What the Next Election Year Will Do To Your Finances

With each election, there comes some uncertainty stemming from a potential change in party leadership, perspective and policy direction. These changes can be minimal or quite dramatic, especially if there are other factors in play, from global conflict to a recession.

As we approach the 2020 election year, I reached out to entrepreneurs, business leaders and financial experts who’ve experienced the past few elections and watched the economic conditions change in response. Here’s how the election could affect every aspect of your finances in 2020 — and beyond.

Last updated: Dec. 16, 2019

If history is any indication, 2020 should be a good year for the markets. According to the Stock Trader’s Almanac, the Dow Jones Industrial Average has climbed an average of 10.1% during election years if the sitting president is running for reelection, USA Today reported. This is because there’s typically less uncertainty when the current president has a chance of remaining in office.

If you’re an investor, this election year could be good for your wallet.

A Movato study found that the increases in home prices are typically lower during a presidential election year. Looking at historical data from the California Realtors Association, the study found that home prices increased an average of 6% in the year before an election and 5.3% the year after, but by only 4.5% during an election year.

An article in the British Journal of Political Science concluded that this could be due to a general feeling of uncertainty that makes would-be buyers wary of making a large purchase. That means that 2020 could potentially be a good year for buyers, but a bad year for sellers.

“When it comes to legislation, I expect there will be a lot of ‘sound and fury signifying nothing’ prior to the time that the 2020 elected candidates take office, which isn’t until the beginning of 2021,” said Bill Smith, managing director for CBIZ MHM’s National Tax Office.

Still, there might be some moves on both sides of the aisle to change tax laws in 2020, he said.

“On the Republican side, I wouldn’t be surprised if the president and Senate said they were going to introduce the 10% middle-class tax cut that President [Donald] Trump previously proposed before the 2018 elections,” Smith said. “However, knowing full well that all tax legislation has to originate in the House of Representatives, this would be an obvious electoral tactic. The Senate can propose a bill and send it to the House for consideration, but it will die a natural death there.

“On the flip side, the Democrats will have to wrestle with some of the higher-cost proposals that candidates have put forward,” he continued. “They are unlikely to do anything to scale back the tax cuts from the Tax Cuts and Jobs Act before the election. Ultimately, I don’t expect there will be any significant tax legislation passed.”

While the future may be uncertain, the current economy appears to be thriving.

“If we are considering the holiday season and record spending, I’d say consumer confidence is soaring, despite the uncertainty of an upcoming election year,” said Renee Johnson, editor-in-chief of Tech Report. “If anything, finances don’t yet seem affected by it because many consumers have reported raises and other financial benefits.”

Making the most of the current positive financial environment can help you to handle any downturns in the future. Think of it as the squirrel’s approach to the imminent arrival of winter.

It’s common to hunker down and play it safe in uncertain economic environments. However, some business leaders believe it’s the ideal time to seek out potential opportunities for greater gains.

“An election year always means new opportunities and changes that can lead to improvements related to taxes, incentives and more,” said John Occhipinti, CEO of NatureBox.

Even though the exact impact the election will have on finances once the elected president takes office in 2021 is unknown, many of today’s business leaders still believe it’s possible to be proactive during the election year. That means careful planning and being disciplined about spending and saving money.

“Markets tend to go through a roller coaster during an election year as sides are drawn and things become clearer about the main candidates,” said Jon Bradshaw, CTO of Appointment. “That means investments will continue to go up and down. I plan on continuing to save as much as possible and invest further to ride out the volatile swings.”

Chalmers Brown, CTO of Due, said that this election year looks to be particularly tumultuous.

“I have always seen finances take a slight hit during an election year due to the uncertainty around any changing of the guard,” he said. “This upcoming election may signal even more uncertainty and financial trauma due to issues around the Chinese tariffs, impeachment, and wide-ranging candidates and platforms. It’s important to stay calm and keep saving.”

Staying on track with your financial goals in 2020 will prevent you from being too affected by any possible swings in the economy.

“With careful planning, fiscal discipline and continual reinvestment, any changes that occur during an election year don’t have to negatively impact your finances,” said John Rampton, co-founder and CEO of Calendar.

The best way to be prepared for any changes that will take place during the next presidential term is to anticipate what they could be and react accordingly. Watch and listen to what candidates say and do, as well as how the media and financial advisors interpret these political platforms.

With so many presidential candidates currently in the mix, all with different visions for the future and policies they wish to enact, it’s impossible to predict exactly what the effects on your finances will be in 2021 and beyond. So we turned to a few experts to hear what they think could be some possible effects, depending on who ends up in the Oval Office.

Norm Champ, author of “Mastering Money,” believes 2021 will be a good year for the economy, especially if Trump is reelected.

“Generally, presidential election years are good years for the U.S. economy,” he said. “Incumbent administrations do everything they can to keep the economy strong. Thus, I’d expect current robust economic growth to continue unless there is an unexpected event. If job opportunities and some wage growth continue, this will be positive for people’s finances.”

However, not all experts agree that the results of the 2020 election will bring good news for the economy, as you’ll see in the following slides.

“If there is fear that Democrats will overspend, that is likely to raise interest rates, which dramatically impacts both the housing industry and small business loans,” Smith said. “The government already accepted a $1.5 trillion increase to the deficit under the [Tax Cuts and Jobs Act], so a recession caused by increased interest rates could have a meaningful impact on the average person’s financial situation — e.g., job loss, housing sales down, construction down, etc. But those suppositions are premised on the theory that the market will react negatively (fearfully or accurately, only time will tell) to a Democratic takeover and its presumptive correlation to increased taxes.”

Some experts think that this point of view is a bit dramatic, especially depending on who wins. In June 2019, Bloomberg reported that “a [Joe] Biden general election victory would be viewed as neutral for the stock market.”

As the nation’s debt continues to rise, taxes will have to increase, said Jason Ball, CFP and founder of Ball Comprehensive Planning.

“Taxes are going to have to go up — the question is [for] which group,” he said. “Democrats want to tax the very wealthy.”

It’s important to note that some think this strategy of taxing the wealthy will be ineffective. For example, the Foundation for Economic Education, a nonpolitical, nonprofit educational foundation, posits that a wealth tax “may provide an inconsequential amount of revenue to the federal government while simultaneously costing the IRS a significant amount of resources.”

“Right now, we’re likely in the lowest tax environment for business owners and investors in our lifetimes; therefore, if a Democrat is elected, they are likely to propose bills that will increase our tax rates and reduce business profits,” said Kelly Crane, president and chief investment officer at Napa Valley Wealth Management. “Investors and business owners should spend time adjusting their financial plans to reduce their tax liabilities now and going forward.”

The Tax Foundation is aligned with Crane, stating that a “corporate income tax limits capital formation, which discourages growth in productivity, output, employment and wages.” But there’s a vast gap between different Democratic candidates’ proposed corporate tax hikes. Sen. Amy Klobuchar has proposed raising the rate to 25%; Biden has proposed raising it to 28%; and Pete Buttigieg, Sens. Elizabeth Warren and Bernie Sanders have proposed raising the rate back to the pre-reform level of 35%.

“The Republican strategy is to have the extremely wealthy pay a lower tax rate than the average worker,” Ball said. “[This strategy is based on] the ‘horse and sparrow theory,’ rebranded as the ‘trickle-down theory.’ The average family would most likely see their share of the tax burden go up while the extremely wealthy [would see] their income taxes go down.”

This might not actually be the case, however. Trump’s top economic advisor told CNBC that the president would be proposing more tax cuts going into the reelection, with the Washington Post reporting that Trump is expected to suggest a 15% middle-class tax rate.

If income taxes increase, the amount of taxes Americans would have to pay when taking out money from tax-deferred accounts such as 401(k) plans and traditional IRAs would go up. Fortunately, there is a workaround, said Matt Hylland, a partner and financial advisor at Arnold and Mote Wealth Management in Cedar Rapids, Iowa.

“One way to hedge against rising future tax rates is to perform Roth conversions,” he said. “We find Roth conversions beneficial for many clients today, and that benefit rises if you assume higher future tax rates. Since Roth conversions involve paying taxes now instead of later, as you would do with a 401(k) or traditional IRA, performing Roth conversions effectively locks in today’s tax rates.”

“In the event that the Democratic party gains control of the Senate, the House of Representatives and the White House in the next election, we would expect a very aggressive agenda regarding retirement savings,” said Chad Parks, founder and CEO of Ubiquity Retirement + Savings. “This agenda could include a mandated retirement savings plan at the federal level.”

Although this could help more people gain access to retirement accounts, it’s unclear how effective a federally-mandated retirement savings plan would be based on the implementation of this type of plan on the state level. California is the most recent state to start a retirement savings program, making it one of 10 states to offer state-run plans, according to CNBC. Oregon, which began its pilot program in 2017, was one of the first. An analysis of the OregonSaves program performed by research firm Cerulli Associates found that although the plan had 50,000 participants, the average balance in state-run 401(k) plans was less than $500. The report concluded that “mandated state-sponsored retirement plans can succeed in gathering participant accounts, but asset growth will be gradual.”

“If the Republican party maintains control of the White House in the next election, there will likely be mild enhancements surrounding saving limits,” Parks said. “These adjustments to retirement savings rules would also prove to benefit savers given that Republican sentiment is favorable toward retirement saving.”

Even if this is the case, there is likely more that will need to be done to ensure Americans can retire comfortably. CNBC reports that the current Congress has made several “positive” attempts to restructure retirement savings in America, but has yet to “address some key areas contributing to the retirement crisis, including looming shortfalls to Social Security and rising health costs. Not to mention other issues that crop up as people are living longer lives.”

Some experts believe that if Sanders or Warren pass their proposed universal healthcare plan, this would save the American people money in the long run, on average.

“The reason it’s ‘on average’ is because offering benefits to everyone means that everyone can go to the doctor,” said Chane Steiner, CEO of Crediful. “This means [everyone would be covered for] regular checkups, and [this would increase the likeliness of] catching illnesses or problems early on. By catching things early, the treatments will likely be cheaper and the long-term effects of the illness won’t result in further, more expensive doctor’s visits. That being said, there are people who will go in to see the doctor even if they don’t need to. These people will cost the system resources that must inevitably come from the wallets of tax-payers.”

It’s hard to determine whether something like “Medicare for All” would actually save Americans billions or trillions of dollars because it’s so different from our current healthcare system. For those who are seriously ill and have high costs for health insurance and prescriptions, a universal healthcare plan could be a big cost-saver, CNBC reported. However, it would likely increase indirect healthcare costs for many Americans, with taxes anticipated to rise to fund state and federal healthcare programs.

Although universal healthcare could raise taxes, some experts believe that it could greatly benefit small-business owners who would no longer have to foot the bill for their employees’ insurance, as it would now be funded by the government.

“It really makes no sense for your employer to be managing your insurance plan,” Ball said. “It would be great to see small businesses no longer have to deal with this and focus their energy on growing their business. This would be one of Warren’s or [Sanders’] key points, and it would be a big win [for small business owners].”

“We don’t know who will win the election, but we do know that unless Washington acts, millions of Americans will continue to be saddled by student loan debt that is preventing them from reaching financial goals like buying a house, starting a business or retiring,” said Andrew Housser, co-CEO of Freedom Financial Network.

Lessening or eliminating student loan debt could help many Americans reach their financial goals faster — though it could saddle the nation with a $1.6 trillion burden. Warren, who has proposed forgiving up to $50,000 in student loan debt for individuals with a household income of under $100,000, said she would pay for this by increasing taxes on the wealthy, NPR reported. Sanders wants to eliminate all student loan debt and said he will pay for this with a “Wall Street speculation tax” that would tax stock, bond and derivative trades.

The possible repercussions of eliminating student loan debt are wide-ranging — and not all are positive. A 2018 study by Bard College’s Levy Economics Institute concluded that eliminating student loan debt would stimulate the economy and improve employment rates, but a 2015 study conducted by Democratic think-tank Demos concluded that eliminating student debt for all households would increase the racial wealth gap.

Sanders and Warren both support tuition-free public two-year and four-year colleges. This could save college students — and their families — thousands of dollars and prevent them from having to take on student loan debt. It could also enable people to attend college who wouldn’t be able to afford to do so otherwise.

As the Los Angeles Times recently pointed out, however, “a lot of the plans being rolled out … are focusing on students on the higher end of the economic spectrum, who are not facing the most dire circumstances.” The Times noted that free education won’t solve the problems of those who are simply struggling to pay living costs.

Many employees must take unpaid time off to care for a newborn, but candidates like Sanders, Tom Steyer and Andrew Yang support increasing paid family leave.

“This is something that I believe would be a huge win for families with newborns,” Ball said.

Conservative think tank The Heritage Foundation points out that paid family leave only saves money for parents to a certain degree, however, given trade-offs like “higher taxes or deficits, lower pay, reduced benefits, less spending on other federal programs, and fewer promotions, especially for women.”

Although we don’t yet know who will be president, the same best practices will still stand when it comes to your personal finances.

“All of the candidates — including the incumbent president — are pushing their own ideas on job creation, healthcare, higher education and tax policy, but what will provide the best financial stability for Americans is to ensure that they are following basic rules of personal finance,” said David Kilby, president and founder of FinFit. “This includes budgeting within your means, paying off debt quickly, building an emergency fund and ensuring you’re saving for retirement.”

More From GOBankingRates

• What Is a Roth 401(k)? See If This Plan Is Right for You
• 5 Best Investment Apps: Commission-Free Trading and More
• Best Money Market Accounts of 2020
• Retirees Confess What They Wish They’d Done With Their Money

Gabrielle Olya contributed to the reporting for this article.