Written by Dr. James Royal Bankrate.com
The 2024 election is right around the corner, and it’s been one of the most contentious campaign seasons in recent memory. For retirees, the outcome of the election has several implications, particularly the looming Social Security shortfall that could lead to significant reductions in benefits. Whoever is elected this year could help determine how programs are funded and whether and by how much benefits are cut. But Social Security is just one of several issues that affect retirement planning.
“The 2024 election is going to be a big one for retirees,” said Brandon Ashton, director of retirement security at Cornerstone Financial Services in Southfield, Michigan. “Tax policy, pension reform, raising the retirement age, raising the minimum benefit age, health care costs, and many other issues are at stake in 2024.”
That’s why experts say people planning for retirement should stay up to date on any changes and how they may affect their plans. are.
Here are five key areas to watch as the election unfolds, and what you can do to set yourself up for success no matter who wins.
1. Prepare for Social Security changes
Social Security provides a significant portion of income for American retirees, but the program’s lack of trust funds means benefits could be cut as early as 2033 if the funding situation is not resolved. Analysts predict that it may be possible. The average check would automatically be cut by about 21%, leaving hard-pressed retirees to live on even less, according to NPR.
“Whoever is elected president will determine the future direction of Social Security,” Ashton said. Former President Donald Trump and Vice President Kamala Harris have “made contrasting statements about this plan, and neither has offered a clear long-term solution,” he said.
But regardless of what the new president wants, Congress ultimately has the power to make funding changes. Some senators are discussing raising the full retirement age, cutting benefits or eliminating annual cost-of-living increases to keep Social Security payments up to speed with inflation.
“If one party wins a majority, it could focus on priorities that address solvency issues, such as tax increases, benefit adjustments, and structural reforms,” Ashton said.
But some advisers say changes to Social Security may not be on the cards for the next Congress.
“Congress will probably be reluctant to proceed during the session and the depletion of the trust fund will be postponed to next year’s agenda,” said Michael Primavera, a retirement planning advisor at Daniel A. White & Associates in Lewes, Delaware. ” he said.
Low-cost solutions will become more difficult to achieve if Congress doesn’t act soon, but this fact plays into the hands of those who want to cut benefits for retirees. The longer the delay, the less satisfactory the solution and the more likely it is that the retiree will suffer some form of benefit reduction, whether it be a reduction in lifetime benefits or an immediate reduction.
What you can do: Increase your savings and investments for your retirement. With potential benefit cuts on the horizon, soon-to-be retirees should consider financial steps to increase their own retirement funds. This could include increasing your savings and investments and increasing your allocation to retirement growth assets. With eight to nine years left before potential cuts, you can make significant changes now to strengthen your financial future.
2. Adjust for possible changes in income tax rates
Some advisers believe the expiration of the 2017 Tax Cuts and Jobs Act (informally known as the “Trump tax cuts”) will be one of the most contentious issues. The law is scheduled to expire at the end of 2025. Congress must act to update the law. Otherwise, the tax system will revert to the way it was before 2017. Both candidates have made various proposals for tax adjustments.
Harris has proposed raising the top tax rate from 37% to 39.6%. But she said she would not increase taxes on households earning less than $400,000. Harris also would impose a minimum tax of 25% on households with assets over $100 million and increase long-term capital gains taxes for households with income over $1 million, raising the top rate from 20% to 28%. It is also suggested that it be increased. It also proposes raising the corporate tax rate.
President Trump said he would extend current tax provisions through a 2025 deadline, lower corporate tax rates and increase the $10,000 deduction limit for state and local taxes. He also proposes abolishing the social security tax and introducing a flat 10% tariff on all imports, a move that tax experts say would shrink the economy and increase debt. It points out that there is a possibility.
“Whether the Trump tax cuts remain in place, are modified, or are completely ‘repeated’, you should be aware of where you stand in terms of projected income and what tax bracket you fall into. It’s important to know,” Primavera said. Retirees can control how much money comes out of their retirement accounts as income, giving them some control over their income, and therefore their taxes.
What you can do: Take your tax planning seriously. As tax rates increase, tax planning becomes more important. With smart planning, you can minimize the taxes you have to pay. “Remember that the big variables in retirement income are the amount you receive from qualified accounts (IRAs, 401(k)s, etc.) and the required minimum distributions (RMDs) that go with it at age 73,” says Primavera. he said.
3. Consider Roth IRA conversion
A potential increase in tax rates in 2026 may mean this year and next year remain the best times to take advantage of Roth IRA conversions. This strategy converts a traditional retirement plan, such as an IRA or 401(k), into a Roth IRA, which offers a variety of benefits.
“If you think the Trump tax cuts are about to expire, why not take advantage of them while they’re still available? Roth conversions are a great strategy for retirement planning,” Primavera said. “If you have a large IRA balance and have room for additional income in your current tax bracket, pay taxes on that income now and reinvest it in your Roth IRA. A Roth IRA has the potential to grow. You will not be taxed again.”
What you can do: Consider converting to a Roth IRA. Of course, there’s no guarantee what your current tax rate will be, but retirement advisors have long advised their clients to consider converting to a Roth IRA. This conversion can be especially beneficial if you have many years left in retirement, but advisors like Primavera advise clients to avoid hitting the next tax bracket when converting. Even if your tax rate doesn’t go up, this move may make sense, but plan carefully.
4. Be aware of changes to inheritance tax
“With President Trump’s tax cuts expiring at the end of 2025, the biggest change will be the estate tax cut,” said Steve Azzury, ChFC, owner of Azzulie Financial in Troy, Michigan.
Current inheritance tax law for 2024 allows Americans to donate $13.61 million without paying estate taxes. This exemption applies to each individual, totaling $27.22 million per couple gifting together. Tax experts say this amount would be reduced to about $7 million per person if inheritance taxes returned to the previous system. Funds donated above this threshold are subject to a tax rate of up to 40%, but this does not include other taxes at the state level, such as inheritance tax.
What you can do: Stay on the lookout. There is no need to take immediate action as you have some time to see which way the wind blows on this issue. However, given the significant tax savings available under the current regime with large estate gifts, it may make sense to speak to a financial advisor about your personal situation. “We encourage you to make your gift now to preserve these deductions,” Azzury said.
5. Don’t abandon your long-term strategy
If your preferred candidate doesn’t win, you may want to abandon your investments and retirement plans. Experts say, “Don’t do it.”
“Elections are always fun. Everyone has an opinion, but that shouldn’t change your retirement goals,” Azouly said. “These goals should be based on your lifestyle, assets, income, and activities you plan to pursue in retirement.”
“One of the things I want to avoid with your nest egg is selling it all and turning it into cash,” Primavera said. If you need to reduce risk, do so in a planned manner. “Rather than reacting on an ad hoc basis and withdrawing everything from the market, reduce your market exposure by periodically rebalancing your portfolio to a more risk-averse strategy.”
What you can do: Stick to an investment plan that meets your long-term needs, ignore short-term noise, and above all, avoid costly emotional reactions when investing. The economy and stock market performed well under Republican and Democratic administrations.
conclusion
It’s important for retirees to stay informed about the changes that affect them, especially the key areas that will most impact their income. It’s also important to make smart, considered decisions that lead to long-term financial benefits, rather than making imprudent, emotional decisions based on half-truths. Work with an experienced financial advisor to create a plan that works for you and your family.
