When I started writing this article, my intent was to cover the impact on all retirees, not just those with financial resources. However, as I progressed through my research, it became evident that the impact will be more or less painful in certain areas, based on your financial position.
For example, tariffs tend to increase the price of goods, which has more of an impact on low-income households. Higher-income households tend to spend more on services, which are not as impacted by tariffs. My firm tends to work with those who are retired or about to be, with $2 million to $10 million in investment assets. This article focuses on the impact for those high-net-worth individuals.
After a roaring start to 2025, U.S. equity markets have fallen sharply on the news about, and now implementation of, tariffs. Much could change in the next few weeks or months, but I want to provide an overview of how tariffs actually work and the specific impact they will have on retirees with significant amounts in the market.
How do tariffs work?
There is a widely held misconception that a 25% tariff on goods from Mexico means Mexico pays the U.S. 25% of the value of the goods we import. That is not the case. Tariffs are assessed to the importing corporation.
Let’s say, hypothetically, that the cost for GM to import the Chevy Silverado was $20,000 prior to March 4, 2025.
With the new 25% tariff, it would cost GM $25,000 to import that vehicle. At that point, GM has three options:
- Pass the price increase on to consumers. In my hypothetical Silverado scenario, the sticker price would increase by $5,000.
- Negotiate with the manufacturer. GM can look for ways to reduce that cost in Mexico either through negotiations or trying to find ways to reduce other input costs.
- Change the supply source or manufacture domestically. GM can search for other trading partners who do not have a 25% tariff, or it can manufacture domestically. This is easier said than done. If we do have the labor force and the materials necessary to make the product domestically, it would often cost more than the tariff itself. There are also products that we just cannot manufacture domestically because we don’t have the natural resources. We saw a version of this during the pandemic when factories in China were shut down. It led to supply shortages that drove up the price of goods significantly.
- Take the margin reduction. This is the United States, and companies are very good at making money. (Shrinkflation is real.) However, corporations may be willing to take a temporary hit to the bottom line if they have good reason to believe it is only temporary.
There has been ample coverage of which industries and goods will be most impacted. Cars and fruit from Mexico. Energy from Canada. But a $5,000 increase on a car or a 20% increase in your monthly grocery bill from $1,000 to $1,200 will not have a significant impact on a family with $5 million in the bank.
However, a 20% drop in their portfolio would cost them $1 million. That’s a lot of avocados!
Why would tariffs impact the market?
The consumer, the economy and the market are like three domino tiles stacked up uncomfortably close to one another. As Americans earn, they spend. As they spend, GDP (how we measure economic growth) increases. A growing economy increases earnings for corporate America. If earnings grow, stock prices usually go up.
Think of tariffs as an atomic bomb. I know that this is too dramatic, but stay with me. No one wants to use an atomic bomb. It is a threat either to protect yourself or to use in negotiation. Tariffs are not meant to be used. They cause economic explosions, or recessions. They are to be used as a negotiation tactic.
Until the tariffs on March 4, the consensus on Wall Street was that they were just that — a negotiation tactic. But when implemented, they raise prices, cut profits, slow economic growth and increase global tensions.
Higher prices alone are probably the least economically impactful effect of the tariffs. As we saw when prices went up during the pandemic, wage increases and bank balances were significant enough to bear it.
However, if price increases reach the point where people stop buying, productivity drops, layoffs start, and we likely will find ourselves in recession.
Canada, Mexico and China are also unhappy because we’re not buying their goods, which means they lay off their workers and also possibly fall into recession.
S&P 500 stocks, which, according to S&P Global, derive about 30% of their revenue from overseas, start to lose value. The Atlanta Fed has already reversed its GDP forecast to a negative figure.
What can you do?
This has been a sad and scary story so far. But more times than not, even with a significant loss, your financial plan still works because, in the tax brackets we’re talking about, you still have enough money to cover your expenses and not run out. Our clients’ financial plans are linked to their investment accounts, so if we are flirting with the line (risk capacity), we’ll know it. You can access a free version of the software we use.
Most investors have been rewarded for concentration over the last 15 years. U.S. stocks, specifically U.S. growth stocks, have dominated other asset classes. However, the beginning of 2025 has looked much the opposite. The Magnificent 7 stocks have retreated, while bonds are up since U.S. equities started falling. Many foreign markets have outperformed the U.S. YTD as of March 5.
Think of this as a balanced diet. You were skinny despite eating pizza over the last 15 years. Now, you may have to have a balanced diet to stay skinny.
No one knows how this will shake out, and the developments are moving fast. When I started writing this article, the tariffs were across the board for Mexico and Canada. As I finished, it looked like the tariffs on autos would be delayed for a month, and before this article was published, the tariffs for Mexico and Canada were postponed until April.
For now, it pays to be vigilant and balanced in your approach.
