2025 Planning and Wealth Management Outlook

With a new administration in Washington that could bring changes to tax policy and influence some economic factors, 2025 will likely be a year of "shifting gears" for investors. Perhaps that is a gradual shift, for example, in how investors plan for taxes and manage concerns about inflation. As a result, it's our view that some investors may choose to make small adjustments to their wealth management plans in 2025, but in general, investors should keep in mind that the most effective plans take the long view.

In this planning and wealth management outlook, I share a few areas for investors to review to stay on track to reach their personal goals based on a desire to both grow and preserve wealth, for life and for legacy.

For 2025, here are three themes to consider in wealth management plans:

• Anticipate some changes to the tax landscape
• Manage continued concerns about inflation
• Be aware of rising risk management costs

Since the election, one of the most common questions I hear from investors is, "What do you expect for income and estate taxes in 2025?"

Congress is expected to tackle major tax legislation in 2025, but any changes would likely not take effect until 2026. We generally don't recommend making changes to your tax plans based on potential future legislation. However, understanding—and anticipating—those changes can help investors be prepared for the future.

The focus for Congress in 2025 will be on the Tax Cuts and Jobs Acts (TCJA), which made sweeping changes when it was enacted in 2017, such as lowering individual income tax rates and increasing the gift and estate tax exemption. Those changes will expire at the end of 2025, unless Congress acts.

Although President-elect Trump has indicated wanting to extend many of the TCJA's provisions, as well as repeal the cap on the deduction for state and local taxes, and eliminate income taxes on tips, overtime, and Social Security benefits, campaign promises are typically the starting point for negotiations among lawmakers, and nothing is certain until Congress passes legislation. Even if some tax changes are fast-tracked through the budget reconciliation process, those changes would still not likely take effect until 2026.

With that in mind, high-net worth taxpayers may want to consider taking advantage of the highest ever lifetime gift and estate tax exemption ($13.99 million per individual in 2025) to gift this higher wealth amount while they can, with certainty, and reduce future estate tax liability.

Overall, given the changing landscape in Washington and what we know from the last Republican administration, we expect that any new tax laws would likely result in taxes that would be the same or lower for individuals, with the potential extension of portions of the TCJA, or even more aggressive cuts, depending on how debates with deficit hawks progress in the new administration and Congress.

The table below highlights key provisions of the TCJA that are currently law. These are some of the areas Congress will consider keeping in place, expanding, or changing when they tackle tax legislation in 2025.

Since inflation soared in 2021 to its highest level since 1981, the pace of price appreciation has been ticking down, yet many investors—particularly retirees and those saving for retirement—remain worried about the impact of inflation on day-to-day expenses and their ability to live the lifestyle they want. This makes sense. While the pace of price appreciation in goods in services [as indicated by the consumer price index (CPI) and other indicators] has slowed, prices for most goods and services as well as real estate and the general cost of living are likely permanently higher. In growing economies, the cost of living typically does not fall, except in deflationary environments, which we don't expect. Talk in Washington about possible new tariffs and immigration reform—both of which could possibly impact inflation—make the future of inflation in 2025 uncertain.

This fall, just prior to the election, we surveyed more than 1,000 American investors,¹ and 77% said they were concerned about inflation when thinking about their retirement. And when we looked at just non-retirees (survey respondents who are working full- or part-time), 26% said they expect to delay their retirement due to the impact of inflation and the economy on their retirement savings/portfolio.

As investors, inflation is not something we can control, but we can take steps to prepare our portfolios to be well-positioned to help mitigate some the effects of inflation.

Stay invested. Our research has shown that equities have historically been an effective defense against inflation, so while past performance does not guarantee future results, consider staying invested based on your circumstances, goals, time horizon, and risk tolerance. Then, stay diversified to have broad exposure across various asset classes.

Consider ways to buffer your portfolio against inflation. Treasury Inflation-Protected Securities (TIPS) can help cushion a portfolio against inflation. That's because their principal value is tied to inflation, so when inflation goes up, so does its principal value (and vice versa). If held to maturity, TIPS can provide a positive inflation-adjusted yield.

For retirees, or anyone looking to generate predictable income from their investments, another strategy that can help mitigate the effects of inflation is a bond ladder. By buying bonds with staggered maturity dates (and holding each bond to maturity) investors can receive regular interest payments and potentially lock in higher rates if the principal is reinvested as bonds mature to keep the ladder going.

Maintain reserves. A healthy cash cushion held in a high-yield checking or money market account can bring peace of mind when inflation feels like it's crimping your lifestyle. All investors should try to maintain an emergency fund of at least three to six months of living expenses. Doing so can help keep your investment plan on track, because when unexpected expenses come up, you won't have to pull money out of your portfolio to cover them. Retirees should aim to have to have an emergency fund that can cover a year of spending, minus Social Security or pension payments.

Retirees should also pay attention to risk capacity, or how much cash they'll need to cover the next one to four years. That amount is money they may need soon, so it should be saved in relatively "safe" places beyond an emergency fund, such as high-quality, short-term bonds and CDs with maturities of one to four years.

Risk management is key to holistic planning and wealth management. For some investors, the home they own is their largest asset. Insuring it is essential to mitigating the risk of catastrophic loss and is typically a requirement when there's a mortgage on the home.

Almost 66 percent of households in the U.S. are homeowners (versus renters), so the trend of sharply rising home insurance rates is a factor to be aware of when thinking about wealth management in 2025 and beyond.

Researchers from the National Bureau of Economic Research studied U.S. homeowner's insurance premiums between 2014 and 2023 and found that average premiums jumped by more than 30 percent since 2020, with a wide variation by location. Homeowners in areas prone to natural disasters like hurricanes (the Gulf Coast) and wildfires (the Mountain West) had average annual insurance premiums of $4,000 or more in 2023, compared to average premiums of $2,000 or less in areas not prone to natural disasters.

For homeowners, rising premiums can be a reminder to review your policy to be sure the insurance limits and deductibles continue to meet your needs.

If natural disasters increase in number and intensity, premiums will likely continue to rise. The increasing costs to insure are a reminder to revisit your expenses, cashflow, and budget each year. Understand where your money is going. Then, you can make adjustments to spending, saving, and your timing of financial goals, if needed.

Another major theme in risk management goes beyond insurance, to investments. In our view, staying keenly focused on the time horizon for your financial goals is critical for prudent risk management, because doing so creates space and capacity to take risk, to help continue investing to potentially grow wealth. In 2025, we'll continue to discuss goal-based investing by time horizon, to help manage the ups and downs of markets, so investors can be better positioned to both preserve and potentially grow wealth.

While 2025 might be a year of new tax legislation, declining (and yet still uncertain) inflation, and continued rising insurance costs, keep in mind that effective wealth management is often about seeing the bigger, longer-term picture. When your goals are personalized to you and aligned with your specific time horizon and capacity to take on risk and emotionally tolerate it, you can better weather short-term news and trends on your way to growing, protecting, and using your wealth.