By H. William Wolfson, DC, MS, MPASSM, CFP®
The choices for retirement savings are extensive and can be overwhelming. And when it comes to retirement planning, inaction can be as bad as making a bad investment decision. One of the most common fears, public speaking, may now be eclipsed for many with the fear of outliving their money. According to the Internal Revenue Service, there is a litany of retirement plan options; however, for each option there are rules and regulations that may appear to be onerous, complicated and confusing. Unfortunately, if a plan is selected and then implemented incorrectly, fines or other negative effects may be assessed to the plan or even the individual investor.
Life Expectancy and Savings
Brighthouse Financial recently reported, “According to LIMRA [Life Insurance Marketing and Research Association] research, only 42 percent of pre-retirees and retirees have estimated how many years their assets will last, and only 38 percent have a plan for generating income from savings.” These statistics indicate that many people lack the ability to determine, or the desire to compute, what will be required to fund their retirement adequately.
Wall Street Journal financial writers Dan Ariely and Aline Holzwarth noted, “As we live longer, funding retirement is a moving target. And to have any hope of successfully securing our future lifestyles, we have to start early and we have to build a more detailed and accurate picture of the way we hope to live. We have to understand not just how much we will earn in our life and how far we are from retirement (in years and in dollars), but also how we want to spend our time both during our working years and after.”
The Vanguard Group’s annual survey on the state of retirement savings, How America Saves 2018, does feature some positive trends in savings activities. Among them: more individuals are enrolled in defined contribution plans, employers are allowing participants to invest in target-date or balanced funds, since 2003 automatic participant enrollment is up 300 percent, two-thirds of participants are enrolled in automatic annual deferral-rate, and most related account balances have increased substantially.
Not all the news is good. Financial writer Anne Tergesen, reporting in The Wall Street Journal, noted that researchers at Harvard University discovered that workers withdraw nearly half of their enforced contributions within eight years of joining a 401(k) plan. Unfortunately, this causes what is known as “leakage,” which negates the positive effects of compounding interest over an extended period of time (i.e. 30 years).
As a result, Tergesen points out, employers are being urged to offer financial wellness initiatives—such as better financial education and customized advice to participants-- to counteract early withdrawals and subsequent leakage. The goal is to limit the effects of the leakage and help educate participants in basic money management skills
There are a number of additional mistakes individuals can make that can usurp successful retirement plans and savings. According to retirement planning expert Rodger Friedman, these include:
- Not considering the impact of taxes on your retirement income
- Not considering the impact of healthcare costs in retirement
- Not considering the impact of potential long-term care costs in retirement
- Not having adequate liquidity and an emergency fund
- Tying up too much money in your home
- Entering retirement with significant levels of debt
- Not having a plan for Social Security
- Spending too much money early in your retirement
- Taking no risk, too little risk, or too much risk
- Believing you can do it yourself without professional help
IRA to Roth IRA Conversions: Good or Bad Idea?
The conversion of a traditional IRA to a Roth IRA will allow for tax-free income; however, one should be mindful of the related taxes and other factors involved before moving forward. CPA Ed Slott, writing for Investment News, commented, “Those who are over age 70½ obviously have less time to make the upfront tax cost of a Roth conversion worth the benefit, given their shorter life expectancy.” Slott offers these additional factors to consider:
- When will the funds be needed? If the funds won't be needed in the foreseeable future, it could pay to do the Roth conversion.
- Future tax rates. If the client is concerned about higher tax rates in the future, it might make sense to pay the tax at lower rates now and then never again. Remember, a Roth conversion is not an all-or-nothing choice. Partial conversions may be a way to hedge.
- Beneficiary's projected tax rates. Look at the tax rates of the beneficiaries. If they might be in a higher tax bracket, a conversion now can be a good estate-planning move so that the beneficiaries can inherit tax-free retirement savings.
- Qualified charitable distributions (QCD). For IRA owners who will take advantage of this to reduce or even eliminate the tax on their required minimum distributions (RMDs), a Roth conversion might not be necessary. The QCD option is only available to individuals who are age 70½ or older.
- Medical bills. RMD income can be partially offset by these medical deductions. Roth conversions will increase adjusted gross income and decrease the amount deductible for medical expenses.
Financial writer Laura Saunders offers some additional factors to weigh when considering what to do with an IRA: “Converting [IRA to Roth IRA] is a bad idea for some savers; consider the implications for financial aid, charity donations and the risk of ‘stealth’ taxes.”
Rule-of-Thumb Withdrawals May No Longer be Applicable
Once you are ready for retirement, and assuming all expenses and income has been analyzed, draft a plan to withdraw necessary retirement funds in addition to receiving a flow of income from Social Security, pensions, IRAs, 401(k)s, annuities and the like. To avoid outliving your money, financial advisor William Bengen proposed the 4% Rule (also known as the “Bengen Rule” in his honor) in 1994 for withdrawing funds from an accumulated portfolio.
Barrons writer Reshma Kapadia recently noted, “High stock and bond prices, more market volatility, rising inflation, and an uncertain economic outlook make retiring today a tougher calculation that ever before.” As a result, the appropriate withdrawal percentage for an individual will likely be a shifting percentage based on his or her guaranteed income vs. variable income sources—and factoring in his or her market-risk tolerance.
Alternative Strategies and Retirement Options
Full retirement age (FRA) with Social Security differs depending on the year someone was born. Importantly, there is no prohibition (sans certain occupations) as to when an individual must stop working. Waiting longer or delaying taking Social Security after reaching your FRA allows the monthly benefit to grow up to 8 percent per year until age 70.
If you continue working after your FRA, additional earnings may increase your earnings profile and subsequently increase your monthly benefit. Withdrawals from retirement accounts usually must begin by age 70½ with certain exceptions.
Delaying withdrawals may help retirement accounts maintain value depending on the underlying assets in the account. Know that any non-guaranteed asset is subject to inflation, market and other risks. This can increase or decrease account values.
If you own your home, tapping its value via a reverse mortgage allows access to immediate cash if specific rules are met. However, before entering into this type of agreement, make sure you have a thorough understanding of all that is involved.
Cash can also be used to purchase a guaranteed annuity, creating guaranteed monthly income immediately or in the future. A myriad of options exist on how an income stream will be paid and all contract terms and costs should be thoroughly vetted before any purchase is considered.
Retirement Account Changes on the Horizon
On Aug. 31, 2018, President Trump signed an executive order directing the Treasury Department to investigate the plausibility of changing required minimum distributions (RMD) to accurately reflect life expectancies. Permitting 401(k) and IRA accounts to remain invested longer without taking required withdrawals beginning at age 70½ may allow account values to grow. While this might sound good to some, Forbes financial writer Howard Gleckman, points out, “[U.S.] Treasury doesn’t have the legal authority to do that. But even if it did, such a step would do little more than benefit those who least need the extra money in retirement.”
In addition, the order directs the Treasury Department to review the plausibility of non-like businesses entering into Multiple Employer Plans (MEPs). CNBC financial reporter Sarah O’Brien commented, “Research from The Pew Charitable Trusts shows that 37 percent of small-business owners say such plans [401(k)] are too expensive to set up, and 22 percent say their organization does not have the resources to administer a plan. ... If regulations were eased, unrelated companies would be able to team up and share the associated costs and administration.”
In respect to retirement planning, it is important to fully know and understand your current and future needs. With all the political noise and confusion from the nation’s capital, it is in your best interest to ask questions and consult with trusted professionals before entering into a financial or legal transaction. Once completed, any actions taken more than likely cannot be reversed.
Dr. Wolfson is a financial consultant and advisor. He retired after 27 years of active chiropractic practice. Dr. Wolfson can be reached at (631) 486-2792 or firstname.lastname@example.org. View more published articles here.