Flip on the TV, and it’s campaign ads left and right. The election season is in full swing. Michigan is more than ever a key battleground state in the race for the White House. Hearing about the policies of Joe Biden and President Trump can make you stop and think about what might happen to your savings and retirement assets. And that can be stressful!

Let’s take a moment to objectively analyze what you should do (or not do) in advance of and after the big day on November 3.

1) Try not to stress out much. In today’s crazy political world with 24/7 cable news and social media, everyone has an opinion to voice to the world. Many of them are alarming and unhelpful. So as best you can, try to ignore all of that noise when it comes to your finances. We are not saying that issues don’t matter; they certainly do, but changing around your investment portfolio based on a political issue or opinion is dangerous.

Next, we can analyze data to find out how the markets have actually performed under various political party regimes. The results may surprise you. If I asked you whether the stock market fairs better under a Democratic or Republican President, what would do you say? Well, it wouldn’t matter, because the stock market has done rather well under either party in the last 100+ years and the last 50 years.

How about market performances depending on how Congress is split? The funny thing about the stock market is that it prefers that nothing ever ‘gets done’ in D.C.! The S&P 500 does best under a divided Congress when the Democrats control one house and the Republicans hold the other.

Here’s the point on this subject – it will not be the end of this country or the world if one candidate or another wins or loses. Life and financial markets always go on. Think about the 20th century – the stock market dealt with world wars, pandemics, famines, depressions, high inflation at times, impeachments, etc. – and stocks and bonds performed well.

2) There could be a few wrenches thrown in. It’s important to know that while a single election does not impact your long-term financial plan much, individual events and even some new policies can be cause for re-evaluation. For example, if there is a new tax law that disallows a strategy we have been using, then we have to change course a little bit. If you own a small business, and the rules change regarding employee health care or retirement savings plans – we need to address those situations. So it’s not like we are saying to simply ignore everything. Elections matter, and what actually gets done legislatively are things we pay attention to.

It’s not just at the national level. Perhaps the state of Michigan changes college savings rules. Or Medicaid programs. Or even the state income tax. These are all important policies of which we stay on top of.

3) Change is usually slow. It’s rare that major tax laws or policies affecting your retirement plan happen quickly. These ‘acts of Congress’ (literally) happen over time, not overnight. So don’t be concerned that you will wake up one morning to see that your income tax rate went from 25% to 50% – that will never happen. Congress signals to the American people when significant laws will happen.

• For example, the Tax Cuts and Jobs Act of 2017 was touted for months and months in advance of the year-end signing into low. What’s ironic is that the stock market went up all during 2017 anticipating the lower rates in 2018 and beyond. Then 2018 came about, and the stock market struggled. Markets figured a tax overhaul was on the horizon, but vast policy changes like that require multiple stages of approval and a lot of back and forth before anything is signed into law.

4) The elephant in the room – our nation’s debt. I just checked the national debt clock – roughly $27 trillion & it just keeps going up. The prospects seem grim no matter who wins the presidency. But here’s the thing – interest rates are at all-time lows. The interest burden we face is quite small in comparison. Sure rates could go up, but the market is currently pricing in rather low-interest rates for decades to come. So the debt should not be something to lose sleep over. You should be concerned about your health, how your kids are doing in school – not so much what your share of our country’s debt is.

5) Prepare for change. As you know, there has been a heck of a lot of stimulus thrown into our economy since 2008 – particularly just since March. And there may be more on the way ahead of November. More debt only increases the need to pay it down at some point in the future. If Joe Biden wins, maybe higher taxes are in the cards for the wealthy – which includes potential tax hikes on estates and capital gains. A Democratic-controlled government could even suggest a national sales tax similar to what parts of Europe have going on. If Donald Trump is re-elected, expect more pressure on China, and changes to trade policy. 

What can we do? Maybe “what SHOULD we do?” is the more apt question. Here are a few things to consider to reduce uncertainty for YOUR long-term financial plan.

1. Do nothing. As the old Oscar Wilde saying goes, “To do nothing at all is the most difficult thing in the world, the most difficult and the most intellectual.” We don’t kick-up our heels and never act when things change, but we also don’t want to make decisions based on stress, political pundits, and a crystal ball. At TFC, we work with you to make data-driven, rational moves to optimize your long-term financial plan. At the right time, we work with you to tweak the route based on the new rules of the road.
2. Ok, we can do something – the Roth Conversion. It’s a great time to consider a Roth Conversion. With a Roth Conversion, you move pre-tax investments (like a 401(k) or Traditional IRA) to post-tax accounts (like a Roth 401(k) or Roth IRA). This strategy is all about locking-in today’s tax rates. The risk we are mitigating here is higher tax rates later on. Roth Conversions are particularly beneficial during your years of low income – so it depends not only on the tax policy but also on YOUR situation.
3. Tax gain or loss harvesting. Once again, this strategy is highly dependent on you, not just the outcome of the election. If you have big unrealized gains in a taxable investment account and are concerned that your capital gains rate could go up in the future, you could sell it, and lock-in today’s relatively favorable tax policy. On the flip side, if you’ve had a good income year, consider selling one of your loser-investments to capture the $3,000 capital loss deduction. Going forward, if there are different tax rules, the Roth Conversion and Capital Gain/Loss Harvesting could become more important tactics.
4. Asset location. You might not be as familiar with this strategy. Asset location involves placing investments with higher dividend yields in tax-sheltered accounts. If tax rates increase, then we don’t want our dividends and interest to be very high, lest we face a bigger bill to Uncle Sam. For some individuals though, with bond yield so darn low, it could make sense to put assets expected to grow more (like certain equity investments) in tax-sheltered accounts and leave low-yielding bond funds in a taxable account. Once again, YOUR situation matters a lot here. You may be noticing a theme!

Here’s the point

• Elections matter, but it’s important to cut through the punditry and rhetoric. We should focus on your long-term financial plan more than election outcomes. While policies set forth by our good friends in Washington D.C. matter, changes in your life are usually more important.
• A single election won’t impact your long-term investment strategy and retirement plan
• We will be mindful of possible legislative changes such as the threat of higher taxes; we outlined several actionable steps to take to reduce the risk.
• Be aware of what is happening at the state and local level. If you own a business, one seemingly small change in policy can matter more than who wins the White House.

Action items

• Let’s sit down to talk about your concerns regarding the risks surrounding the election. While you might cognitively understand that your long-term plan is in good shape, it is natural to get antsy during this time.
• Consider strategies like the Roth Conversion, capital gain/loss harvesting, methods to reduce your estate tax liability, and asset location. This is our wheelhouse – let us work with you to ensure you are set up for success no matter the outcome on November 3.
• It’s also a great opportunity to just review your long-term plan to make sure everything is on track. Life changes all the time, so just like periodically checking your smoke detectors, it’s a good idea to check on your financial plan.

Feature Image: Photo by cottonbro from Pexels