Opinion: Will tariffs affect your retirement plans?

Andy Drennen

On Feb. 1, President Donald Trump ordered a 25% tariff tax on Canadian goods (10% on energy resources), 25% on Mexican goods and 10% on Chinese goods to take effect on Feb. 4. On Feb. 3, the president granted a one-month grace period to Canada and Mexico; the tariffs on China stand and are being met with retaliatory measures.

According to the White House, the added import taxes are an attempt to force the countries to enact measures to stop the flow of illegal immigration, fentanyl and other drugs from entering the United States. The administration’s announcements surrounding tariff enforcement measures seem to be quite fluid.

Tariffs can be punitive to the exporting country’s economy. Before passing the import taxes onto the end consumers, importers could look for alternative suppliers, reshore production to the U.S., order fewer quantities or negotiate lower prices to offset tariff costs. Costs that aren’t mitigated will likely be passed onto the U.S. consumer and could be inflationary.

Inflation does not hinge on tariffs from those three trading partners alone, but it’s not insignificant. The U.S. imported over $1.3 trillion in 2023 from the three countries, deriving $480 billion from Mexico, $430 billion from Canada and $427 billion from China, according to Trading Economics. The United States is the largest trading partner for all three countries.

So, what do tariffs have to do with your plans for retirement?

If passed onto the consumer, tariffs could be inflationary. Inflation is often referred to as the silent killer and will be a factor in determining how much income you’ll need to live on during your retirement years. A dollar today is worth more than a dollar tomorrow, and, if your income or income-producing assets fail to keep up, your retirement lifestyle may need to change.

The prices of goods and services will likely increase over time regardless of policy action. Health care is a large portion of expenses during retirement. The Peterson Center on Healthcare reported that the cost of medical care increased a cumulative 121.3% while all goods and services increased 86.1% from January 2000 through June 2024. If a couple retired today at age 60, they should plan to spend $642,000 during their retirement years if they live to age 95. If your retirement years are further down the road you can plan on those costs only increasing.

After peaking at 9.1% in June 2022, inflation has been trending down but has not yet reached the Federal Reserve’s 2% target. Typically, central banks will lower their nation’s key interest rate to stimulate a weak economy and raise the rate to preempt the economy from overheating. However, the Fed did the opposite last year. The board reduced the key rate by 1% while GDP rose by a modest 2.8%. This action by the Fed was a preemptive strike against keeping monetary policy too restrictive and stifling growth.

A tempered amount of inflation is positive as it is a sign of a growing economy. The bond market is telling us to expect a modest amount of inflation moving forward. Longer-term bond investors will demand higher interest rates to safeguard purchasing power against higher inflation. Long-term interest rates will typically decline if there is anticipated weakness on the horizon.

This year longer-term bond yields have stayed relatively elevated. The 10-year U.S. Treasury bond has fluctuated between 4.4% and 4.7%, while the 30-year Treasury has traded between 4.6% and 4.9%; well above the 2.7% rate of inflation that was reported by the Bureau of Labor Statistics for 2024.

The Fed has maintained that they will let the data guide changes to monetary policy. Given the Fed funds rate cuts last year along with the strength of the U.S. economy, one might conclude that the Fed will hold its course until consumers and investors have had a chance to digest potential policy changes. However, based on figures from the CME Group, investors are pricing in a 72% probability that the federal funds rate will be lower than the 4.25% to 4.5% that it is today. Note that this data changes daily.

On Feb. 3, Canadian Prime Minister Justin Trudeau posted on social media platform X that Canada is implementing its $1.3 billion border plan and will add nearly 10,000 front-line personnel “reinforcing the boarder with new choppers, technology and personnel, enhanced coordination with our American partners and increased resources to stop the flow of fentanyl.”

Additionally, President Trump posted on social media platform X that he had spoken with President Claudia Sheinbaum of Mexico who agreed to immediately supply 10,000 Mexican soldiers “specifically designated to stop the flow of fentanyl, and illegal migrants into our country.”

Are those measures enough to sidestep a trade war? We shall see. Tariffs or no tariffs, work with your credentialed wealth management team to make sure you have the right asset mix to protect your desired retirement lifestyle from being diminished by inflation.

Andy Drennen is a certified financial planner and senior portfolio manager at Simmons Private Wealth in Springfield. He can be reached at andy.drennen@simmonsbank.com.