Your money: 5 things to watch in 2021

There’s a lot still up in the air in these 5 key personal finance areas.

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Every 4 years, we take a look at how the presidential and congressional elections may impact your personal finances: taxes, investments, health care, retirement, and more. Our analysis is intended to be non-partisan and focused on helping you plan today for potential scenarios and outcomes.

Key takeaways

  • With the conclusion of the 2020 election season, we know more about the balance of power, but there are still lots of unknowns.
  • There will likely be more stimulus injected into the economy, but the scope has yet to be determined.
  • The stock market has priced in a full recovery in 2021, but there could be volatility depending on government action and the trajectory of the COVID-19 pandemic.
  • Tax changes are likely, but the scope will be curtailed by the slim Democratic majority in Congress.
  • Changes to retirement laws may be a bipartisan initiative early in 2021.
  • The future of the Affordable Care Act is in the hands of the Supreme Court, but Congress will likely take interim actions to strengthen it this year.

We had been collectively holding our breath waiting for 2020 to end, and here we are finally in a new year. Now what?

Despite continued turmoil, the election results are now final and after the inauguration on January 20, Joe Biden’s new administration can start acting. Given that the Georgia runoffs put the Senate in Democratic control with a 50-50 split, it will be possible for Biden’s team to control the agenda, be able to confirm their favored cabinet nominees, and introduce much of the legislation proposed during the campaign.

However, the slim majorities in both Houses of Congress will likely limit the scope of the Democrats’ agenda across taxes, health care, and climate change. One big unknown is the trajectory of the economic recovery going forward. The vaccine is rolling out, but slower than expected, and there is market volatility. What actions will the government take in terms of additional stimulus, tax law changes, monetary policy, trade agreements, international accords, and regulations? What will happen with markets, inflation, and interest rates?

Depending on your personal financial situation, you may want to keep track of how these 5 key situations develop:

1. Stimulus

More 2021 outlooks

For more about the 2021 outlook for investors, see the Fidelity Viewpoints special report and find out what our pros see as big trends to watch as the new year begins.

2021 outlook overview

With the $900 billion second stimulus bill President Trump signed into law, money has started to go out to eligible taxpayers. Given the final makeup of the Senate with Democratic control, an additional cash payout is likely in the near future, perhaps up to the $2,000 per individual that passed the House of Representatives in late December.

There could be other financial stimulus too, particularly on infrastructure reform or direct relief to impacted businesses like restaurants, plus more student loan relief, extended unemployment, and eviction protections.

Much of the proposed agenda for Biden’s first 100 days involves heavy government spending on its key pillars of handling climate change, racial injustice, jobs, and the economy, but it will all likely be seen through the lens of managing the recovery from COVID-19.

“It’s going to be COVID 24/7, with Biden and his COVID Czar Jeff Zients focusing on defeating the pandemic,” says Andy Vermilye, vice president of public policy at Fidelity.

2. Investments

The stock market has priced in a full recovery in 2021. But with many countries back into some form of lockdown, and the vaccine rollout going slower than planned, that full recovery is at risk of being delayed, and therefore might require further fiscal relief.

“That leaves the market somewhat vulnerable to disappointment over the near term,” says Jurrien Timmer, head of global macro at Fidelity, whose outlook for 2021 underscores this point.

With the two wins in Georgia, the Democrats are positioned to do more in terms of fiscal relief, should it be needed. Coordinated fiscal and monetary policy accommodation was an important policy bridge in 2020, and it now has an easier path to being extended in 2021 while we wait for the economy to fully recover and reopen.

If you think of the economy as being at 100% (of capacity) last February, then plunging down to 20% or 30% in March, and then recovering back to 70% in the fall, the question is how quickly or slowly we can get back to 100%.

“While surging COVID cases, lockdowns, and a slower-than-expected vaccine rollout may delay that return to normal, we will now have an administration and Congress that might more easily add fiscal relief, which in turn could be an important boost for a market that is looking for a bridge back to the pre-COVID days,” says Timmer.

In their 2021 sector outlook, Fidelity experts think that stocks in the key sectors of technology, energy, financials, and health care will benefit from the balance of political power in Washington. Even with the Democrats gaining control of the Senate, the coalition is broad, and the majority is slim, which could keep a check on the scale of change.

3. Taxes

The balance of power in Washington will also keep a check on what tax changes will come early in the new Biden administration, at least until the midterm elections in 2022 have a chance to change the tone once again. For now, that means with a split Senate and a narrow Democratic majority in the House of Representatives, most major tax reform would have to get done through the budget reconciliation process.

“That creates a check on any extreme tax reform bill, but there still could be changes in marginal and individual rates down the road for those earning over $400,000. We expect to see an increase in the corporate rate, but not much beyond the mid-20% range,” says Jim Febeo, head of government relations at Fidelity. “Changing estate tax law will likely remain more difficult but other revenue raising measures could be in play as partial offsets to anticipated COVID-relief/stimulus and infrastructure proposals.”

The incoming Treasury Secretary, former Fed chief Janet Yellen, and current Fed Chairman Powell are likely to continue dovish policies as the economy continues to recover. We could also see coordination on regulatory priorities to avoid creating additional economic headwinds in the short term.

The Biden administration might be able to bundle infrastructure projects with some tax changes that would be intended to pay for spending, adds Vermilye.

4. Retirement

There were a lot of changes to retirement planning in 2020, mostly because of the Secure Act, which passed with bipartisan support. There were also provisions in recent pandemic relief bills that temporarily altered rules for retirement withdrawals.

With the new balance of power in Congress, a retirement bill with further enhancements could emerge in 2021. Provisions could include such things as raising the age for required minimum distributions to 75, indexing catch-up contributions for inflation, and adding additional catch-up options for those over 60.

“There will be a strong effort to move it, but it has to be attached to a larger must-pass revenue measure to get through, so it could take some time to come to fruition,” says Vermilye.

In the meantime, those concerned about inflation and interest rates can take some solace in the fact that the Biden administration will work closely with the Federal Reserve on both of those issues.

“The good news is, despite low rates, opportunities exist for those who know where to look and how to manage the risks of doing so,” says Adam Kramer in his 2021 income outlook. “A professionally managed, tactical approach to income investing that seeks opportunities in a variety of asset classes, including high-yield bonds, emerging market debt, convertible bonds, preferred stock, and dividend paying equities may help investors achieve their income goals.”

5. Health care

Joe Biden ran a big part of his campaign on improving the Affordable Care Act, but the future of that law depends heavily on what happens with the case currently before the Supreme Court, and that may not be decided until the summer.

“I’d put the odds of the court overturning the whole law pretty low. From that point, it’s then a matter of what the government can do administratively through the Health and Human Services Department and through current law,” says Febeo. For instance, the Biden administration may undo many recent actions taken, some as simple as widening the open enrollment period that Trump narrowed.

In the meantime, at least for the first part of 2021, health care policy will ostensibly be about fighting COVID-19, rolling out the vaccine distribution, and getting the economy back to normal.

Next steps to consider

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Find out what Fidelity pros see as big trends to watch as the new year begins.

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