23 percent of GDP, freeze domestic discretionary and defense spending, moderate spending growth on healthcare, and start to address social security. Any of these changes will take time, so patience and long planning are the keys. It’s like the extra weight we gain after the holidays, easy to gain and difficult to lose, so we start a weight reduction regimen today.

What can you do to protect yourself from the massive iceberg steaming ahead? Start by creating a tax shield from your current buckets of money. Not sure what I mean by buckets? Let me explain. After over 20 years in the industry, I’ve started to see money in colors and classify each of these as buckets—yellow, green, red, blue, and gray.

Yellow bucket: This is your till bucket. Like a cashier till, paying for gas, groceries, insurance, mortgage payments, etc. The other section of your yellow money is where you store three to six months of emergency money. You can expect a modest return of around .25 percent to .50 percent in this bucket.

Green bucket: This is your retirement bucket. This is where most Americans start building their personal retirement plans using a 401K plan. Usually, it’s mutual funds or similar, and you have the choice to be aggressive or not. You can expect eight to 10 percent growth over the long haul.

Red bucket: This is your tactical bucket. Either professionally managed or DIY, like those that made money with GameStop. You can expect exceptional growth or losses, usually around +30 percent/-30 percent.

Blue Bucket: This is your tax shield bucket. This is money that grows tax-deferred and supplements your income during retirement but can also be used strategically for other uses like college planning, buying a car, etc. You can expect around five to seven percent return. No negative market losses.

Gray bucket: This is your guaranteed income bucket. This will complement your social security and increase your protected income number; your PI is the percentage of guaranteed income that covers your essential expenses in retirement. You can expect two to four percent return. No negative market losses.

We know that tax rates will rise in 2026 when the Tax Cuts and Jobs Act sunsets. We’ve recently had the stock market pullback over the last few months which creates the opportunity to convert at a discount. We’ve also had advisors in and out of the workplace creating a temporary dip in a client’s typical taxable income.

While this is not a “free” Roth IRA conversion, it is a wonderful way to help offset the cost of doing a Roth Conversion, which is the biggest reason clients balk at the idea. We can use an annuity with a bonus to help offset the tax costs. Keep in mind we would not want to pull the taxes out of the converted Roth IRA, but instead use cash equivalents to cover the tax bill.

Ultimately, we create a tax advantage using the tax code, and give the clients access to extra income or legacy to the beneficiary.

To circle back to my story on the Empress: the journey to the Columbia River was incredible, and the Pacific Northwest is one of the most beautiful landscapes in the world. I’m positive that the modern radar played a huge role in the safety of everyone on the Empress. As the skipper of your boat, you have all the tools you’ll need to navigate your clients towards retirement. I hope you are helping clients establish diversified money buckets, tax shields, and national debt awareness to keep them safe from financial icebergs that can and will cause destruction in the near future.

Sal Mendoza is the vice president of Field Support at LifePro Financial Services. He has spent nearly 20 years in the financial services industry building meaningful relationships with advisors across the country and has helped to support and grow their practices each year. Mendoza has a broad understanding of the brokerage world as it pertains to new business, underwriting, and sales. He coaches hundreds of financial professionals on how to build effective financial strategies that achieve their clients’ long term goals and helps them stay educated on the latest industry trends.