Legislation Risk is the risk we all face that laws might change in the future in a way that negatively impacts us.
An example of legislation risk is the idea that Social Security might disappear. The U.S. Government might just decide to cancel the whole thing.
That would negatively affect us, because a stream of income we would not receive income that we were expecting.
Another example is that the tax rate might go up and stay up. A lot of people believe that our tax rates in the U.S. are too low, low enough to bankrupt the country if they aren’t raised. If congress starts believing that too, they will probably raise taxes.
That would negatively affect us, because we might have to pay a lot more taxes on our 401k withdrawals than we had expected to and anyone who was relying on having low taxation of 401k proceeds in order to get through retirement may have a really tough time once they get to retirement.
What Can We Do
Nobody can predict the future. At best we can make educated guesses.
What we can do, though, is try to reduce the risk of one rule change completely destroying our plans. A way to do that might be to fall under multiple different laws.
This is another way to say diversifying across asset classes. Diversifying across asset classes helps to mitigate this risk as well as many others. I talked more about this in my Diversification post.
Diversifying Across Asset Classes
If you have a mix of 401k, an HSA, a Roth IRA, a regular IRA, some permanent insurance, a mortgage, and other stuff, then all the laws would have to change in order to destroy the plan you have.
A law change in any one area could significantly hurt you, but you would still have a lot of other accounts that would remain intact.