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SMART IS THE NEW RICH Edition: Tax Hikes & Fiscal Cliff; Protecting Your Money

Aired November 17, 2012 - 09:30   ET

THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.

CHRISTINE ROMANS, HOST: Thanks, Randi. See you at the top of the hour.

Good morning, everyone. I'm Christine Romans.

Your economy is recovering slowly, but the fiscal life is fast approaching. You expect your political leaders to help, not hurt, right? You rehired the guy who lives in this house and he's working to make a deal to avoid the cliff with the people in this house.

But when it comes to your house and your family, there's only one way to be prepared for whatever they do.

Today, "SMART IS THE NEW RICH".

(BEGIN VIDEOTAPE)

ROMANS (voice-over): Our new president, same as the old president, the new Congress, same dynamic as the old Congress. But there's a new optimism in Washington about solving our problems.

REP. NANCY PELOSI (D-CA), CALIFORNIA: We want an agreement. We want an agreement.

BARACK OBAMA, PRESIDENT OF THE UNITED STATES: I'm open to compromise. I'm open to new ideas.

REP. JOHN BOEHNER (R-OH), SPEAKER OF THE HOUSE: I think it's important for us to come to an agreement with the president.

ROMANS: And that starts with the fiscal cliff. We've sounded the warning.

(on camera): Job destruction that would happen under the fiscal cliff.

ALI VELSHI, CNN CHIEF BUSINESS CORRESPONDENT: Economic growth is at 2 percent. This only hurts it.

ERIN BURNETT, CNN ANCHOR: On the edge of a fiscal cliff.

ANDERSON COOPER, CNN ANCHOR: Could do some very bad things to the economy.

ROMANS: But how should you prepare for this scary scenario or for any deals Washington makes to avoid it? It's about getting back to basics. Taxes, investments, savings, retirement, jobs -- the things that made Americans secure in the past are no longer guarantees. Now, a prosperous future depends on knowledge and a solid plan.

Remember, "SMART IS THE NEW RICH". While there's uncertainty in the broader economy, your personal economy can still thrive.

(END VIDEOTAPE)

ROMANS: Washington, Wall Street, Main Street, all trying to figure out what the tax bill is going to look like. Most Republicans in Congress have signed this pledge to never ever, ever, ever raise taxes, even on the very richest of the rich. Democrats, including President Obama, say raise those taxes on the rich but keep them low for everyone else.

That's the deadlock, and here's that cliff. If lawmakers don't act the consequences will be felt by just about all of us, taxes for 90 percent of Americans would rise next year.

According to the non-partisan Tax Policy Center, your income tax bill would rise $3,500 and if you make 50 grand a year the taxes will raise 2 grand. And the infamous 1 percent, the taxes on them would rise an average of $120,000. That's if we go off the fiscal cliff and that's the worst case scenario, of course, that everyone is trying to avoid.

But let's be honest, say they avoid that fiscal cliff, some Americans will likely still pay higher taxes next year.

Jeanne Sahadi is a senior writer at CNN Money.

Will Cain is CNN contributor. He's been licking his wounds since Election Day, but we're bringing him back.

Jeanne, Republicans are now on board to raise revenue, right, to raise revenue by cutting tax breaks. But they're not on board with raising tax rates.

JEANNE SAHADI, CNN MONEY: No, they're not.

ROMANS: Some of them have pledged they will never, ever do that. So, how do we reconcile that? That's the challenge.

SAHADI: You know, President Obama came out this week and said compromise is hard, but we've got to do and do it together. He is still sticking to the "I want to raise tax rates" line, but when I talk to budget experts in Washington, they say, well, maybe -- maybe what you do is you reduce tax breaks on the rich at $200,000 or $500,000.

ROMANS: It sounds like a Mitt Romney plan actually.

SAHADI: Well --

ROMANS: Have a bucket of concessions. SAHADI: You know, the cap on deductions is not an unpopular idea. It's a kind of a smart way to get over political fight over very popular tax breaks. And maybe the Democrats will go for a tax rate hike on people making $500,000 or more, $1 million or more.

You know, I don't know how it's going to turn out. I wish -- I wish I did because --

ROMANS: I don't think they know.

(CROSSTALK)

ROMANS: And that's what's so kind of curious about the whole thing because we're so close to having, you know, a New Year with a paycheck that's going to -- you know, there are withholding tables and we don't know what it's going to be.

I want to -- I want to turn to Will here quickly.

Mohamed El-Erian, the CEO of the bond giant PIMCO, wrote an editorial for "Fortune" this week saying, quote, "President Obama will -- and should -- insist on increasing taxes on the highest earning brackets." Then, Warren Buffett, Will, of course, the billionaire, told our Poppy Harlow that taxes should be significantly higher on the wealthy. Many rich Americans like those two guys are paying a lower tax rates, mostly because capital gain taxes are only 15 percent right now.

Will both sides seem willing to avoid an economic disaster by extending the Bush tax cuts for the majority of Americans? And why do Republicans insist so much on protecting those tax breaks for the very richest among us?

WILL CAIN, CNN CONTRIBUTOR: Here's why, I'm going to give you two reasons. First of all, regarding the language we use often when we talk about this issue. Why don't Republicans pay their fair share? Well, that offends many Republicans.

Now, I hijacked your graphics department to show you why that offends them. I just want to show you the percentage of income tax paid by those that we call the very richest of the rich. This is the top 1 percent, those that make over about $340,000. They pay 36 percent of our total federal income tax.

Now, if we drop that to people who make above $150,000, the top 5 percent, you can see they pay about 59 percent of the total federal taxes.

ROMANS: What level, what income level? That's --

CAIN: That's top 5 percent, which is about $153,000.

ROMANS: Right.

CAIN: So when you say pay your fair share, what is fair? I mean, that doesn't look very fair to me. That looks disordinately.

ROMANS: Right.

CAIN: Heavy burden on the rich. But fine, let's move beyond.

The second reason Republicans say I'm not really excited about raising taxes on anyone, including the rich, is the possible detrimental effect it has on the economy.

Now, the CBO suggested just that highest portion, those who make over $250,000, could cost 200,000 jobs over the last year. Ernst & Young did a study that said 700,000 jobs over the next 10 years. Regardless, who knows how many jobs?

Two years ago, President Obama felt the same way, Christine. In fact, I think we have a clip of this. I also hijacked you on that front where he said this.

(BEGIN VIDEO CLIP)

OBAMA: The last thing you want to do is to raise taxes in the middle of a recession because that would just suck up -- take more demand out of the economy and put businesses in a further hole.

(END VIDEO CLIP)

CAIN: He said that two years ago. We are coming out of a recession possibly, a fragile recovery.

So you ask yourself is raising taxes a good idea now?

ROMANS: I mean, there's an interesting thing happening in Washington where people are starting to downplay the fiscal cliff. They're saying it's more like a slope. It's not going to hurt if we go over it. And, you know, Warren Buffett among them saying, well, don't worry, it won't be a recession and 535 people can agree it won't cripple the U.S. economy.

But the $7 trillion taken out of the economy over 10 years what.

SAHADI: Right.

ROMANS: What would be felt first?

SAHADI: I think one thing we should go into this with, we may go over the cliff but we're not going to stay over the cliff. I don't think anyone in Washington wants us to be over the cliff for 10 years. We may over the cliff for a couple of months or a couple of weeks.

ROMANS: I think that's risky with the markets. That's playing with fire, you know?

SAHADI: That's correct. I think whatever your ideology, whatever you think about taxes and how much revenue we should raise and from whom, we should all agree that everybody should know what the heck it is they have got to pay.

CAIN: That's right. SAHADI: Because, you know, if I'm going to budget my paycheck, I would I like to know what I'm getting in my paycheck.

ROMANS: You know, Congress made this to be so horrible that we would never ever do it. Congress said like here's a cup of poison. If we don't get a budget deal, we're going to make us ourselves drink this poison.

Now, they are saying that poison is not going to kill it, but they design it had so we would never be standing here and talking about, Will. And now, even on the left, Paul Krugman and others are saying go over to the cliff. It's better to go over the cliff --

CAIN: Right.

ROMANS: -- than to give in to Republicans again. The president gave in twice.

CAIN: That's right.

ROMANS: And so, you got intransigence now kind of on both extremes.

CAIN: How dedicated both sides are to their premise.

You know, if we go over the cliff, I have to say, I think, from a political perspective --

ROMANS: You don't think it's a slope, you think it's a cliff?

CAIN: No, I do think it's a slope. I think it's an austerity sloping crisis of some kind.

ROMANS: I think it's a black diamond slalom course so you're not going down the Bunny Hill.

CAIN: I agree with you and Jeanne on this, by the way. What it does is it breeds an incredible amount of uncertainty in the markets. I mean, if we don't know what tax rates we're paying, that has a huge depressing effect on the economy.

By the way, if we go over the cliff or the slope, I do think it benefits Democrats. All the tax cuts expire. They can come back and say now we want to present tax cuts for the middle class and lower income individuals and are Republicans going to vote against that?

ROMANS: There's so much more to be done here and said here. I hope we're not here with a special on New Year's Eve. I hope it's still Anderson Cooper in Times Square and not us.

(LAUGHTER)

ROMANS: Thanks, guys. Nice to see you.

It's becoming all too common. Wall Street tanks after a Washington debacle. With the fiscal cliff looming, how can you protect your savings and investments? (COMMERCIAL BREAK)

ROMANS: You know, the Dow at its worst was down almost 700 points since the election, wow. I mean, pick your reason, but all signals point to the fiscal cliff. Sure, there are concerns about Europe, the slowing growth in China, new tensions in the Middle East, all of these things wrapped up together.

But what some investors fear the most -- rising taxes on their investment. Take a look at what is driving that fear. Here's what happens to most filers if we go off that dreaded fiscal cliff.

Capital gains taxes rise from 15 percent to 20 percent. Dividends, most will end up paying their highest rate on those. And the top estate tax rate rises from 35 percent to 55 percent.

The non-partisan Congressional Budget Office says going off the cliff will put the U.S. economy right back into a recession.

And smart investors are preparing themselves for a rise in taxes, a potential drop in stock prices, and more volatility.

You can avoid any major losses if you get smart about your investments, and now is the time to protect yourself and really understand what you're doing in your portfolio.

Matt McCall is president of Penn Management Group.

Brian Mack, he's the president of Optimum Capital Management.

Both of you say don't panic.

Matt, a lot of people rely on the dividend yield, that safe dividend yield that they are getting, especially getting nothing in a bank account, you're getting nothing from C.D.s. And a lot of older people who have a lot of rich dividend-paying stocks in their portfolio, and they are really worried about what's going to happen here.

What are you -- what's your advice?

MATT MCCALL, PRESIDENT, PENN FINANCIAL GROUP: Yes, I understand the worry 100 percent, because if dividend rate goes up, obviously, you're making less income coming in every month off the dividend-paying stocks.

And we've seen since the election, dividend-paying stocks are typically what we call the safe haven. They don't get hit as hard when the market comes down. They have gotten just as hard the market.

ROMANS: Wow.

MCCALL: Many are getting even harder.

So, yes, as an investor I would be very concerned as well, because a lot of people live off this, too, Christine. People are living off every penny they get. Now, if that decreases, that's a big issue. ROMANS: I recently talked to a pension plan manager who said, you know, there's a lot of demand from safe investors for these kinds of investments, but they are the first kind of thing that you're going to see going over the fiscal cliff.

Ryan, when you look at different parts of the economy that could be at risk if we were to go over the fiscal cliff, what does that mean for investors in their sectors and their portfolios?

RYAN MACK, PRESIDENT, OPTIMUM CAPITAL MANAGEMENT: I mean, essentially -- I mean, the defense sector could obviously be at risk right now. We've seen a lot of cuts, $600 billion worth of cuts that are on the table for defense cuts, a lot of different jobs that might be lost in that area.

Health care stocks -- I mean, a lot of individuals trying to figure out how to play the different health care type investments and quality.

But, overall, we have to understand that just reviewing your asset classes and make sure you have the appropriate mix, your asset allocation structure, making sure that you are minding your volatility, how much risk can you actually take. I mean, yes, of course, it will be a whole lot safer to be in cash and treasury --

(CROSSTALK)

ROMANS: Not getting any money on those.

MACK: But again, you can sell all your stocks today and go into the safe investment by tomorrow. But that's just not the right thing to do. We have to be a little bit more cautious and make sure we have a qualified rebalanced structure to make sure we have a good rebalancing over the long run.

ROMANS: Know your risk and rebalance.

So, here's the next thing -- if you get real cautious right now and jump out with the Dow at its worst this week was down almost 700 points from the election. Maybe that's pricing the worst case scenario in. Who knows? I mean, you could see this as a great buying opportunity, too.

MCCALL: I see that longer term, it's a great buying opportunity. Between now and the end of the year, assuming the fiscal cliff, nothing gets done between now and the end of the calendar year, we're going to have a lot more volatility. We're going to have some days rumors that come out a deal is almost done, the markets are going to rally a few percent. And it's going to be the opposite, big down days.

But if you're a long-term investors, you'll look at stocks, such as -- Apple, as for example, out there. It's a stock that I do own. Valuation-wise, it's one of the greatest valuations you can find in the market. And it just gets cheaper and cheaper.

ROMANS: Yes. MCCALL: Do you think people are going to stop buying iPods because of the fiscal cliff? I don't think so.

So, if you want to buy stocks now, and you're looking at your wish list, use the selloff to buy in.

MACK: And you have you have to look at the quality of the stocks that are left in this economy. I mean this, economy right now, people have been trimming down their stuff and productivity is up because companies right now have trimmed down their employment, making sure they are getting more productivity out of the current employees that they have and demanding the most of the balance sheets and income statements that are left are looking pretty good as comparatively, a whole lot better than four years ago. So, the ones that are left are a whole lot better off and a lot of quality stocks that are left.

ROMANS: Quick, quick response from each of you. You don't think they will put us over the fiscal cliff, they will find some solution?

MCCALL: I think there will be a solution and I think once that happens, the market does rally. So, you want to be in the market.

ROMANS: What about you?

MACK: They'll get additional revenues, and not a tax rate rise but they'll get additional deductions.

ROMANS: So rebrand it as tax revenue.

MACK: Yes. Do more revenue but they have to more spending, which is necessary.

ROMANS: All right. Do you think we go even for a few days, that would be bad, right, if we went over for a few days?

MACK: I don't think so. The earlier the better, especially right now with the holiday season coming.

ROMANS: Matt McCall, Ryan Mack -- thanks, guys.

All right. That's your portfolio. Now, let's talk jobs. I'm going to tell you how you can make $70,000 a year with an associate's degree.

(COMMERCIAL BREAK)

ROMANS: Twelve million jobs in the next four years. It's a pledge made by Mitt Romney before the election and matched by President Obama's campaign. And now it's up to this president to turn president to turn that promise into a reality.

Here's where we are. You can see that when you add every single month of job lost with every single month with jobs gains since the president took office there are now 194,000 more jobs today than when President Obama took office. But 12.3 million Americans remain out of work. It's an employer's market with 3.4 unemployed Americans for job opening in the U.S. So to get a job, you've got to be exceptional. Our colleagues at CNN Money have a gallery featuring how some folks are getting hired.

Jason Russell of Atlanta sharpened his entrepreneurial skills. After he was laid off from an I.T. job, he co-founded a mobile application company and he credits that with helping him land a new job as a sales engineer.

Volunteering can also help. Greg Saum of Ridgefield, Washington, was looking for a teaching job for three years. He says volunteering with some local high school theatre students helped him build connections in his resume. He just landed a part-time teaching gig.

And, of course, get more education or training. After a divorce, Susan Gescheidle of Highland Park, Illinois, went back to school to finish her degree in humanities. She graduated in June. By August, she was work as a bank teller.

By the way, if you're thinking of going back to school, consider health care. As our population ages, jobs in this industry are exploding -- 296,000 jobs have been created in health care over the past year.

One of the few fields where you can make a good salary without a bachelor's degree:

Dental hygienists can make almost $70,000 a year with just an associated degree. We spent a day with one to get the dirt on cleaning teeth.

(BEGIN VIDEOTAPE)

CHARMAINE DAVIS, REGISTERED DENTAL HYGIENIST: How are you? Good to see you.

UNIDENTIFIED MALE: Nice to see you. Thank you.

ROMANS (voice-over): Charmaine Davis loves her job.

DAVIS: Lots of people love dental hygienist. I love, love hygiene. This is my passion. This is my career.

ROMANS: Flexibility, high pay and growing command put dental hygienist at the top of this list of best health care jobs, ahead of audiologist, occupational therapist, physical therapist, and optometrist.

DAVIS: We'll get started and then we'll do the oral exam.

ROMANS: The median income for dental hygienists is about $68,000 a year, according to government stats. Hiring is projected to rise 38 percent by the year 2020, above average for an industry already on a hiring tear.

More than 3 million health care jobs have been added over the last decade. And the industry is projected to grow nearly 30 percent by 2020.

PAUL KECKLEY, DIR., DELOITTE CENTER FOR HEALTH SOLUTIONS: The data clearly says that virtually every occupation in health care will see job growth ranging from primary care and general surgery, dentistry, even psychologists.

But the largest number of new jobs will be mid-level jobs. These will be jobs of technicians, of allied health professionals, of home health aides, even health coaches.

ROMANS: Here's the pay for those top jobs in health care.

But not all health care jobs are created equal. There's huge demand for home health and personal care aides, but they take home about $20,000 a year. Good-paying jobs like Charmaine's take an investment and more school.

DAVIS: I took the opportunity of doing it in the evenings. It was four days a week and I worked full time during the day and on the weekends.

ROMANS (on camera): Wow. So you were working so hard?

DAVIS: I was working really hard. But it was worth it.

ROMANS : But these are investments you have to make in a career, right? A decision to not have a job, but to have a career.

DAVIS: That was my goal.

ROMANS (voice-over): She needed an associated degree. The typical program cost 30 grand. Charmaine made the investment and is collecting the dividends. And we're not just talking about the money.

(on camera): And when they open that mouth --

DAVIS: When they open that mouth, nothing surprises me after 24 years.

ROMANS: Really?

DAVIS: Nothing.

ROMANS: It feels good to get that plaque out.

DAVIS: It does. And do that polishing and walk out and get that beautiful smile, knowing that they're going to continue with their home care.

ROMANS: She's the real deal.

(LAUGHTER)

(END VIDEOTAPE)

ROMANS: Another reason Charmaine's got a great job, teeth cleaning, like most parts of health care, can't be outsourced. Now you've got the job. It's time to start thinking about retirement. "SMART IS THE NEW RICH" quiz: how much money do you need to save to satisfy your basic needs in retirement? Is it five times your salary? Eight times your salary? Fifteen times?

My rant and the answer when we come back.

(COMMERCIAL BREAK)

ROMANS: Have you been dreaming about the day you will no longer wake up to this sound?

(BUZZER)

ROMANS: That's right, your alarm clock. Someday that sound will be for a bridge game or a trip to see the grandkids or tea time, not for the daily grind.

Many of you tell me that because of the financial crisis, you can't afford to turn off that alarm just yet. You have to keep working longer than you thought. And saving for retirement, frankly, for most Americans, they're consumed with the right now, making the money last as long as the month.

At least on that front, though, I'm here to tell you, the crisis is easing. We're doing better on our mortgage payments. Late payments fell to a three-year low in the third quarter. There are fewer homeowners who owe more on their house than the house is worth. And Americans are cutting back on credit card use.

These are all good signs of progress on the monthly budget, which brings me back to the alarm clock. That's to get your attention for the answer to this quiz. The quiz I gave you before the break, right?

Fidelity says you need to save eight times your ending salary to meet basic needs in retirement. Financial planners tell me it's even more if you make more than $100,000 a year, closer to 10 to 12 times your ending salary, and that's not counting how much you'll need for out of pocket health care expenses. For that, a 65-year-old couple needs another $283,000 saved. And even then, that's about a 90 percent chance it will be enough.

Look, I don't want to leave you feeling like I'm giving you a lecture here. This is a reminder of the basic rules we set aside after the crisis. First, if you can't afford it, put it down. You're going to be under a lot of pressure to spend, spend, spend over the next few weeks. I can hear the cash registers now.

But with every purchase, every time you hear that sound, ask yourself: does this get me closer to that magic number of eight times, 10 times, 12 times my salary?

Next, live 15 percent below your means. You build wealth by spending less money than you earn. It's not about keeping up with the Joneses.

Start saving for college when your kids are young. You tell me I can't afford the necessities now. How am I going to put something away? I'm telling you, you can.

Try this. As soon as your child is out of diapers, take that money, it could be $500 a year, put it into a 529 plan. Same thing with any raise you get at work. Put it in your 401(k) or your IRA immediately so you never even notice it.

Start small, build quickly so someday you won't have to hear this.

(BUZZER)

ROMANS: The annoying alarm clock.

So l how much are you saving? What are your favorite tricks and how are you doing it? Find us on Facebook or Twitter. We want to hear your story. Our handle is @CNNBottomLine. My handle is @ChristineRomans.

"CNN SATURDAY MORNING" with Randi Kaye continues right now.