Three issues to watch with your financial plan in mind

Election years bring a unique blend of excitement and anxiety. The air is thick with questions: Which candidate will win the election? What policies will shape our future? Where is the economy headed? These are common questions that swirl in the minds of many as the election approaches. At Badgley Phelps, we aim to ease these concerns by offering sound financial advice that withstands the test of an election cycle and improves your financial health on the other side. Here are three presidential platform issues to watch with your financial plan in mind, some strategies for navigating possible changes effectively, and several insights on investing during an election year.

Key presidential platform issues impacting financial planning in 2024

1. Understanding Social Security policies is essential for your financial planning

   Social Security is perpetually a hot-button issue, particularly during election years. According to current projections, the reserve funds of the Old-Age and Survivors Insurance (OAS) and Disability Insurance (DI) are expected to be fully depleted by 2035, which is a year later than previous estimates. This looming depletion raises significant concerns about the future of Social Security benefits. It is crucial to understand each candidate's stance on Social Security during an election year, as their policies could directly impact the benefits millions of Americans rely on. With the potential for reduced benefits in the near future, it is vital to stay informed and prepared for any changes that may come.

   Planning for potential changes is key to any financial plan. We can work with our clients to adapt or change the assumptions within their plan, specifically if they want to plan for a life with limited or no social security benefits.

2. Navigating the complexities of taxes: What you need to know for financial planning

   The Tax Cuts and Jobs Act of 2017 is set to expire at the end of 2025, leading to a reversion of income and estate tax brackets to their pre-2017 levels. This shift will reintroduce higher marginal tax rates and lower estate tax thresholds, signaling significant changes in the current tax system. While the exact impacts will become clearer only after the election, it's prudent to start planning for these anticipated changes now.

   Income taxes: The upcoming adjustment offers a strategic opportunity to benefit from the current lower tax brackets. One effective approach is the Roth Conversion, which involves converting a traditional IRA into a Roth IRA at a potentially lower tax rate before the tax brackets increase.

   Estate taxes: The federal estate tax exemption is currently set at $13.61 million per individual but is expected to decrease to around $7 million. For those with estates exceeding the current exemption, it may be wise to consider gifting assets while still alive. This proactive strategy can help reduce future estate tax liabilities. Engaging with an estate planning attorney can ensure your estate is efficiently structured and compliant with evolving regulations. For more insights on estate taxes, read our detailed article here.

   Federal deficit: The federal deficit will likely play a major role in the upcoming election, influencing fiscal policies that affect the broader economy and individual finances. Candidates' proposed solutions for managing the deficit—whether through tax increases, spending cuts, or borrowing—reveal their economic priorities and can affect income and estate taxes, as well as funding for crucial programs like Social Security and healthcare. As voters evaluate candidates' positions on the deficit, they will consider the potential impacts on their personal finances and the nation's economic stability, making this a key issue in determining the election's outcome.

3. Understanding candidates’ healthcare policies

   Another crucial topic during an election cycle is healthcare. Candidates' proposed policies can significantly affect healthcare costs, insurance coverage, and access to medical services. For example, the Affordable Care Act (ACA) of 2010 expanded insurance access through Medicaid and health insurance exchanges, leading to greater coverage for many but also resulting in higher premiums for some individuals depending on their health needs and income. Additionally, the repeal of the ACA's individual mandate in 2017 led to a decrease in insured individuals, which could impact financial stability and healthcare affordability for those who previously felt obligated to carry insurance.

   Another key change was the introduction of Medicare Part D in 2006, which provided prescription drug coverage for Medicare beneficiaries. This significantly reduced out-of-pocket costs for many seniors but introduced a complex array of plan options and varying levels of coverage. Understanding each candidate’s healthcare proposals is essential for preparing for potential shifts in medical expenses and ensuring that you maintain adequate coverage. By staying informed, you can better anticipate how policy changes might impact your financial situation and take proactive steps to address them.

Insights on investing during an election year

The stock market's performance during an election year is often unpredictable. Since 1950, election years have historically been the most volatile year for the S&P 500 in a four-year election cycle but have provided one of the better average returns at 9.1% per year. (Source: Fidelity)

Data source: Haver, FactSet, FMR via Fidelity, as of November 14, 2023.

Fidelity research also shows that historical data over the last 90 years reveals no clear pattern in political party and the impact on market returns on an annual basis. Interestingly, regardless of the president's party affiliation, a divided Congress has historically yielded the best annual returns since 1933. This suggests that the markets are fundamentally non-partisan. As such, it is important to maintain a long-term investment perspective and not let the volatility of an election year influence your investment decisions. A robust financial plan that guides your asset allocation is crucial, especially in times of uncertainty.

Data source: Strategas Research Partners, via Fidelity, as of November 5, 2023.

Read Badgley Phelps’ 2024 third-quarter Outlook.

Conclusion

Retirement planning is a critical area to focus on during an election cycle. Changes in tax laws, Social Security, and healthcare can all affect your retirement plans. It is important to review your retirement strategy considering potential policy changes and adjust your savings and investment plans accordingly. Consider working with a wealth manager to evaluate your retirement goals and ensure that you are on track to achieve them, regardless of the election's outcome.

Election years are characterized by uncertainty and change. However, by staying informed and proactive, you can navigate these changes effectively and secure your financial future. At Badgley Phelps, we are committed to providing you with the guidance and support you need to make informed financial decisions during this time. Whether it is understanding the implications of Social Security policies, preparing for changes in tax laws, or managing your investments wisely, we are here to help you every step of the way. Remember, a well-structured financial plan is your best defense against the uncertainties of an election cycle.

Originally posted on August 19, 2024