America's Kudzu Problem

Renovations, Patience, and a Hill Covered in Kudzu

Renovations are coming along at the new office we purchased last month. I have to admit, it's been a big exercise in patience! But the end will come sooner or later, and we know it's going to be a positive long-term move for our firm and our clients.

Behind the office is a steep hill. I couldn't tell you the grade because it's completely covered in kudzu. You know the vine I'm talking about. It's the bright green plant that grows rapidly and takes over everything if left unchecked.

I've been daydreaming about the day it's transformed into a beautifully landscaped hillside. Until then, we'll have to keep mowing the kudzu back.

The thing about kudzu is that once it's established, removing it takes a tremendous amount of work and persistence. And just when you think you've gotten rid of it, another vine creeps across the grass and wraps itself around anything in its path.

As I stood looking at that hillside over the Independence Day weekend, I couldn't help but think of another problem that has quietly spread for generations.

America's Debt Didn't Start Here

Over the holiday weekend, I came across a Newsweek article discussing the history of America's national debt.

According to historical data from the U.S. Treasury, America first recorded a national debt in the late 18th century when the nation's first Treasury Secretary, Alexander Hamilton, consolidated the country's obligations through the Funding Act of 1790.

The original debt totaled $71 million was about $2.6 billion in today's dollars. It was largely the result of borrowing to finance the Revolutionary War.

Hamilton famously referred to the Revolutionary War debt as "the price of liberty" and believed that a national debt, "if not excessive, will be to us a national blessing."

I doubt he could have imagined that less than 250 years later, America would be staring down approximately $39.4 trillion in debt.

The Kudzu Kept Growing

A few decades later, President Andrew Jackson believed indebtedness was a fundamental threat to freedom and paid off the national debt in 1835. Did you know this remains the only time in our nation's history that America has been debt-free?

The reprieve didn't last long.

During the Civil War, the national debt surpassed $1 billion for the first time and reached nearly $3 billion by the war's end. World War I accelerated borrowing once again.

Following World War II, however, something remarkable happened. According to the U.S. Treasury, debt as a percentage of our economy declined for decades thanks largely to strong economic growth.

By 1981, the national debt crossed the $1 trillion mark. President Reagan warned that this milestone should serve as a wake-up call. Think about that for a moment. It took our country nearly 200 years to accumulate the first trillion dollars of debt, but only three years to add the second trillion.

America experienced its last balanced federal budget during the 1990s. As the Newsweek article points out, debt growth slowed during that period, due in part to a balanced budget under President Bill Clinton and House Speaker Newt Gingrich. Unfortunately, debt began climbing again following the September 11 attacks and the wars that followed.

You probably remember the rest of the story.

The debt surpassed $10 trillion during the Global Financial Crisis in 2008. Then, during the COVID-19 pandemic, what once seemed unimaginable became reality when approximately $4.2 trillion was added to the national debt in a single year.

Treasury Secretary Scott Bessent has repeatedly said that his strategy is to grow America's economy faster than the debt grows, making the debt more manageable over time. I certainly hope he's right. But when you look at the numbers on usdebtclock.org, it's hard not to appreciate the magnitude of the challenge.

Like the kudzu behind our office, the national debt didn't become this large overnight. It grew slowly, year after year, until today it seems almost impossible to imagine what removing it would even look like.

So, What Does This Mean for You?

I'm not sharing this to create fear or to make a political statement. None of us controls Congress or the federal budget. What we can control is how we prepare.

One of my concerns is that if lawmakers don't address our long-term fiscal challenges, taxes may eventually have to increase.

While that would most likely affect everyone, it could have an even greater impact on retirees and those approaching retirement who have accumulated significant assets in tax-deferred accounts such as traditional 401(k)s and IRAs.

Those accounts have provided valuable tax deductions during our working years, but every dollar withdrawn in retirement is generally taxed as ordinary income.

That doesn't make them bad savings tools. In fact, they have helped millions of Americans save for retirement. But they do raise an important planning question.

Should some of those dollars eventually be moved into tax-free accounts?

Planning Now

For some people, contributing to a Roth 401(k) instead of a traditional 401(k) may make sense. Others who are nearing retirement or already retired may benefit from evaluating whether converting a portion of a traditional IRA to a Roth IRA is appropriate.

A Roth conversion isn't right for everyone, but when it makes sense, it allows you to pay taxes at today's rates so future qualified withdrawals can be tax-free.

The point is this: we can't control the national debt, but we can control how prepared we are if tax laws change in the future.

If you'd like to discuss whether a Roth conversion analysis makes sense for your situation, simply reply to this email or give us a call at 864.641.7955. We'd be happy to help you evaluate your options.

Until next week,

David C. Treece,

Financial Planner