As if the stress from high inflation and the possibility of an economic downturn wasn’t already enough, add concerns about higher taxes on 401(k) plans and IRAs to the list of worries.
According to Allianz Life’s 2023 Q3 Quarterly Market Perceptions Study, Americans are increasingly worried about taxes on retirement income from 401(k)s and IRAs increasing in the future. This is in addition to persistent fears about a big market crash or recession.
In fact, 7 in 10 (72%) respondents worry that higher taxes in the future will impact their retirement income from tax-deferred accounts such as a 401(k) or IRA.
“While paying taxes is inevitable, how much we pay in taxes will change,” said Kelly LaVigne, VP of consumer insights, Allianz Life. “And, a change in taxes can have a significant effect on your portfolio if you have not incorporated tax strategies into your financial plan and diversified across tax categories. For a goal like retirement, you want to diversify your assets across a spectrum of long-term capital gains, regular income and non-taxable income. This strategy, along with incorporating strategic tax deferral will help achieve some control over the amount or timing of taxes you will pay.”
The study did not specifically ask respondents why they have increasing fears about paying higher taxes on their 401(k) plan and IRA distributions, but presumably all the talk of Social Security shortfalls and record federal debt levels may have something to do with that finding.
At any rate, Americans want help to reduce tax risk. Indeed, 73% of respondents say they would stop using their current financial advisor if they did not help effectively manage taxes on retirement income. Slightly more Gen Xers (84%) than Boomers (67%) or Millennials (77%) said they would stop using an advisor if they didn’t help effectively manage taxes on retirement income.
At the same time, many Americans worry about retirement income from tax-advantaged sources like Social Security. In this case, a large majority of respondents (72%) say they can’t count on Social Security benefits when planning retirement income. Even more (79%), worry about the future of Medicare and Social Security.
Another Market Crash?
Still, while Americans are concerned about the taxes they will have to pay in the future, right now, they worry that another big market crash is coming.
One positive is that fewer Americans now worry that a major recession is coming than did all of last year. While the study’s third quarter results show that 55% worry a major recession is right around the corner, 64% of respondents said the same in the second quarter. Similarly, 53% of Americans worry that another big market crash is on the horizon. 
Consequently, this ongoing worry is leading Americans to hold more money in cash, the study notes. Most Americans (54%) say they are keeping more money than they should in cash because they’re worried about a recession.
Millennials are more concerned about an economic downturn affecting their personal finances compared to Gen Xers or Boomers. More than half (52%) of Millennials are concerned they will be laid off because of an economic downturn in 2023, compared to 29% of Gen Xers and 25% of Boomers. Moreover, nearly 6 in 10 (57%) Millennials say they are keeping more money than they should in cash because they’re worried about a recession, compared to 52% of Gen Xers and 46% of Boomers.
“While you might not feel like you’re losing money by holding it in cash, over the long term you will lose out,” observes LaVigne. “Money kept in cash, or in low interest-bearing accounts, isn’t keeping up with the rising cost of living. The idea is to incorporate risk management strategies that may also lower volatility into your financial strategy so that you can invest more confidently and weather market downturns over the long term.”
The findings are based on a survey conducted in August 2023 among a nationally representative sample of 1,005 adults.
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