Leading up to the election, economists warned about the financial risks of a Biden presidency. Now that Biden is in office, it is time for Americans to consider what the next four years may do to their retirement accounts.
Expect the National Debt to Continue Rising
In 2020, the government released two major stimulus packages to boost the economy. While the money may have helped the economy, it also added to the national debt.
The second stimulus package included $600 checks for qualifying citizens. However, Biden is trying to pass a new stimulus package with an additional $1,400 for each American.
Biden’s stimulus proposal is priced at $1.9 trillion. The nation already owes over $27 trillion. Piling on more debt can lead to excessive inflation and higher interest rates.
To deal with the debt, a Democrat-led government is likely to try passing large tax hikes. Businesses will receive a greater share of the tax burden, further squeezing industries that are already suffering due to excessive lockdowns.
A Recession Hurts the Performance of Your Stocks
Throwing money at the problem is unlikely to fix the state of the economy. Businesses will continue to suffer, resulting in job losses and the potential for an extended recession.
Recessions tend to hit stocks the hardest. The potential for increased taxes may not help with employment. Additional job losses may also occur if Joe Biden manages to increase the federal minimum wage to $15 per hour.
When the business world suffers, you may notice the value of your stocks declining. The Dow Jones has averaged an annual return of 5.4% since its inspection in 1896. In the coming months and years, the Dow may experience extreme volatility and the risk of losses not seen since the 2008/2009 financial crisis.
Lower Returns From Bonds and Treasuries
If the national debt continues to rise, you can expect less income from government bonds and treasury notes. Bond prices are linked to the Federal interest rate.
As the interest rate increases, bond prices fall. The newly issued bonds with higher prices attract more demand while the older bonds are left to degrade.
Bonds are typically considered a type of fixed income, which should provide greater stability compared to stock investments. However, limited returns during Biden’s administration may force investors to consider putting the money elsewhere.
Potential Changes to Retirement Accounts from the Biden Administration
Along with a struggling economy, your retirement accounts may be affected by government policies. Joe Biden has several changes planned for retirement saving in the United States, including:
- Raising the income cap for social security tax
- No more tax deductions for 401(k)s
- Automatic 401(k)s for select workers
- Reduced tax advantages for high earners
Biden plans on addressing retirement in several ways, starting with changes to the social security tax. He proposes increasing the cap on the tax to collect more revenue from high earners. Currently, you only pay social security tax on the first $142,800 that you earn.
Biden has also proposed major changes to 401(k)s. He plans on getting rid of tax deductions in favor of tax credits. For the average citizen approaching retirement age, the tax credit is likely to result in less of a tax advantage compared to the income deduction.
Additional sweeping tax reforms include automatic 401(k)s for workers who are not eligible for retirement accounts through their workplace and reduced tax advantages for the top earners. Depending on your income, these changes may impact the way that you save money toward retirement.
How to Deal with Changes to Retirement Accounts
Biden has the advantage of a democrat majority in both the house and the senate, making it easier for him to swiftly enact new legislation that pushes his liberal agendas. Experienced investors are already starting to siphon funds from stocks, bonds, and treasuries to more stable investments, such as gold and silver.
If Biden removes the tax deduction for 401(k)s, you may receive a better tax advantage by maximizing your contributions to an individual retirement account (IRA). However, instead of investing in stocks, bonds, and treasuries, consider a more stable investment for your IRA.
Gold is one of the few investments expected to provide a positive return in 2021. It may even offer the stability needed to protect your retirement account through the rest of Biden’s presidency.
If you have a retirement account and would like to protect your spending power from and potential increase in inflation due to Biden’s spending spree call us today at 800-300-0717.
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