Understanding Legislative Risk: What It Means for Your Retirement


May 31, 2024

Understanding Legislative Risk: What It Means for Your Retirement

May 31, 2024

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Did you know that legislative changes can drastically alter the landscape of your retirement plans? When laws and regulations shift, the ripple effects can impact everything from Social Security benefits and tax liabilities to healthcare costs and investment opportunities. This is what we refer to as legislative risk—the potential for changes in legislation to significantly affect your financial plans. 

Legislative risk matters because it can directly influence your financial security in retirement. Changes in Social Security can reduce expected benefits, tax law modifications can affect how much of your retirement savings you get to keep, and new regulations can alter the viability of certain investments. By understanding and preparing for legislative risk, you can better protect your retirement savings and make sure you’re set up for a more stable financial future. 

 

What Is Legislative Risk? 

Legislative risk refers to the potential for changes in laws and regulations to impact financial plans and investments. This type of risk is particularly significant for retirees and those planning for retirement, as government policies can directly affect income sources, tax obligations, healthcare costs, and investment opportunities. Legislative risk encompasses a broad range of possible changes, including modifications to tax laws, Social Security benefits, pension regulations, and healthcare legislation. 

Historical Examples of Legislative Changes Impacting Retirement Plans 

  • Social Security Amendments (1983): One of the most significant changes to Social Security occurred in 1983 when Congress passed a series of amendments to address the program’s financial shortfall. These changes included gradually increasing the full retirement age from 65 to 67, taxing Social Security benefits for higher-income beneficiaries, and extending Social Security coverage to federal employees hired after 1983. 
  • Pension Protection Act (2006): This act was introduced to strengthen the funding of pension plans and improve the pension insurance system. It required companies to fully fund their pension plans over seven years and introduced new rules for the calculation of pension liabilities. 
  • Affordable Care Act (2010): The introduction of the ACA brought significant changes to healthcare for retirees, especially those under 65 who were not yet eligible for Medicare. It provided more options and protections for those buying health insurance on the individual market and expanded Medicaid in many states. However, it also introduced new taxes and fees that impacted investment income and higher-income retirees. 

Overview of Current Legislative Discussions or Pending Laws 

  • Secure Act 2.0: Building on the original Secure Act of 2019, Secure Act 2.0 proposes several changes aimed at enhancing retirement security. Key provisions include increasing the required minimum distribution (RMD) age from 72 to 73, allowing for higher catch-up contributions for individuals over 60, and expanding access to retirement plans for part-time workers.  
  • Social Security Reform Proposals: There are ongoing discussions in Congress about how to address the long-term solvency of Social Security. Proposals include raising the payroll tax cap, adjusting the benefit formula to reduce payouts for higher earners, and potentially increasing the retirement age.  
  • Healthcare Legislation: With the continuous evolution of healthcare policies, potential changes to Medicare and the Affordable Care Act are always on the horizon. Proposed changes might include adjustments to Medicare premiums, benefits, or eligibility criteria, all of which can affect retirees’ healthcare costs and access​. 

How Legislative Risk Can Impact Your Retirement 

Income Sources 

  • Social Security: Legislative changes to Social Security can significantly impact retirees’ income. For instance, adjustments to the cost-of-living adjustments (COLA), changes in the full retirement age, or modifications in the benefit calculation formula can reduce the amount of Social Security benefits retirees receive. Proposed reforms, such as increasing the payroll tax cap or changing benefit formulas, could also affect future retirees’ planning and savings strategies​. 
  • Pensions: Legislative reforms can influence the security and availability of pension plans. Changes in funding requirements, like those introduced in the Pension Protection Act of 2006, can lead to companies freezing or terminating their pension plans. Additionally, any new regulations aimed at pension fund management can affect the stability and reliability of these income sources for retirees​. 
  • Retirement Accounts: Legislative risk also encompasses changes to rules governing retirement accounts such as 401(k)s and IRAs. For example, changes to required minimum distribution (RMD) rules, contribution limits, or tax advantages can alter how retirees save and withdraw funds.  

Taxation 

Changes in tax laws can have a profound impact on retirement savings and withdrawals. Modifications to income tax rates, capital gains taxes, or the treatment of retirement account withdrawals can affect how much retirees owe in taxes. For example, increases in income tax rates can reduce the net income retirees receive from their taxable retirement accounts. Similarly, changes in the taxation of Social Security benefits or the introduction of new taxes on investment income can alter retirement planning strategies​. 

 Healthcare 

Legislative changes to Medicare can directly impact retirees’ healthcare costs and access. Potential reforms could include changes to premiums, benefits, or eligibility criteria. For instance, increasing the Medicare eligibility age or modifying the benefits package can result in higher out-of-pocket costs for retirees. Additionally, legislative changes that affect Medicare Advantage plans or prescription drug coverage can significantly alter healthcare expenses for retirees​.  

Investment Regulations 

New regulations can influence investment strategies and options available to retirees. Legislative changes that impose new fiduciary standards, alter investment product regulations, or introduce new financial transaction taxes can impact the way retirees manage their investment portfolios. For example, stricter fiduciary rules could limit the availability of certain investment products, while new taxes on financial transactions could increase the cost of trading securities, thereby affecting overall investment returns​. 

Steps to Evaluate How Susceptible Your Retirement Plan is to Legislative Changes 

  1. Inventory Your Income Sources: List all your income sources, including Social Security, pensions, retirement accounts (e.g., 401(k), IRA), and any other investments. Determine what percentage of your total income each source represents. 
  2. Analyze Your Dependence on Social Security: Assess how much of your retirement income relies on Social Security benefits. Since Social Security is directly influenced by legislative changes, a high dependency can increase your exposure to legislative risk. 
  3. Evaluate Your Pension Stability: If you have a pension, investigate its funding status and the financial health of the entity managing it. Underfunded pensions or those managed by financially unstable entities are more vulnerable to legislative changes that might reduce benefits or alter payment structures. 
  4. Review Your Tax-Advantaged Accounts: Examine your 401(k), IRA, and other tax-advantaged accounts. Understand how potential changes in tax laws could affect your contributions, growth, and withdrawals. Pay special attention to changes in RMDs and tax rates on withdrawals. 
  5. Assess Healthcare Coverage: Consider how changes in Medicare or other healthcare policies could impact your retirement. If you are not yet eligible for Medicare, evaluate your current healthcare coverage and its susceptibility to legislative changes. 
  6. Consult a Financial Professional: Work with a financial professional to conduct a thorough review of your retirement plan. They can help identify areas of vulnerability and suggest strategies to mitigate legislative risk. 

Identifying Key Factors That Could Make You More Vulnerable 

  • High Reliance on Social Security: If Social Security constitutes a large portion of your retirement income, you are more exposed to changes in benefit formulas, cost-of-living adjustments (COLA), or eligibility requirements. Any legislative changes affecting Social Security could significantly impact your financial stability. 
  • Heavy Investment in Tax-Advantaged Accounts: Significant reliance on 401(k)s, IRAs, or other tax-advantaged accounts means changes in tax laws could affect your retirement savings. Legislative adjustments to contribution limits, withdrawal rules, or tax rates can alter the value and accessibility of these funds. 
  • Dependence on Underfunded Pensions: Retirees with pensions from underfunded plans or plans managed by financially unstable entities face higher risks. Legislative changes aimed at pension reform could result in reduced benefits or altered payment structures. 
  • Healthcare Costs: If a substantial portion of your retirement budget goes towards healthcare, changes in Medicare or healthcare legislation can have a major impact. Rising premiums, reduced benefits, or changes in eligibility could increase your out-of-pocket healthcare expenses. 
  • Limited Diversification: A lack of diversification in your income sources and investments can heighten your vulnerability to legislative risk. If your retirement plan relies heavily on a single income source or investment type, legislative changes affecting that area can have a disproportionate impact. 
  • Fixed Income Investments: Retirees heavily invested in fixed income assets, such as bonds, might be more exposed to interest rate changes driven by legislative policies. Changes in fiscal or monetary policy can influence interest rates, affecting the returns on these investments. 

Strategies to Mitigate Legislative Risk 

By diversifying your income sources and investments, keeping your plans flexible, seeking professional advice, and regularly reviewing and adjusting your retirement plan, you can help yourself mitigate legislative risk. 

Importance of Diversifying Income Sources and Investments 

Diversification is a fundamental strategy for mitigating legislative risk. By spreading your assets across various types of investments and income sources, you can reduce the impact of any single legislative change on your overall retirement plan. Here are some key points to consider: 

  • Income Sources: Make sure that your retirement income comes from a mix of sources, such as Social Security, pensions, retirement accounts (like a 401(k) or IRA), and other investments. This reduces your reliance on any one source and helps protect you from changes that might affect one particular income stream. Evaluating the tax requirements for each retirement income source is also important, as well as considering if converting some tax-deferred funds to tax-free is beneficial to your overall income and tax strategy. 
  • Investment Types: Diversify your investments across different asset classes, including stocks, bonds, real estate, and possibly alternative investments like commodities or cryptocurrencies. This helps to balance the risk and return potential, and legislative changes affecting one type of investment will likely have a lesser impact on a well-diversified portfolio​. 

Keeping Retirement Plans Flexible to Adapt to Changes 

Flexibility in your retirement planning allows you to adjust your strategies in response to legislative changes. Here’s how to maintain flexibility: 

  • Adjustable Withdrawals: Plan for adjustable withdrawal rates from your retirement accounts. This way, if tax laws change or if there are new penalties, you can modify how much you withdraw each year without significantly impacting your overall plan. 
  • Contingency Plans: Develop contingency plans for various scenarios, such as changes in Social Security benefits, tax law adjustments, or healthcare costs. By having a backup plan, you can quickly adapt without jeopardizing your retirement security​.
  • Emergency Fund: Maintain a robust emergency fund to cover unexpected expenses or to provide a cushion if legislative changes negatively affect your income or expenses. This fund should be easily accessible and sufficient to cover several months of living expenses​. 

The Role of Financial Professionals in Navigating Legislative Risk 

Financial professionals play a crucial role in helping you navigate legislative risk. They stay informed about current and proposed legislative changes and can provide advice tailored to your specific situation: 

  • Professional Guidance: Advisors can help you understand complex legislative changes and their potential impact on your retirement plan. They can also suggest strategies to mitigate these risks based on their professional experience and knowledge​​. 
  • Customized Plans: A financial professional can create a customized retirement plan that takes into account your unique financial situation, goals, and risk tolerance. This personalized approach helps make sure that your plan is both comprehensive and flexible​.
  • Regular Updates: Advisors can provide regular updates on legislative changes and recommend adjustments to your plan as needed. This ongoing support helps you stay proactive and responsive to new developments​

Importance of Regularly Reviewing and Adjusting Your Retirement Plan 

Regular reviews and adjustments to your retirement plan are essential for staying ahead of legislative changes: 

  • Annual Checkups: Conduct an annual review of your retirement plan to assess its performance and make necessary adjustments. This includes rebalancing your portfolio, updating your income projections, and revisiting your withdrawal strategies​. 
  • Monitor Legislative Developments: Stay informed about legislative changes that could impact your retirement. Use reliable sources of information, such as government websites, financial news outlets, and updates from your advisor​​. 
  • Adjust Strategies: Be prepared to adjust your strategies based on new information. This might involve reallocating assets, changing withdrawal rates, or altering your investment approach to align with the latest legislative landscape. 

Conclusion

Take the time to assess your retirement plan and evaluate its vulnerability to legislative changes. Consider seeking the guidance of a financial professional who can help you navigate these complexities and tailor a plan that suits your specific needs and goals. 

Additionally, by keeping abreast of legislative developments and regularly reviewing your retirement plan, you can adapt to changes. Remember, the key to a stable and fulfilling retirement lies in preparation and adaptability. 

For more insights into managing legislative risk, taxes, and your portfolio, click here to download our comprehensive Election Uncertainty guide. 

 

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Standard Disclosure

This blog expresses the author’s views as of the date indicated, are subject to change without notice, and may not be updated.  The information contained within is believed to be from reliable sources.  However, its accurateness, completeness, and the opinions based thereon by the author are not guaranteed – no responsibility is assumed for omissions or errors.  This blog aims to expose you to ideas and financial vehicles that may help you work towards your financial goals. No promises or guarantees are made that you will accomplish such goals. Past performance is no guarantee of future results, and any expected returns or hypothetical projections may not reflect actual future performance or outcomes. All investments involve risk and may lose money. Nothing in this document should be construed as investment, tax, financial, accounting, or legal advice. Each prospective investor must evaluate and investigate any investments considered or any investment strategies or recommendations described herein (including the risks and merits thereof), seek professional advice for their particular circumstances, and inform themselves about the tax or other consequences of any investments or services considered.  Investment advisory services are offered through Liberty Wealth Management, LLC (“LWM”), DBA Liberty Group, an SEC-registered investment adviser.  For additional information on LWM or its investment professionals, please visit www.adviserinfo.sec.gov  or contact us directly at 411 30th Street, 2nd Floor, Oakland, CA  94609, T: 510-658-1880, F: 510-658-1886,  www.libertygroupllc.com. Registration with the U.S. Securities and Exchange Commission or any state securities authority does not imply a certain level of skill or training.

 

References

Appleby, Denise. (December 22, 2023). The Pension Protection Act of 2006—and How It Still Helps Retirement. Investopedia. https://www.investopedia.com/articles/retirement/06/ppa2006.asp 

United States Congress. (n.d.). S.1 – Social Security Amendments of 1983. Congress.gov. https://www.congress.gov/bill/98th-congress/senate-bill/1 

U.S. Department of Health and Human Services. (n.d.). About the Affordable Care Act. Hhs.gov. https://www.hhs.gov/healthcare/about-the-aca/index.html