What the 2016 Election Means for
There are a lot of things you can improvise in life, but financing your retirement isn’t one of them. To plan for it, you have to be knowledgeable of the laws. And with many of those being written in Washington, D.C., the ways that Americans pay for retirement are always a matter of debate during election season.
The long-term solvency of Social Security, the one source of retirement income most Americans count on, has been called into question. As a result, that previously ironclad source of retirement income has begun to feature itself more prominently into political conversations.
Melissa Register, a senior wealth planner for Fifth Third Private Bank in Cleveland, says that for her Generation X clients, she does run a simulation that omits Social Security as one of its assumptions. While she doubts the program will be significantly reduced or discontinued, she runs the simulation out of an abundance of caution
Roth IRA Concerns Linger
It’s not just Social Security that’s on the table in this election. A post-election reconfiguration in Washington could lead to new rules for Roth IRAs, says Michael Donovan, a Fifth Third wealth management advisor in the greater Chicago area.
Currently, people holding traditional IRAs and 401(k)s have the option to convert their savings into a Roth. But Congress has the ability to revise some of the provisions that make the plans so appealing, such as introducing a Required Minimum Distribution (RMD), eliminating the stretch Roth IRA for young beneficiaries, capping IRA account balances, and eliminating the so-called “backdoor Roth IRA.”
In addition, Donovan says many of his clients fear that the taxfree growth in a Roth account will eventually be taxed if the government comes to need the revenue. “Many of my clients don’t want to convert into a Roth for that reason,” he observes.
Outside of Roth IRAs, other retirement plans, such as 401(k)s and IRAs, will likely remain untouched, regardless of who wins in November, Register says. “The only changes we expect are continued inflation adjustments to maximum contributions. It’s now $18,000 for 401(k) plans, but that will increase over time.”
The Role of the Economy in Retirement Planning
For business owners, the estate tax looms large in retirement planning. Their companies—often an illiquid asset—are the “800-pound gorillas of their portfolios,” Donovan notes. As such, the prospect of a forced sale of their company to meet the estate tax has long been a concern that affects how those business owners approach retirement
Steady increases to the estate tax exemption, now at $5.45 million per individual (or $10.9 million per couple), has alleviated some succession planning concerns of small-business owners. Democratic candidate Hillary Clinton has said she’d lower the estate tax exemption to $3.5 million per individual, while Republican candidate Donald Trump has stated he’d like to abolish the estate tax altogether. But it’s not likely to be a top priority for either one after they’re in office, says Register. “There are much bigger tax and economic issues to address before the estate tax should be up for discussion again.”
“Most small-business owners who are on the cusp of retirement and trying to find the most advantageous time to make their exit are closely watching the election as a harbinger of the economy and the capital markets,” says Glen Johnson, who has many business owners as clients in his role as managing director at Mirador Family Wealth Advisors. “The political composition of the White House and Capitol Hill can impact the business climate, which plays a significant role in their ability to get the best price and the best terms on the sale of their company.”
“If there’s a wholesale shift from a split government with the Republicans in charge of Congress, to, a Democratic sweep, then a more-profound change in economic policy could result that would raise the level of uncertainty among investors,” says Jeff Korzenik, chief investment strategist at Fifth Third.
Nonetheless, he remains confident that after the election the stock market should continue to provide a positive return, even if it is less than 10%, in 2017. And given that most people have a sizable portion of their retirement savings tied up in the markets, that would be good news for both retirees and would-be retirees alike.