In times of great change, it is only natural for people to wonder and worry. Without perspective, it morphs into wondering and worrisome-driven decisions or indecision. A general election surfaces this quandary every four years, but even more so this year as we head into what appears to be the most contentious election in modern history.
Even still, today’s candidates aren’t dueling like Alexander Hamilton and Aaron Burr did in 1804. Most articles and commentaries about the financial impact of an election year are focused on investment returns. Predictions are being made based on history — the months and quarters that are most likely to be positive and negative, as well as the likelihood of a positive market. Some are showing likely upsides and downsides based on which party is elected in each branch of government.
As usual, the financial media has investors focused on investment returns. And in the process, they are implying that the ups and downs of a volatile year in the market can be timed to the benefit of the investor, in spite of the overwhelming evidence that shows market-timing produces lackluster returns compared to simply staying invested.
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So, what is an investor nearing or in retirement to do?
- Expect volatility
- Don’t fall prey to the emotional whipsaw of the financial media
- Recognize other forces at play beyond the elections
Simply looking at returns based on it being a general election year is overly simplistic. Keeping it simple, stupid, as the saying goes, is good, but overly simplistic can lead to misguided decisions and conclusions.
The economy and markets are still responding to the highest inflation numbers since 1981. Interest rates have risen faster than any period in our modern history. The U.S. is also involved in at least two wars, depending on how you count the U.S. military engagement at the border and abroad. U.S. debt by household is as high as it’s been in decades.
The tax impact: A history lesson
Weighing even more than all these factors is this: The government spends way more than it brings in with taxes. It is now spending more on interest on debt than it is on national defense. When the government is spending too much, it can either spend less money or make more. As Ronald Reagan said, “To say the government spends like drunken sailors is an insult to drunken sailors.”
So what do they do when they need to raise revenues? Increase taxes and reduce deductions. The lie is this is only on “the rich.” This approach to increasing taxes — introduce a tax “targeted at the rich,” then after it gains acceptance, roll it out on the masses — has a long history. The federal income tax — made possible in 1913 with ratification of the 16th Amendment — was originally introduced as a way to make the wealthy pay their fair share.
When the income tax was first enacted, the top tax rate was only 7% and affected only 1% of workers, which would be the equivalent today of people making in the ballpark of $15 million. And there were seven simple brackets. But it took only three short years for the top rate to jump to 67% in 1917 with 21 brackets. Then it leaped to 77% in 1918 with 56 brackets, with even the first of every dollar taxed at 6%.
Today’s politicians are much more sneaky, with both parties of career politicians doing it. In a speech at the 1988 Republican National Convention, when he accepted the party’s presidential nomination, George H.W. Bush said, “Read my lips: no new taxes.” Yet, the very next year, he signed a bill that increased taxes.
In 1982, after reducing the top income tax rate from 70% to 50%, Reagan joined Republicans and Democrats alike, making Social Security taxable just two years later. But at that time, only up to 50% was taxable. Now it’s up to 85%.
Expect tax increases. In the near term, maybe tax increases aren’t significant, but in the longer term, they will be attacking retirement accounts, Social Security, Medicare premiums and capital gains.
If you have at least $500,000 or more, and your retirement requires $100,000 a year to maintain your lifestyle, $65,000 to $80,000 of your retirement is under attack. The good news is that there is a preferential tax code now. Investment assets are back at all-time highs, and inflation has been tamed somewhat for the moment.
Here are some tips for the election year
- Now’s the time to make tax minimization moves on your retirement money while tax rates are at all-time lows
- Insulate your investments from market crashes, before they come, whether it happens this year or a later year
- Set up retirement income layers that are protected from economic and market volatility so your lifestyle doesn’t go on a stock market roller coaster ride
- And certainly don’t wait in the hopes the market will be higher just before or after the election in November, or that your chosen party will all of a sudden start lowering taxes to benefit you
You can’t control the election outcomes or what the market may or may not do. But you can build your own retirement economy and your own desired market experience that revolves around your lifestyle and what you want.
Dan Dunkin contributed to this article.
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