In our ongoing series on risks faced by a retiree, this time I want to talk about “legislative risk.” (I suppose if you wanted to be more cynical, you could call it “political risk,” but I digress.) Legislative risk describes the chance that our federal and/or state government will change the laws and policies affecting public policy. That would include the tax code as well as entitlement programs like Social Security and Medicare.
Lest you think “it won’t happen in my lifetime” (perhaps because you’re already retired), consider this: over 20 years ago, the top marginal income tax rate was 50%. Capital gains were taxed at a maximum of 20%. Today, the top marginal tax rate is about 40%, and the top capital gains rate is back to 20% again (up from 15%).
The point is that Congress can and will tinker with the tax codes. Some years will be better, some worse. Over a 15 or 20 or 30-year retirement, you can bet that your income tax rates will go up and down. So as you’re figuring out how much you need to live on in retirement, it’s pretty dicey to assume just one set rate for income taxes. A better approach is to factor in some variation for your tax bill, some fudge room—just in case.
But taxes aren’t the only thing to change. Social Security benefits change as well. The amounts have changed over the years, as has the “normal retirement age.” And we’re even assuming the Social Security Trust fund will be there over the next 20 to 30 years.
Medicare benefits also change. The point is to recognize that legislation changes over time, and you’d be wise to plan ahead for such change. It’s dangerous to your financial health to assume things will stay the same throughout all your retirement years.
So if you really want to maximize your retirement readiness, expect legislative changes to impact you in your retirement years, for better and for worse. As the saying goes, the only constant is change!