The presidential election has been decided, but uncertainty remains in the post-election outlook for impact on retirees and pre-retirees. Much still depends on what happens in the Senate, where the balance of power will depend on two runoff elections in Georgia. But two big issues loom large: taxes and stocks.

Taxes and You

Americans often underestimate the impact of taxes on their retirement income. “Many households may forget that not all of these resources belong to them; they will need to pay some portion to the federal and state governments in taxes,” says a new report from the Center for Retirement Research at Boston College. “Households face taxes on most components of their retirement income: benefits from Social Security, pay-outs from traditional employer-sponsored retirement plans, and capital gains taxes on any financial assets that they sell to support retirement consumption.”

Financial planners and economists expected taxes to go up no matter which party won the White House and Senate. The Tax Cut and Jobs Act in 2017 cut corporate taxes permanently and individual taxes temporarily – increasing the nation’s deficit by hundreds of billions of dollars. Then came the pandemic and the Cares Act, a $2.2 trillion stimulus act. That money has to be repaid and the deficit will need to be reduced.

“Nearly all the individual cuts in the Tax Act expire in 2025.”

“The biggest the elephant in the room – that everybody knows is going to be an issue – is taxes; not only the trillions in debt we had, but 2020 almost quadrupled our annual deficit,” said Beau Henderson, lead retirement planning specialist with RichLIfe Advisors in Gainesville, Ga. “Taxes will have to go up. What I’m telling clients is best thing we can do is stay on top and know the rules. Does it mean shifting 401(k)s and IRAs? We get so focused on covid and politics, things outside our control, that we’re not addressing things we can control.”

Many financial planners have recommended that their clients do Roth IRA conversions while individual taxes are at their lowest rates in years. (When you convert a regular IRA to a Roth IRA, those deferred taxes are due immediately.) Nearly all the individual cuts in the Tax Act expire in 2025.

Though what happens in the next few years will depend on what happens in the Senate, Jeff Corliss, the Managing Director and Partner of RDM Financial Group at Hightower in Westport, Conn., said Biden has discussed increasing some capital gains taxes. “For us as (financial) planners, does it make sense to take profit on (stocks) if capital gains rates are going to go up? Is it worth revisiting people’s estate plans? That certainly could impact taxes. Stay tuned.”

Biden also talked about having tax incentives for retirement plans to encourage more people to enroll, increasing Social Security payments to recipients between 78 and 80, Corliss said 

Rebalance your portfolio

The second significant thing to watch is stocks. Early in the pandemic the market crashed, but it recovered quickly. Since then, the market has headed straight up.

“It’s not a set it and forget it.”

“People realize the market highs will have to come down,” said Henderson. “That could be a problem for people closest to retirement. Think back to 2008, when people lost 40 percent of assets.” 

“Regardless of who’s in power, planners need to make sure a person’s investment strategy meets their current situation, whether they are currently working or getting ready to retire,” said Corliss. “We are rebalancing and being prudent on investment strategy and matching it to life stages. It’s not a set it and forget it.”

Rodney A. Brooks writes about retirement and personal finance issues. His column currently runs in U.S. News & World Report. He has written columns on retirement for The Washington Post and USA TODAY. He has also written for National Geographic, Next Avenue and Black Enterprise magazine. He retired as Deputy Managing Editor/Personal Finance and retirement columnist for USA TODAY in 2015. 

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