by Jonathan Goudy / Retirement Planning
The vast majority of those reading this submission find themselves, either currently or prospectively, saving for retirement using a defined contribution plan (such as a 401(k) plan), rather than the defined benefit pension plans that our parents or grandparents enjoyed. This is because few employers, other than governments, can afford to fund traditional pensions. Instead, we live with defined contribution plans, where our ultimate benefits will depend on our level of funding, our employer’s optional matches, and the performance of the securities markets throughout our lifetimes. Gone are the days when we would work for a corporation for 35 years and they would tend to our needs throughout our remaining lifetimes.
The new prototypical retirement involves our leaving our employer and:
We will discuss at another time the issue of proper investing of, and withdrawal rates from, retirement assets, assessing the likelihood of out-living our limited retirement assets, but let us discuss some sobering numbers:
What can we do today to protect against outliving our retirement resources? Let us focus on a slightly more favorable example:
This is where we depart the accepted, conventional world of fee-only financial planning and stride boldly into the world of the commissioned brokerage industry. One solution to this risk and this cash shortfall is the use of a single payment immediate income annuity (SPIA). Let’s revisit our last scenario using the SPIA solution:
Please note that interest rates are still near historic lows and the rates payable on SPIAs lock in at the time of purchase and will increase if and when market interest rates increase, making these numbers even better. If your retirement strategy can allow time for rates to rise, patience is encouraged.
In the past, annuities have been used to generate fees to brokers, to the potential detriment of the client. Placing expensive variable tax-deferred annuities into tax-deferred IRAs (“layering your tax deferral”) is tough to justify under a fiduciary standard. Nevertheless, there exist times and places for low-cost SPIAs in the crafting of your “do-it yourself” pension plan.
Disclaimer
The general information herein is not intended to be, nor should it be treated as tax, legal, or accounting advice, nor can it be used for the purposes of avoiding tax penalties. Please seek advice from an independent tax advisor before acting on any information presented.
by Jonathan Goudy / News, Retirement Planning
Today we discuss five questions to ask yourself five years prior to retiring.
How Long Will You Live?
Where Will You Live?
What Will You Do?
How “Large” Will You Live?
How Lucky Will You Be?
None of us knows what lays in wait for us during retirement. It is prudent, however, to ponder these issues far enough in advance of your retirement date, to enable you to make appropriate changes in your plans or delay your retirement date until adequate resources are available.
Disclaimer
The general information herein is not intended to be, nor should it be treated as tax, legal, or accounting advice, nor can it be used for the purposes of avoiding tax penalties. Please seek advice from an independent tax advisor before acting on any information presented.
by Jonathan Goudy / News, Retirement Planning
We conclude our review of the recommendations in the Bipartisan Policy Center’s (“BPC’s”) report on the future of retirement security (the “Report”).
II. Promote Personal Savings for Short-Term Needs and to Preserve Retirement Savings for Older Age
III. Facilitate Lifetime-Income Options to Reduce the Risk of Outliving Savings
IV. Facilitate the Use of Home Equity for Retirement Consumption
V. Improve Financial Capability Among All Americans
VI. Strengthen Social Security’s Finances and Modernize the Program
Modern employers were unable to afford the traditional DB Pension Plans offering guaranteed lifetime income payments, so DC Plans, such as 401(k) Plans, were implemented in the 1980s. The responsibility was transferred from employer to employee, but employee education and motivation as to the required level of funding to support retirement have been woefully inadequate. When Social Security was implemented in 1935, the retirement age was 65 and the average life expectancy in the United States was 61, versus 79.3 today. Social Security was designed as a safety net, not a retirement plan. The Report provides thoughtful recommendations on fixes for the funding issues, as well as the disbursement issues (annuities). The discussion on repairing social security is one of many, but has some excellent ideas. One need not accept all of the Report’s recommendations, but one must accept that the issues must be addressed in short order.
Disclaimer
The general information herein is not intended to be, nor should it be treated as tax, legal, or accounting advice, nor can it be used for the purposes of avoiding tax penalties. Please seek advice from an independent tax advisor before acting on any information presented.
by Jonathan Goudy / Retirement Planning
It is time to review the much heralded recommendations to improve retirement security and personal savings in the Bipartisan Policy Center’s (“BPC’s”) report on the future of retirement security (the “Report”). The recommendations track the six challenges we have discussed previously.
Improve Access to Workplace Retirement Plans
We will continue this review next time. I hope the reader appreciates the utility and practicality, yet creativity, of these recommendations by this expert Commission, despite this summary treatment. These ideas likely are a good representation (at least in part) of the future of retirement planning in the U.S. and are worthy of your consideration.
Disclaimer
The general information herein is not intended to be, nor should it be treated as tax, legal, or accounting advice, nor can it be used for the purposes of avoiding tax penalties. Please seek advice from an independent tax advisor before acting on any information presented.
by Jonathan Goudy / News, Retirement Planning
Today we continue to review the six challenges for retirement security and personal savings in the Bipartisan Policy Center’s (“BPC’s”) 146 page report on the future of retirement security (the “Report”).
We have discussed the issues. Next time we will look at the Report’s proposed solutions.
Disclaimer
The general information herein is not intended to be, nor should it be treated as tax, legal, or accounting advice, nor can it be used for the purposes of avoiding tax penalties. Please seek advice from an independent tax advisor before acting on any information presented.
by Jonathan Goudy / News, Retirement Planning
Let us resume where we ended last time, with our discussion of the Bipartisan Policy Center’s (“BPC’s”) 146-page report on the future of retirement security (the “Report”). Today we will start to address the six challenges for retirement security and personal savings we mentioned last time.
I. Too Many Americans Lack Access to Workplace Retirement Plans—
II. Many Americans Lack the Resources to Save for Short-Term Needs
Discount these scary statistics any way you wish, but it seems inevitable that at some point in the near future there will be innumerable Baby Boomers retiring without adequate savings to provide for themselves during their remaining years. How will we fund this additional financial strain?
We will address more challenges in our next submission. Until we meet again… SAVE!
Disclaimer
The general information herein is not intended to be, nor should it be treated as tax, legal, or accounting advice, nor can it be used for the purposes of avoiding tax penalties. Please seek advice from an independent tax advisor before acting on any information presented.
by Jonathan Goudy / News, Retirement Planning
For the past two years, the Bipartisan Policy Center (“BPC”), a commission (a.k.a., Washington, D.C. Think Tank) made up of 19 high-profile experts from the political, business, academic and investment worlds, has been developing a plan to strengthen the retirement security and personal savings of all Americans. Quoting from its website, “The Bipartisan Policy Center is a non-profit organization that combines the best ideas from both parties to promote health, security, and opportunity for all Americans. BPC drives principled and politically viable policy solutions through the power of rigorous analysis, painstaking negotiation, and aggressive advocacy.” The BPC’s 146-page report (the “Report”) was released on June 10, 2016 and represents a key consideration in our ongoing discussion of retirement issues.
The Report recommends fixes for six challenges to retirement security and personal savings:
The Report’s proposals of interest to higher income taxpayers include:
The BPC’s co-chairman stated that if the Report’s recommendations are enacted, ”retirement savings for middle-class Americans would be increased by 50 percent by 2065” and old-age poverty would be reduced by one third of today’s levels. Such lofty accomplishments must be paid for by someone and, accordingly, demand a more in-depth inspection, which we will undertake in future submissions.
Disclaimer
The general information herein is not intended to be, nor should it be treated as tax, legal, or accounting advice, nor can it be used for the purposes of avoiding tax penalties. Please seek advice from an independent tax advisor before acting on any information presented.
by Jonathan Goudy / News, Retirement Planning
Before we broaden our investigation into retirement planning, let us take a moment to consider the heated activity on the DoL’s Fiduciary Rule for investment advisors to retirement plans. Please refer back to my previous two submissions if this discussion is new to you. In the two months since the Rule was passed on April 8, 2016:
The industry plaintiffs argue that they should not have to spend the resources to implement the rule, until courts have approved it, and the next administration is in place. The DoL responds that the rule has had a huge amount of exposure and is lawsuit proof. All parties acknowledge that delaying until after the presidential election could result in the death of the rule, depending on who is elected. Perhaps the industry plaintiffs believe that either new administration will be more user-friendly than the current administration and just want a delay. They had successfully deadlocked the SEC and Congress into no action positions on the fiduciary rule, but who would have thought it could come from the DoL? They were mistaken in their beliefs.
Why, again, do we care about the fiduciary rule? Why can we not let the brokerage industry operate as they always have, subject to a lower suitability standard and free to charge whatever fee the account will bear? What is so special about qualified retirement plans and IRAs that they require a separate fiduciary rule and more protection than our individual investments with our brokers? Why should investors have access to the state and federal court system for their complaints, rather than a broker-friendly arbitration system interpreting the contract of adhesion that the modern day brokerage contract has become?
Perhaps a more pertinent question is why has the brokerage industry brought out every possible means of blocking what has been described as a “watered-down,” “toothless” fiduciary investing rule? Why are they so concerned about being held to a fiduciary standard of care in acting on behalf of their clients? What about brokers’ means of compensation is not fair to the client and why do they insist on maintaining these unfair practices? Why should delaying implementation of the fiduciary rule beyond the scheduled April 2017 effective date [thereby giving them time to once again freeze the rule into legislative and regulatory limbo] serve as a victory to those who wish not to be considered fiduciaries to their clients?
When we return to the trials and travails of funding an adequate retirement in the next posting, we will likely appreciate the utility of having our advisors acting in a fiduciary manner, with our best interests in mind, when they handle our precious retirement assets.
Disclaimer
The general information herein is not intended to be, nor should it be treated as tax, legal, or accounting advice, nor can it be used for the purposes of avoiding tax penalties. Please seek advice from an independent tax advisor before acting on any information presented.
by Jonathan Goudy / News, Retirement Planning
In the last submission we discussed the various definitions and requirements of the DoL’s new Fiduciary Rule on ERISA qualified retirement plans (such as 401(k) plans and pensions) and IRAs. We now turn to exemptions from application of the new rules and what the long-term impact of the rules might be.
We have discussed the new Fiduciary definitions and requirements for investment advisors to qualified ERISA plans and IRAs and we have now discussed the exemptions from the new requirements and how to satisfy them. What does this mean to the public retirement plan client?
We will expand our retirement plan discussions next submission.
Disclaimer
The general information herein is not intended to be, nor should it be treated as tax, legal, or accounting advice, nor can it be used for the purposes of avoiding tax penalties. Please seek advice from an independent tax advisor before acting on any information presented.
by Jonathan Goudy / News, Retirement Planning
Having hopefully piqued everyone’s interest with scary statistics last time, let us proceed to consider the U.S. Department of Labor’s (DoL’s) new Fiduciary rule and its potentially broad impact on society. Nearly one-third of U.S. Households owned individual retirement accounts (IRAs) in 2015, with approximately $7.3 Trillion in assets. Some 59% of those with rollover IRAs worked with a financial advisor in choosing investments. [Investment Company Institute data].
The Rule imposes fiduciary duties on advisors who recommend investments to:
An advisor is deemed to have given investment advice under ERISA if:
The Rule specifically makes an advisor’s investment recommendations to rollover assets from a qualified plan or IRA fiduciary in nature. Public speeches, advertisements, investment education, appraisals, fairness opinions and valuations are not deemed investment advice.
This Fiduciary rule marks a radical shift for brokers and broker-dealer firms, who will no longer be judged by a suitability standard but instead, owe a higher, fiduciary duty to put their clients’ interests first. The rule prohibits commission-based fee arrangements and other forms of conflicted compensation common in the brokerage industry. Investment advisors cannot accept compensation or payments that would create a conflict unless they qualify for an exemption that ensures the client is protected. An investment advisor who makes an investment recommendation and receives conflicted compensation in connection with the advice provided to the plan or IRA will engage in a prohibited transaction unless one of the enumerated carve-outs from the rule applies or the advisor complies with the “Best Interest Contract Exemption” (“BICE”) requirement. To keep the reader on the edge of his/her seat, we will address the specifics of the prohibited transaction exemptions and BICE, together with the broader potential impact of the Fiduciary rule, in the next submission.
The Fiduciary rule is effective on June 7, 2016, but is implemented in phases:
The House passed a resolution blocking effectiveness of the Fiduciary rule on April 28, 2016, with less than a veto-proof majority, and the Senate is considering such a measure. President Obama has vowed to veto any such legislation hitting his desk.
Disclaimer
The general information herein is not intended to be, nor should it be treated as tax, legal, or accounting advice, nor can it be used for the purposes of avoiding tax penalties. Please seek advice from an independent tax advisor before acting on any information presented.