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Workers planning to punch the clock for the last time during 2017 might need to curb their enthusiasm, or at least curtail retirement travel plans. America faces an uncertain political and economic environment. Dramatic changes in everything from interest rates to healthcare costs could be just over the horizon.
Indeed, many financial planners are advising clients to put portfolios, savings strategies and tax planning under a microscope as 2016 comes to a close. Here are 15 ways financial planners said retirement might change — and some ways it is certain to change — in the new year. Learn what you can do to protect your portfolio and pocketbook in the face of these retirement changes.
1. Interest and Mortgage Rates Might Rise
The Federal Reserve hasn’t raised rates yet this year, leaving them in a range between 0.25 percent and 0.5 percent. However, the central bank has signaled it is likely to increase the benchmark federal funds rate in December. Some experts have said President-elect Donald Trump’s economic policy team will favor an even more aggressive approach to raising interest rates in an effort to squelch any hint of robust inflation.
“What that means is that interest rates will go up for mortgages, for one,” said Don Chamberlin, president and CEO of The Chamberlin Group, a tax and wealth advisory firm in St. Louis. “So, if someone who is retiring is thinking about refinancing their mortgage to have a lower payment throughout their retirement, they may need to do that sooner rather than later.”
2. CDs Might Gain Ground
Rising interest rates could offer some savers a boost. Certificates of deposit insured by the Federal Deposit Insurance Corp. have long been considered one of the safest investments, especially for retirees who want to limit their risk.
If the Federal Reserve boosts the federal funds rate, certificates of deposit will reap higher returns. Over the long term, that could lead some conservative investors to opt for CDs over stocks and other options that weren’t very attractive when interest rates were low.
“People may be putting more money into those types of asset classes and that could eventually affect the stock market in that the market may not be as attractive a place to put money if we have higher rates for CDs,” Chamberlin said.
3. Bond Values Might Take a Hit
Interest rate increases have a more immediate impact on bonds. A bond is essentially a loan that the bond's buyer makes to the bond's issuer. The issuer pays the bond's purchaser interest at a so-called coupon rate that is fixed when the investor buys the bond.
Since coupon rates for most bonds are close to the prevailing market interest rate, bonds purchased and issued in a low-interest-rate environment reap lower returns than bonds bought when interest rates are higher.
Bondholders who want to sell existing bonds issued at lower coupon rates have to dump them at a discount to make the bonds appealing to consumers who can otherwise simply buy newly issued bonds with a higher coupon rate.
“There’s an inverse relationship between rates and the price of bonds. In other words, when interest rates go up, the value of (existing) bonds goes down,” Chamberlin said. “Everybody’s known that, at some point, interest rates had to go up." With the new administration about to take office, "it’s time to be even more cautious” when choosing investment options potentially affected by rising rates, he said.
4. Lower Returns Likely for REITs
Rising interest rates can affect real estate investment trusts as well, according to H. Brian Adcock, president at Adcock Financial Group in Tampa, Fla. He has advised clients to take a close look at the income-generating investments in their portfolios, including REITs.
“Ringing in the new year may come with some additional focus on where retirees will get their income," Adcock said. "Some retirees have been able to harvest the benefit and income provided by many publicly traded REITs." But with interest rates on the rise, REITs will face headwinds and might struggle to repeat the returns they have reaped in recent years, he said.
5. Some Mutual Fund Risks Could Grow
Retirees and those approaching the end of work might also want to consider shifting holdings out of some types of mutual funds. Several factors can adversely affect returns in such funds, including the mutual fund manager’s investment decisions, and divestments by other investors in the fund.
"Bond and REITs mutual funds will come with other risk outside of rising rates,” Adcock said.
Adcock said retirees must pay attention not only the type of income-producing investment they select, but also the vehicle they use to hold that investment. So, for example, it might make sense to purchase bonds directly rather than through a mutual fund.
“Investors may consider holding bonds directly where pricing will still go up or down, but the income will be more reliable and they know the maturity and risk of their holdings," Adcock said.
6. Access to IRAs Will Be Easier
Several states are in the process of setting up retirement savings programs for workers who don’t have access to plans through their employers. Some state programs, often called Secure Choice plans, require business owners who don’t offer a workplace retirement savings plan to enroll employees in an individual retirement account. Others make enrollment optional.
Regardless of the specifics, such plans will make it easier for millions of workers to set savings aside for retirement, said Kate Crowther, director of government relations for Ubiquity Retirement + Savings, a flat-fee, Web-based retirement plan and benefits provider.
“These programs, and the legislation creating them, are critical because 75 percent of uncovered workers will not seek to save on their own,” she said. “Given the new environment, we will see financial institutions expand their product offerings to capture a segment of this market."
7. Tax Cuts Probably Are Coming
Trump’s proposed tax plan would cut the average tax bill in 2017 by $2,940, or 4.1 percent of after-tax income, according to an analysis by the Tax Policy Center. The specifics vary significantly depending on income levels, however.
For example, the top 0.1 percent of earners would see an average tax cut of nearly $1.1 million, more than 14 percent of after-tax income. Meanwhile, the poorest households would see taxes go down an average of $110, or 0.8 percent of their after-tax income.
If those cuts come to fruition, it might make sense for some eligible retirees to convert traditional IRAs to Roth IRAs. That is true even though they would pay income tax on the contributions built up in the traditional IRA when they convert.
With traditional IRAs, savers get a tax break when they make contributions, but must pay income taxes on withdrawals made after they retire. By contrast, both investment growth and withdrawals are tax-free for Roth IRAs.
“So paying taxes at a lower tax rate in 2017, ‘18 or ‘19 may be a good way to kind of lock in the taxes at an (attractive) rate and never have to worry about taxes again on that,” said Jason Silverberg, vice president of financial planning at Financial Advantage Associates in Rockville, Md.
8. You Might Get a Higher Standard Deduction
Trump’s tax plan also calls for an increase in the standard deduction, to $30,000 for married couples filing jointly — compared with $12,600 currently. Single filers would see their standard deduction jump from $6,300 to $15,000.
“So if your standard deduction is actually higher than your itemized deductions, you’re going to want to take your standard deduction,” said Silverberg, author of the forthcoming book “The Financial Planning Puzzle."
A higher standard deduction could have several implications, depending on a retiree's specific circumstances. For example, if you have been considering selling your home and downsizing to an apartment or other rental, giving up the mortgage interest deduction might not seem like such a sacrifice under a tax plan with higher standard deductions.
9. Investment Advisors Will Face New Rules
New rules regulating the investment-advice industry are set to take effect in April, although Trump’s election has cast some doubt on the fate of the U.S. Department of Labor’s so-called “fiduciary rule.” The rule requires investment brokers and advisors to put the best interest of their customers first when offering retirement investment guidance.
Put simply, the rule's goal is to eliminate conflicts of interest for brokers and advisors who might receive higher commissions and other incentives for certain products they sell. Investors — especially those planning for retirement in the near future — should keep this rule on their radar as Trump settles into office.
10. Healthcare Costs Will Rise
For current clients, Silverberg typically budgets $1,000 to $1,200 a month for Medicare and Medigap health insurance premiums, deductibles and other out-of-pocket costs. Those allocations are on the generous side, in part because of the trend toward higher healthcare costs.
“Whether it’s through the Affordable Care Act or some other program, it doesn’t matter — healthcare costs are going up,” he said. “What I do know is that there is a lot of uncertainty there, and it’s better to err on the side of caution.”
11. Inflation Will Become More Likely
Inflation is often seen as a dirty word, especially for retirees who aren’t bringing home annual salaries and regular raises. But some inflation can help stimulate the economy.
For example, companies that are able to charge higher prices for goods and services might raise wages or hire additional employees. While lower unemployment and rising wages might not impact retirees directly, they do mean working people are contributing to local, state and federal tax revenues — a positive for retirees using roads, libraries and other tax-supported services.
“Inflation isn’t necessarily a bad thing,” Silverberg said. “It just means you have to understand how to keep up with it.”
He advises clients to consider keeping some blue-chip stocks in their portfolio rather than relying on CDs and other investment options that might not outpace inflation, especially after taxes are taken into account.
“If you buy safe, blue-chip stocks, you can collect the dividends and have a little bit of inflation protection," he said. He added that "over the long run, a stock portfolio will go up.”
12. Social Security Benefits Will Rise Modestly
Inflation remains low in the U.S. As a result, the federal government has settled on just a tiny cost-of-living adjustment of 0.3 percent for Social Security benefits in 2017. This change is expected to increase the average Social Security check by $5, to $1,360. The Social Security Administration projects retired couples will get $2,260 per month in 2017 on average, up from $2,254 in 2016.
13. More Income Will Be Subject to Social Security Taxes
The cap on earnings subject to Social Security taxes will increase from $118,500 in 2016 to $127,200 in 2017. Employees typically contribute 6.2 percent of their income up to that cap, with companies contributing a matching amount into the Social Security system.
While this change won’t have much impact on people who plan to retire at the dawn of 2017, it will affect some who retire later in the year — increasing both their contributions and, possibly, their retirement payments.
14. Social Security’s Future Will Remain Murky
The Social Security trust fund balance will reach zero around 2034, according to the Social Security and Medicare boards of trustees' most-recent annual report. That means by 2034, the system will only bring in enough revenue to cover 79 percent of the benefits it has promised.
Although nothing has been set in stone, lawmakers could reform the system in several ways, including increasing Social Security taxes or raising the retirement age. Such uncertainty leaves those planning for retirement — regardless of their age — with some question marks in their financial planning.
“At some point, Social Security needs to be changed. We know that,” Silverberg said. “I think people have a lot of fears about Social Security and what it’s going to look like.”
15. Uncertainty Will Increase
Don't let uncertainty create fears that keep you from relishing retirement. Just make sure you have a well-vetted plan.
“I think the takeaway here is that a retiree should really seek out professional guidance,” Silverberg said. “You want to stress-test your financial plan to manage the risks that you may not see. To have someone help you through that is worth the fees you would have to pay because, now, you can sleep at night.”