As you probably know, on this blog I try to remain relatively neutral when it comes to money and politics. That’s because I think stewardship principles derived from the Bible are timeless and applicable in any political climate.
Furthermore, I think political outcomes tend to have a relatively modest impact on our individual finances, at least in the short run.
But not surprisingly, many are wondering about the recent election and how potential changes may affect their personal finances and retirement stewardship. High schoolers are wondering about college tuition costs. Millennials and GenXers are wondering what will happen with taxes, jobs, and wages. Retirees and near-retirees are wondering what will happen with the stock market, interest rates, and health care.
Much of what I discuss in this post is somewhat speculative, but I do think some changes are coming. How much impact they have on each of us is also highly uncertain. Nonetheless, I will discuss some of these possible changes and what you might want to do (or not do) as part of your retirement stewardship plan to prepare for them.
My not-so-crystal ball
My ball is probably more glass than crystal and clouded glass at that. Here’s what I have been able to glean from my reading.
First, the incoming administration is likely to push for (and get) some changes to federal tax laws, the Affordable Care Act (aka, Obamacare), and perhaps Medicare. How significant remains to be seen.
Concerning taxes, think “simplification” and “lower taxes” due to fewer and lower tax brackets. Due to lower brackets, low-income families would pay no taxes, which would mean that lower income retirees may be able to live tax-free as well. High-income retirees, on the other hand, may have to pay more.
Regarding Social Security and Medicare, there have been promises to “protect them,” but it’s hard to know what exactly that means. The president-elect’s website says he wants to “modernize Medicare” so that it can handle the challenges of the Baby Boomers, but details are still sketchy.
And if deficit reduction becomes a top priority, some changes to these programs as well as other entitlements could indeed be coming.
An outright repeal and replacement of Obamacare may be difficult, plus the incoming president has said that he likes some of the key provisions of the current law. He wants everyone to have access to Health Savings Accounts (HSAs), which are tax-free medical savings accounts. He also wants more competition across state lines. It’s hard to guess what this would mean for health care costs. Although they probably won’t get much less expensive, they may not rise at as fast a rate either.
It’s also very possible that the new regime could alter some economic policies in the areas of free trade and stimulus spending for public infrastructure improvements. These could impact the financial markets for better or worse – I’m not sure anyone knows which, it depends on who you listen to.
After years of near-zero interest rates, rising interest rates are now a near certainty. The “Fed” raised them twice in 2016 and strongly signaled that more are in store for 2017. These actions will make borrowing more expensive. However, savers who use “safer” things such as CDs, traditional savings accounts, and money market accounts will get a boost.
Inflation is also likely to increase. Like interest rates, it has been pretty subdued over the last few years, hovering around 2 percent and 2016 will end under that at about 1.7 percent. Inflation in the 3 to 4 percent range may be more the norm in the years ahead.
One thing is fairly certain: For most of us, there is more uncertainty than before the election. Just when we thought we understood the arcane tax policies, they will probably change (or at least be simplified). We got a handle on Obamacare and the new health care landscape, but it could change again too. We have come to expect slow, steady growth in the stock market (and ignored those sounding the “bubble” alarm) but now the prospect of even greater volatility has risen its ugly head.
Avoid overreacting, one way or the other
Here’s the thing: None of us like uncertainty and most of us don’t like change (unless it’s the change we want). So, we are tempted to seek out prognosticators, pundits, and prophets to tell us what’s going to happen and what we need to do about it.
I want to take you back to February 2016. Just about a year ago, the stock market was going CRAZY. All the financial headlines were about it being the worst start ever in the history of the stock market. Take this CNN Money headline on February 10, 2016:
Stock market’s terrible start to 2016 just got worse…Fear continues to reign on Wall Street.
A natural reaction to such headlines may be, “Wow, if the pros are afraid, I’d better be terrified. I’d better sell all my stock funds to protect myself from the catastrophic losses that are sure to come.”
Perhaps you also remember some of the headlines after the “Brexit.” You would have thought the world was going to come to an end.
I have recently read stories of people who sold all their stocks in response to the results of the last election because they were so fearful of what might happen. They made extreme, potentially harmful financial decisions based on strong emotions.
Personally, in early 2016, when the market was tanking, I did just the opposite. I had a fair amount of my retirement portfolio in cash (about 25%) waiting for an opportunity such as that. So, I bought some additional shares of my favorite stock dividend fund. It was a hard decision, but since I did, the fund is up approx. 14% and its holdings are pretty conservative (i.e., would not be considered a “growth” stock fund). Other more aggressive funds have done even better.
Admittedly, it’s possible that for any number of reasons the results could have been very different. But from what I could tell, there was no clear reason for the markets to start off so poorly. My best course seemed to be to buy a little on the dip.
There’s no less media noise out there right now. Some are predicting growth and prosperity not seen in decades. Others are predicting financial Armageddon. That’s because the media always seems to live out on the ends of the continuum of possibilities, perhaps because it’s what sells news copy.
The actual reality (which I have no certainty about, nor does anyone else) will be much more subtle and likely to be somewhere toward the center of the continuum.
So, in times of uncertainty, what average folks like you and me need to be on guard against are strong emotional responses, especially euphoric optimism on the one hand or fearful pessimism on the other. If you sense that you are riding on the emotional tide of the news every day, stop listening to the news (really, maybe you should), or, take a deep breath, step away, and really think about what you are feeling and why. We need to exercise self-control in such situations:
A man without self-control is like a city broken into and left without walls. (Proverbs 25:28 – ESV)
Whether you are feeling overly optimistic and enthusiastic, or doubtful and pessimistic, strong emotions can cloud your judgment and result in bad decisions. There is usually little to be gained by becoming overly enthusiastic or cynical. Strong emotion often leads to behavioral missteps.
Plus, we always need to keep in mind that it is the Sovereign One who upholds and controls all things by His power of his might and works all things according to His plan:
Remember the former things of old; for I am God, and there is no other; I am God, and there is none like me, declaring the end from the beginning and from ancient times things not yet done, saying, ‘My counsel shall stand, and I will accomplish all my purpose.” (Isaiah 46: 9-10 – ESV)
What to do then?
So what should you do in light of the new political realities, well the simple answer is probably nothing, or at least very little. I certainly make no claim to be a pundit or prognosticator, but for what it’s worth, here are some thoughts.
Since no one knows what the financial markets will do (although one analyst did make this bold prediction: “in 2017, the markets will fluctuate” – LOL), I suggest you continue to keep an “all weather” portfolio. I wouldn’t make any big bets that the market is going to do one thing or another. Rather, I think it is wise to stay diversified and hedge your bets by owning some bonds, international stocks, and possibly some commodities like gold or real estate if you are comfortable with them. The exact mix (your asset allocation) should depend on your age and risk tolerance.
Bottom line: There’s probably no reason to change your plan, so stay diversified and remain flexible.
Inflation, which I mentioned earlier and is likely to be on the rise, is the enemy of us all because it diminishes the future value of money we save today unless we can earn enough on that money to at least equal inflation. And remember, like compound interest, inflation compounds as well.
Think of it as “negative interest.” Three percent increase per year over ten years is a cumulative inflation rate of 34.4 percent, which is greater than 3 percent a year times ten years, which would be 30 percent. That means that one dollar today would only be worth 65.6 cents ten years from now.
Our goal is to earn more than inflation, otherwise, our money is worth less each year than it was the year before. We want to avoid keeping too much of our savings in cash or very low return “safe” investments, especially if we’re younger. Instead, we invest in things that have a high probability of increasing in value along with inflation. (Remember: Inflation is not the same thing as rising interest rates, although they sometimes go hand-in-hand.) Investor junkie has a good article about investing for inflation protection.
It’s almost always a good idea to ramp up your retirement savings if you need to, especially since any aggressive steps toward entitlement reform and federal debt reduction may mean that we will be more “on our own” in retirement than before.
Obviously, things like Medicare and Social Security won’t suddenly be done away with, but some changes are sure to occur, even if they are more long-term in taking effect.
If you are nearing retirement age, (the age when they will elect to start receiving Social Security), you may want to maximize your benefits (i.e., delay as long as possible, perhaps until age 70) on the assumption that no significant changes to payouts will occur (although they may). In other words, don’t take it too soon unless you are in poor health or have a shorter than average life expectancy.
It’s possible that there will be benefit reductions and reductions in cost of living adjustments to reduce the risk of Social Security insolvency. This may be bad for those currently receiving it, but the good news for future recipients is that it won’t run dry.
The big wild card in the mix is health care. I think health care costs will increasingly be “on us” (that’s what HSAs are all about), even if, due to increased completion in free markets, costs stop increasing as fast as they have been. If single payer options and public provision of services are reduced, we will probably all have to pay more out of pocket to receive good health care. Managing our out of pocket expenses in retirement is especially important as health issues can be more frequent, chronic, or severe.
Fully funding your Health Savings Account (HSA) each year is an excellent way to help with this. Otherwise, increasing your retirement savings to help with increased healthcare costs later on is the way to go.
Along with this, long-term care insurance appears to be a necessity increasingly for most people. There is no long-term care insurance provision at the government level except for Medicaid for those who are completely broke, and it is unlikely to receive enough funding to provide enough care for enough people. So, unless you are self-insured against it, you should at least consider the catastrophic protection long-term care insurance provides. I recommend you take a hard look before age 55. It starts to get much more expensive at age 65 and higher.
If you are working, give your employment situation some thought. Remember, whatever knowledge and skills you have that you use in your job are your greatest wealth-generating tool. Do whatever you can to develop or update your technical skills. The only way to make yourself valuable in the post-recession economy is to acquire skills that are so in demand no one will care how old you are: computer, medical, accounting, and engineering come to mind.
If you’re in college or have children who are, it appears to be a bad idea to concentrate on the liberal arts. I have nothing against them, as a liberal arts education is great in developing the life of the mind. And many liberal arts grads have gone on to successful careers. But if businesses start hiring again, the demand will be very high for highly-skilled positions. So any student needs to think about how to add technical or in-demand skills to their education, at least as a minor or certificate program.
And remember: the world needs good plumbers and electricians just as much as it does computer programmers and nurses!
Act and trust
Here’s a final thought. As I have stated many times before, when it comes to retirement stewardship, we need to both act and trust: Act, meaning make the wise, prudent, and rational choices and then take action based on Biblical principles and God’s commands. Trust, saying that, having done what we can, put our faith, hope, and trust in God alone for our future provision.
The heart of man plans his way, but the Lord establishes his steps. (Proverbs 16:9 – ESV)