When we set up Your Merkle Plan, we talked about legislative risk – how what happens in Washington can impact your plan in good and bad ways. A few months ago, we passed along the latest retirement law changes in SECURE Act 2.0. This massive legislation had 90 retirement provisions, including changing the RMD age from 72 to 73, decreasing RMD penalties, and increasing the amount you can contribute to some retirement accounts. Generally, most of these provisions make sense and give you more control over your retirement savings.
I was a vocal critic of the first SECURE Act that went into effect on January 1st, 2020, because it eliminated the stretch IRA and replaced it with the 10-year rule. Instead of being able to stretch distributions over a lifetime, those inheriting an IRA from someone other than their spouse now have to take the money out within ten years. When this law passed, we talked to many of you about how this might impact your beneficiaries. Some of you chose to implement an IRA relocation strategy and the ability to see more money go to your loved ones and less to taxes.
I take you on this walk down memory lane to remind us that there is always something going on in Congress that could impact your retirement. The latest buzz surrounds the debt limit. I think it’s unlikely that the U.S. will default on its debt. Aside from that, several outcomes are on the table, including increasing the debt ceiling limit and making sweeping changes to the budget. These budget changes could include program cuts or generating more revenue (aka raising taxes).
According to the Center for Budget and Policy Priorities, Social Security, health insurance, and defense comprise the three major federal spending areas. In 2022, about 21% of the budget paid for Social Security, including monthly retirement benefits for about 49 million retired workers. Four health insurance programs – Medicare, Medicaid, the Children’s Health Insurance Program (CHIP), and Affordable Care Act (ACA) accounted for about 25% of the budget in 2022, or $1.4 trillion. Half of this amount goes to Medicare which provides health coverage to around 80 million people age 65 or older.
Unsurprisingly, the debt ceiling includes talk about cuts to Social Security and Medicare. I’ve always felt like any lawmaker would be crazy to run on the platform of cutting Medicare or Social Security for baby boomers when we know that voter turnout is highest among those who are already using those services or soon will be. Still, I do think Medicare and Social Security reform are on the table – every year.
It’s more likely Congress will raise taxes, another one of the risks we talked about when we set up Your Merkle Plan. Taxes are currently at historic lows, with the top tax bracket at 37%. It was just 42 years ago when the top bracket was 70%. That’s why we’ve discussed the possibility of increasing taxes and included a long-term tax strategy in Your Merkle Plan.
Last month three U.S. banks failed, lawmakers took emergency action, and there were more central bank rate hikes. Bank failures are common. Since 2001, there have been 563 bank failures. They don’t typically garner the news that the bank failures of 2023 have. The latest bank failures don’t feel like the start of another 2008, but there could still be some aftershocks as some call for enhancing the FDIC’s deposit insurance and tightening bank regulations.
The markets will surely react to these changes, adding to the potential for volatility.
History has taught us that something is always “threatening” the economy. It’s good to be aware of these things, but that awareness doesn’t have to be accompanied by worry. Your Merkle Plan was built with risk and market volatility in mind, and it will continue to withstand the next thing that comes your way.