The year ahead: What retirees should watch out for in 2018

New Year 2018, By Grahamec. Via Wikimedia Commons.

The economy is strong and the stock market is surging. Interest rates are rising a bit, but inflation looks steady. That should mean smooth sailing in 2018 for retirees and people planning for retirement, right? Even the new tax law didn’t do much to impact retirement: The final legislation dropped earlier proposals to sharply curtail tax-deferred 401(k) contributions and deductibility of high medical costs.

But at the same time, there’s good reason to worry about possible efforts to change our two most important retirement programs–Social Security and Medicare. Further, the fiduciary rule governing retirement advice could be undermined. And higher interest rates actually could be a double-edged sword for retirees.

So let’s assess the landscape for the year ahead for retirees and for those nearing retirement.

Stock Market

Anyone professing to tell you where the markets will go this year is lying or guessing. Still, it’s worth noting that we’re nearly nine years into a bull market.

“It’s always hazardous to forecast these things, but at some point, the bull market will end,” says Michael Kitces, partner and the director of wealth management for Pinnacle Advisory Group, co-founder of the XY Planning Network, and publisher of Nerd’s Eye View.

Kitces wonders how prepared retirees will be for the next market downturn and the sequence of return risk that entails.

“Substantial caution is merited on retiree spending rates when starting from these elevated levels,” he says. “The risk that you might experience an early bear market means you probably shouldn’t spend as much in the first place.”

Historically, the average safe withdrawal rate has been 6.5%, Kitces says.

“But it might be wiser for new retirees to just start with a lower initial rate of around 4%,” he suggests. That would be better than starting with a higher rate that might have to be cut; it’s stressful for most people to ramp up their lifestyle to a higher level and then have to trim it back if a bear market does show up.”

Social Security and Medicare

Will Medicare or Social Security face cutbacks in 2018? Both programs are overwhelmingly popular with voters, but some Republicans hope to tackle reform of both programs in 2018. The signals are mixed–House Speaker Paul Ryan wants to move forward, but Senate Majority Leader Mitch McConnell is opposed.

The Republican plan for Medicare has two components. First, it would raise the age of Medicare eligibility to 67 from 65, and shift Medicare to a flat premium-support payment, or voucher, that beneficiaries would use to help buy either private health insurance or a form of traditional Medicare. I explained what these changes would entail here.

Some changes to Medicare could pass the Senate with a simple majority, but changes to Social Security seem less likely. By law, the program’s revenue cannot be used to offset federal deficits; that means any changes to benefits would need to pass the U.S. Senate with 60 votes rather than the simple majority that can approve budget-related bills.

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