James Royal, Ph.D. | Bankrate.com (TNS)
The 2024 elections are 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 some ramifications, especially with a looming Social Security shortfall, which could lead to drastic cuts in benefits. Whoever is elected this year could help shape how the program is funded and whether benefits are cut and by how much. But Social Security is only one of several issues impacting retirement planning.
“The 2024 election is going to be a big one for retirees,” says Brandon Ashton, director of retirement security at Cornerstone Financial Services in Southfield, Michigan. “Tax legislation, pension reforms, raising the retirement age, raising the required minimum distribution age, healthcare costs and many more issues are at stake in 2024.”
That’s why experts say that those planning for retirement must stay up to date on any changes and how those changes could affect their plans.
Here are five key areas to watch as the election unfolds and what to do to set yourself up for success — no matter who wins.
1. Prepare for changes to Social Security
Social Security provides a substantial portion of income for America’s retirees, but with the program’s trust fund running low, analysts expect that benefits could be cut as soon as 2033 if the funding situation isn’t solved. The average check would be automatically cut by some 21%, according to NPR, leaving strapped retirees with even less to get by on.
“Whoever wins the presidency will set the tone for the future of Social Security,” says Ashton. Former President Donald Trump and Vice President Kamala Harris “have made contrasting statements about the program, but neither offers a clear long-term solution,” he says.
But regardless of what a new president wants, it is Congress that would ultimately make any funding changes. Some senators have discussed raising the full retirement age, cutting benefits or eliminating the annual cost of living increase, which helps Social Security’s payments keep up with inflation.
“If one party gains a majority, their priorities for addressing solvency — whether through tax increases, benefit adjustments, or structural reforms — may take center stage,” says Ashton.
But changes to Social Security may not be on the horizon for the upcoming Congress, say some advisers.
“Congress will most likely balk their way through the session, pushing the exhaustion of the trust fund until next year’s list of issues,” says Michael Primavera, retirement planning adviser at Daniel A. White & Associates in Lewes, Delaware.
If Congress fails to act soon, it would make lower-cost solutions even harder to implement, a fact that plays into the hands of those who would prefer to cut benefits on retirees. The longer Congress delays, the less palatable the solutions will become and the more likely that retirees will suffer a reduced benefit of some kind, whether that’s a lower overall lifetime benefit or immediate cuts.
What you can do: Save and invest more toward your own retirement. With potential benefit reductions on the horizon, soon-to-be retirees should consider financial moves that allow them to fund more of their own retirement. This could include saving and investing more and having a higher allocation for growth assets during retirement. With eight or nine years until a potential cut, you can make substantial changes now to help bolster your finances in the future.
2. Adjust for potential changes to income tax rates
Some advisers think 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 set to expire at the end of 2025. Congress must act to renew it or the tax regime will revert to where it was in 2017 and earlier. Both candidates have made a variety of proposals to adjust the tax system.
Harris has proposed raising the top tax rate from 37% to 39.6%. However, she has said she would not raise taxes on households earning $400,000 or less. Harris has also proposed a minimum 25% tax on households with more than $100 million in assets and higher long-term capital gains taxes on those earning more than $1 million, with the top rate moving from 20% to 28%. Additionally, she has proposed raising the corporate tax rate.
Trump has said he would extend the current tax provisions following the 2025 deadline, lower corporate tax rates and raise the $10,000 cap on state and local tax deductions. He has also proposed eliminating taxes on Social Security and implementing an across-the-board tariff of 10% on all imports, a move that tax experts say could shrink the economy and grow the debt.
“Whether the Trump tax cuts remain intact, are modified or ‘sunset’ altogether, it is important to know where you are in terms of expected income and which tax bracket you fall into,” says Primavera. Retirees have some control over their income — and therefore taxes — because they can adjust how much money comes out of their retirement accounts as income.
What you can do: Take tax planning seriously. If tax rates move higher, planning your taxes becomes more important. Smart planning can minimize the taxes you have to pay. “Remember, the big variable in retirement income is the amount you take from your qualified accounts (IRA, 401(k), etc.) and the required minimum distribution (RMD) that comes with it at age 73,” says Primavera.
3. Consider a Roth IRA conversion
A potential rise in tax rates in 2026 may mean that this year and next remain opportune times to take advantage of a Roth IRA conversion. With this strategy, you convert a traditional retirement plan such as an IRA or 401(k) into a Roth IRA, which offers a range of benefits.
“If you believe the Trump tax cuts are going to expire, why not take advantage of them while you still can? A Roth conversion is a great strategy in retirement planning,” says Primavera. “If you have a large IRA balance and have room in your current tax bracket for additional income, pay the taxes on the income now and reinvest into your Roth IRA, which can now grow and will not be taxed again.”
What you can do: Consider a Roth IRA conversion. Of course, it’s no guarantee what happens to the current tax rates, but retirement advisers have long advised clients to consider a Roth IRA conversion. The conversion can be especially beneficial if you have many years left in retirement, but advisers such as Primavera suggest that clients avoid bumping themselves into the next tax bracket when they convert. Even if tax rates don’t rise, this move could still make sense, but plan carefully.
4. Watch out for changes to estate taxes
“Regarding the Trump tax cuts that are expected to expire at the end of 2025, the biggest change would be the estate tax reduction,” says Steve Azoury, ChFC, owner of Azoury Financial in Troy, Michigan.
The current estate tax laws in 2024 allow Americans to give away $13.61 million without paying any estate taxes. Each individual gets the exemption, for a total of $27.22 million per couple gifting together. If the estate tax reverts to the prior system, this amount will drop to about $7 million per person, according to tax experts. Any money given above that threshold will be taxed at rates as high as 40%, and that’s not including other levies at the state level, such as inheritance taxes.
What you can do: Keep an eye out. You’ll have some time to see which way the wind is blowing on this issue, so it’s not a move that you need to make immediately. However, given the huge tax savings that come with gifting a large estate under the current system, it could make sense to speak with your financial adviser about your personal situation. “You may want to do your gifting now in order to preserve these deductions,” says Azoury.
5. Don’t abandon your long-term game plan
You might be tempted to abandon your investment and retirement plan if your preferred candidate doesn’t win. Don’t do it, experts say.
“Elections are always fun. Everyone has an opinion, but this should not change your retirement goals,” says Azoury. “These goals should be set based on your lifestyle, assets, income and what activities you plan to do in retirement.”
“The one thing I would refrain from doing with your nest egg is selling it all and going straight to cash,” says Primavera. If you need to reduce risk, do so methodically. “Instead of a knee-jerk reaction and pulling everything out of the market, reduce your market exposure with a periodic rebalancing of your portfolio to a more risk-averse strategy,” he says.
What you can do: Stick to the investment plan that meets your long-term needs, don’t sweat the short-term noise, and, above all, avoid costly, emotional reactions when investing. The economy and stock market have performed well under Republican and Democratic administrations, and in particular under both Trump and President Joe Biden, as shown in this Bankrate comparison.
Bottom line
It is vital for retirees to stay up to date on changes that affect them, particularly on the key areas that affect their income the most. It’s also key to make sensible, well-considered decisions that work in your long-term financial interest rather than making ill-advised and emotional decisions based on half-truths. Work with an experienced financial adviser to help you stick to a game plan that works for you and your family.
(Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making an investment decision. In addition, investors are advised that past investment product performance is no guarantee of future price appreciation.)
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