By Andrew Wood and Dan Simon, Retirement Planning Advisors at Daniel A. White and Associates
The 2016 election is behind us. Regardless of who is sitting in the White House come January, there are serious issues that those preparing for retirement (or already in retirement) need to think about following the election. Although all candidates will tell you that their “path” is better for the American public, there are valid concerns that you should know about and how these issues may impact your financial plan. By identifying and taking steps to address these issues, it can help you move forward to better retirement security.
Outside of market risk and volatility, there are three major risks that retirees face which can devastate retirement income plans: longevity, inflation and taxes. We cannot control longevity or inflation (how long we live or how much cost of living increases), but there are steps that retirees can take to address tax risk.
How will taxes impact your retirement income? Do you have a tax-efficient retirement income plan?
One of the biggest issues that separates our two main political parties is taxes. We often hear the Democratic Party push for higher taxes on the wealthy in order to make them pay their fair share, while the Republican Party pushes lower taxes for all.
We are not going to enter into the never-ending debate on which path leads to better economic growth, but we will bring up how taxes will impact your retirement income. The reality is that government spending continues to rise and government revenues are not keeping up with spending. We continue to run up debt at a rapid pace to $20 trillion. There are only two ways to address the debt, increase taxes or decrease spending. The only real way to solve the issue is to do both.
So, what are you and your advisor doing to plan for an increase in taxes? There are many effective strategies to make your retirement income more tax efficient, including retirement income solutions that can provide tax-free income and tax-deferral. However, one of the most effective strategies overlooked is Social Security. With the structure of the taxation of Social Security, specifically the “Provisional Income” formula, you may be able to leverage Social Security to help put you on the path to a more tax-efficient income.
If you are not discussing incorporating alternative Social Security strategies in order to making your retirement income more tax-efficient, you could be missing out on tremendous advantages.
How will increases in interest rates impact your retirement portfolio?
The United States is one of the few remaining countries on the planet where interest rates are still positive and the Federal Reserve has been talking about raising interest rates every month for the last year. Although they have only increased rates once in the last 12 months, the likelihood of continued rate hikes in the future increase as every month passes.
Most individuals increase their exposure to bond funds in order to add “protection” to their retirement portfolios the closer they get to retirement. Although there is a certain level of protection, unfortunately, these assets may still be at risk. Interest rates and bond prices are inversely related, so if we do see an increase in interest rates, bond prices will fall.
Make sure you and your advisor are on the same page when it comes to your exposure to assets that will be impacted directly by interest rates. It may be a good idea to implement some alternative strategies to help protect your retirement nest egg.
How will potential post-election volatility impact your retirement nest-egg?
This is the biggest near-term concern for the clients that we see every day. Unfortunately, we cannot control the financial markets, nor do we know what is going to happen. One thing is certain, the financial markets do NOT like uncertainty, and with any uncertainty comes volatility.
Although different advisors have different perspectives as to the market after the election, make sure your advisor knows YOUR concerns and take the steps to address them. How much risk do you need to take? How much risk can you afford to take?
We cannot answer these question for you, but these are some of the questions you need to start thinking about if you want be sure you are on the path to retirement income security.