Presidential elections. Trade wars (or deals). Brexit. There’s a lot going on in the world right now, and some of it might send ripples through Wall Street in 2020. And if you have a 401(k), IRA or some other type of investment, this stuff affects you too.
As we kick off a new decade, remember that no one—including yours truly—can predict exactly what the economy will do this year. If you’re looking for some magic crystal ball, you won’t find one. It just doesn’t exist.
That doesn’t mean we can’t make some educated guesses, though. There are economic indicators that can give us hints about what might happen with the economy in the near future.
So, what might be in store for 2020? Let’s take a look at what’s happening with the economy and what that means for you.
You’ll Be Able to Save More for Retirement in 2020
Now, you know me. Before we start looking at 2020, there’s something I need you to know: You control your future. Not the White House. Not Wall Street. Not your employer. You. It’s your job to save and invest for retirement. No one’s going to do it for you.
Be confident about your retirement. Find an investing pro in your area today.
Let’s start off with some good news! You might be able to save a little more for retirement in 2020:
- The IRS is raising the annual contribution limits for employer-sponsored retirement plans to $19,500 (up from $19,000 in 2019). This includes folks who contribute to a 401(k), 403(b), most 457 plans and the federal government’s Thrift Savings Plan.
- For those who are nearing retirement and need to catch up, you can also put in an extra $6,500 into your plan if you’re age 50 and older!1
Now, the annual limit for IRAs stays the same at $6,000. If you’re age 50 or older, the catch-up contribution limit will also remain at $1,000, so you can put up to $7,000 into a traditional or Roth IRA in 2020 if you’ve fallen behind on your retirement savings.2
The SECURE Act: More Changes to Retirement Saving
OK, toward the end of 2019, Congress passed the biggest retirement bill in more than a decade. It’s called the “SECURE Act.”3 Like most of the stuff that comes out of Washington, the bill is a mixed bag and it’s important to be aware of what’s changed. Here are five main things you need to know:
1. Inherited IRAs will be taxed sooner.
If you have plans to leave your IRA to your kids or grandkids so that they can enjoy tax-deferred or tax-free growth long after you’re gone, I’ve got bad news. The SECURE Act pretty much gets rid of that popular estate-planning strategy—also known as a “stretch IRA.” Under the new law, your non-spouse beneficiaries will have to take out all the money in an inherited IRA and pay taxes on it within 10 years of your death. But if you’ve inherited an IRA before Jan. 1, 2020, the new law won’t apply—you can keep the money in the account as long as you’d like.
2. You can put money into your traditional IRA after age 70 ½.
Whether you want to bulk up or catch up on your retirement savings, there are a lot of folks nowadays who are working past the “traditional retirement age.” But previously, if you had a traditional IRA, you couldn’t put any more money into your account once you turned 70 ½ (Roth IRAs, on the other hand, don’t have an age cap on contributions).
The good news for folks with a traditional IRA is that the new law gets rid of those pesky age restrictions. Now you can put money into your traditional IRA no matter how old you are, as long as you’re making an earned income. More money equals more opportunity for growth. Now that’s what I’m talking about!
3. Required minimum distributions will start at age 72, not 70 ½.
Basically, Uncle Sam requires you to start making withdrawals—called required minimum distributions, or RMDs—from certain retirement accounts like a traditional IRA or 401(k) once you hit a certain age. That’s because you haven’t paid your taxes on that money yet, and Uncle Sam wants his cut!
The SECURE Act pushes the age you’re required to take money out of your account to 72, which gives your money a little more time to grow before it’s taxed by the IRS.
4. You may see a new annuity option in your 401(k).
Annuities are basically insurance products that turn a lump sum of money into a guaranteed income for life. And thanks to some more protections offered to employers by the SECURE Act, an annuity option might be coming to a 401(k) plan near you.
If you see an annuity option in your 401(k), I want you to lace up your shoes and run in the opposite direction! – Chris Hogan
Here’s the deal: While the idea of having a steady stream of income for the rest of your life might sound great, annuities are very complex and bogged down by lots of fees. Almost 100% of the time, they’re just not worth it. So, if you see an annuity option in your 401(k), I want you to lace up your shoes and run in the opposite direction! You’re better off investing in good growth stock mutual funds in your 401(k) plan.
5. More access to 401(k) plans for part-time and small-business workers.
For some businesses, offering a 401(k) plan to employees is expensive—and it’s often a cost that small businesses just can’t handle. It’s no wonder that workers at companies with less than 100 employees are less likely to have access to a 401(k).4
The SECURE Act tries to solve that by making it easier for small businesses to work together to offer retirement plans for their employees. The law also requires employers who offer a 401(k) plan to expand access to part-time workers who work at least 500 hours a year for three straight years or 1,000 hours for one year.
If you have questions about the SECURE Act and how it might impact your retirement strategy, talk to a financial advisor who can walk you through these changes.
OK, now on to the bigger economic picture.
What Are Economic Indicators?
Economic indicators are just some statistics and trends that give us insight into how the economy is doing and where it might be headed. That’s the short and sweet of it. Think of these economic indicators as thermometers that help us keep an eye on the temperature of the overall economy.
Here are five of the major economic indicators to keep an eye on in 2020:
- Stock Market
- Housing Market
- Interest Rates
- Unemployment Rate
- Consumer Confidence
Let’s take a look at these indicators and find out what they could mean for you and your money.
1. Stock Market
The stock market is kind of like your local supermarket—the biggest difference is instead of buying bread and milk you’re buying and selling stocks, which are basically small pieces of ownership in a company.
The S&P 500 Index measures the performance of the 500 largest, most stable companies in the New York Stock Exchange. The S&P 500 is considered the most accurate measure of the stock market as a whole. When this index increases, the economy is usually doing well. Still with me?
After a bumpy finish for the stock market in 2018, the S&P 500 bounced back in a huge way in 2019. Toward the end of 2019, the index hit record highs and was up more than 25% for the year.5 That means a lot of people were probably smiling when they checked their 401(k)’s performance at the end of the year!
Will that continue in 2020? Well, it depends on who you ask. With the chance of the economy slowing down, ongoing trade talks with China, and everything that comes with a presidential election, most strategists are predicting modest gains for the year compared to 2019—somewhere around an average of 5%. Still, a few others think we’ll see stocks take a slight dip in 2020.6,7
Stock market investing is like riding a roller coaster. Once the ride gets going, you don’t want to jump off. – Chris Hogan
Here’s an important word of caution: When your investments are doing well, you may be tempted to sell them for some quick cash. Or, if the stock market tanks, you might panic and want to cash out everything to keep from “losing money.” But stock market investing, even through mutual funds, is like riding a roller coaster. Once the ride gets going, you don’t want to jump off.
Listen to me: Don’t touch your investments until retirement! If you want to reallocate them to different types of investments, talk to your financial advisor. Otherwise, leave them alone, people!
2. Housing Market
So, now that we’ve taken a look at what’s happening with the stock market, what’s in store for the housing market? Well, home prices rose at a slower pace in 2019 (3.3%) and mortgage rates went down—so that made for a pretty good year for home sales.8 Still, there are several signs that 2020 could be a little bumpier.
First, the median price of a home went all the way up to $316,000—a record high—and with the supply of homes struggling to keep up with demand from Millennials, affordability could force would-be buyers to sit this year out.
Second, while mortgage rates are expected to stay where they are in 2020 (around 3.7% for a 30-year and 3.2% for a 15-year), tariffs and trade wars could force the Federal Reserve to raise those rates.9 Bottom line: If mortgage rates stay low, that could motivate buyers to get out there and buy a house. But if the Federal Reserve raises interest rates, that could cause even more folks who were on the fence to wait a bit longer.
So, if you’re selling a home in 2020, high demand coupled with low interest rates (for now) could land you a good deal. But be prepared for your house to be on the market a little longer since you might get fewer offers. What if you’re planning to buy a home? My advice is simple: Be patient.
Whether you’re buying or selling a home in 2020, get in touch with one of our real estate professionals. They know your housing market like the back of their hand and know better than anyone what’s happening in your backyard!
3. Interest Rates
OK, hang with me here. The Federal Reserve, which is the U.S. central bank in charge of the nation’s policies on money, has two main goals: to continue growing the economy at a sustainable rate and keep inflation (the price of everything from gas to milk) under control.
How do they do that? The Fed gets together four times a year to decide what to do with the nation’s interest rates. Lower interest rates can help give the economy a jolt, but they can also lead to higher inflation. Higher interest rates can slow inflation down, but if they’re too high they can also choke economic growth. So, they try to find a balance that’s just right.
To try to keep the economy going strong, the Fed cut interest rates three times in 2019, and today the rate is at 1.75%. That’s pretty low. The Fed has also sent signals that it’ll keep rates where they are in 2020 and take a “wait and see” approach with the world economy before making any changes.10
Debt is not your friend. It takes your time and money and it gives you headache and heartache in return. – Chris Hogan
But listen folks, I don’t care how high or how low interest rates are—borrowing money for things like a car loan or a home equity loan is always a bad idea. I want interest to work for you, not against you. Debt is not your friend. It takes your time and money and it gives you headache and heartache in return.
Are we clear?
4. Unemployment Rate
This next one is easy. Each month, the unemployment rate tells us how many people got (or lost) a job. It’s one of the clearest ways to see which way the economy is moving. Rising unemployment is scary—that means fewer jobs and an economy that’s in serious trouble. Lower unemployment means more people are finding work and the economy is getting stronger . . . which is what we all want.
According to the Bureau of Labor Statistics, the national unemployment rate ticked down to 3.5% in 2019—we haven’t seen numbers that low in 50 years!11 Those numbers put a big ol’ smile on my face! That’s because these numbers tell me that more and more people are able to find work, put food on the table, and save for the future. And the good news is it’s expected to stay right around 3.5% for 2020.12 In addition, the U.S. economy is still expected to add an average of 150,000 jobs per month.13
So, what does all that mean for your investments? Well, if companies are hiring, that usually means they’re growing. As their fortunes improve, yours can too—especially if you’re investing in those companies.
5. Consumer Confidence
You can usually tell when someone feels confident. They walk with their head held high, they puff out their chest, and they have a swagger in their step. They also tend to spend more and save less! Well, that last part is what the Consumer Confidence Index says, at least.
The Consumer Confidence Index measures how everyday Americans feel about the economy. When people are confident, they typically spend more money. When their confidence is low, they do the opposite.
While the Conference Board’s Survey of Consumer Confidence from November 2019 showed that consumer confidence dropped for the fourth straight month, confidence levels are still pretty high.
While the Conference Board’s Survey of Consumer Confidence from November 2019 showed that consumer confidence dropped for the fourth straight month, confidence levels are still pretty high.14 Although many experts predict the growth of the economy to slow down somewhat this year, consumer confidence should remain pretty high as wages continue to rise and unemployment remains low.15
Here’s the Bottom Line
When my team and I talked to thousands of millionaires for my latest book, Everyday Millionaires: How Ordinary People Built Extraordinary Wealth—and How You Can Too, virtually all of them said the same thing: The key to building wealth is consistency. That’s the thread that ties all of these millionaires together.
No matter what was going on in Wall Street or the White House, they kept working hard and they kept putting money away. They didn’t get distracted. They didn’t put their hard-earned money in a flashy investing trend they didn’t fully understand. They didn’t panic every time the stock market had a bad day.
And one day, they looked up and saw their nest egg hit the seven-figure mark. Now that’s what winning looks like. And there’s no reason that can’t be you someday.
Need More Investment Advice? Find a Pro!
I hope this information gives you more confidence about investing and the economy. But I’m guessing you probably have more questions about your particular situation. While I can’t speak into the specifics of your financial plan, the good news is you can sit down with a financial advisor in your area who can.
It’s a new year and a new decade. It’s time to get to work!