While everyone was enjoying the holidays and some hot cocoa by the fire, Washington was making some important changes to retirement planning. The most universal part of the bill is that it will delay the start of required minimum distributions. RMD’s currently start at 70 ½, but with this new proposal it will be delayed to 72.
The benefit is that it allows for more tax planning in the years from 59 to 72. We view this adjustment as an extra little present given to us by Uncle Sam for the holidays.
For any clients impacted by these changes, we are integrating them into your future financial plans.
The biggest downside to America’s sweeping new retirement law
by Joanna Campione of Yahoo Finance
The SECURE Act — which stands for Setting Every Community Up for Retirement Enhancement — went into effect on Jan. 1.
The goal of the new law is to boost retirement savings, in part by giving small businesses new incentives to provide retirement plans for employees. And of course anything that’s done to get more people saving for retirement is a win.
Americans are woefully behind on their retirement savings. According to a 2018 survey of nearly 6,000 U.S. workers from the Transamerica Center for Retirement Studies, just 24% plan to retire at that magic age of 65, while 54% of American either expect to continue working past 65 or don’t plan to retire at all. Only 22% say they will retire before age 65.
Michael Goodman, president of Wealthstream Advisors and a member of the American Institute of CPAs, says he likes a lot in the new law. There is one big downside, though.
Prior to the SECURE Act, if a family member had an Individual Retirement Account, died, and left that IRA to a non-spouse heir, that beneficiary could make withdrawals over the course of their lifetime and continue to benefit from the IRA’s tax-deferred growth. This was known as a stretch IRA. Under the SECURE Act, beneficiaries have to take that out within 10 years.
“In the past … if you received an IRA or a 401(k) as a beneficiary, you could take it out over your life expectancy,” Goodman explained. “And what does that really mean, is it means you’re taking small pieces out over your life, also getting the tax deferral. So your money is being able to grow tax deferred within that plan, and then ultimately you’re setting yourself up for a nice little retirement plan in the future. Now you’re going to have to take that out within 10 years.”
He gave the example of a 40-year-old who has a 40-plus-year life expectancy. Before the SECURE Act, they could make withdrawals over the course of four decades. That person now has to withdraw those funds by the time they’re 50.
“So, there’s a lot of planning opportunity there as to what’s the best time to take that out,” Goodman said.
How Congress is making it easier to save for retirement
Still, Goodman pointed out many positive provisions in the law, including an auto-enrollment feature that gives employers a tax credit for putting a system in place to automatically enroll workers when they become eligible for a 401(k). That employee would have to opt out of the program to not save.
“Right now, there’s no requirement to do either one,” Goodman said on Yahoo Finance’s On the Move this week. “I would say probably the vast majority of plans don’t have auto-enrollment. And that’s probably an area where maybe we could have gone a little further in the SECURE Act.”
Goodman contends auto-enrollment should be the law along with auto-increasing of retirement savings, meaning each year an employee’s contribution to a retirement plan increases by a set amount. Employees should be required to opt out of these features as opposed to having to opt in to saving, he says.
Aside from the auto-enrollment component, the SECURE Act also requires employers that offer retirement benefits to provide them to part-time workers once they’ve worked 500 hours each year for three years in a row. The law also changes the age for when IRA and 401(k) holders have to begin withdrawing from their account — it’s now age 72 instead of age 70.5.
What Goodman also likes about the SECURE Act is that it encourages employers to offer annuities as investment options within their 401(k) plans.
“It’s a great feature for people [and gives them] the ability to, perhaps, take their retirement assets and convert it to an income stream, much like Social Security,” he said. “For most people, that’s very comforting. It’s a set income amount, you can’t outlive it, it’s going to go on forever.”
Happiness in Retirement:
Even in retirement, people have trouble spending time
how they want to
by Michelle Chang for Quartz
Retirement well-being has been widely studied, in ways that tend to center around the impact of people’s finances. But how retirees spend their time is shaping up to be at least as interesting a story as how they spend their savings.
A new study [published in the Journal of Financial Planning] led by Tao Guo, an assistant finance professor at William Paterson University, finds that how people allocate their time in retirement is a factor in their well-being. And the reality is that most retirees are spending way less time on what they desire as they get older, contributing to a decrease in overall happiness.
The study used data obtained from the Health and Retirement Study (HRS), a longitudinal survey administered by the University of Michigan’s Institute for Social Research, which contains detailed information on retirees and self-reported happiness derived from daily activities, as well as the amount of time allocated to each activity.
Passive activities such as watching television and staying at home were reported to generate the lowest amount of happiness, while more active endeavors, like socializing, volunteering, walking or exercising, were associated with the highest level of happiness, among retirees of all ages. Yet the study found that as respondents aged, they spent more time watching television, staying home, and running errands.
On the one hand, this makes sense in that, as the researchers suggest, more active endeavors may also demand more self-motivation, better health, or financial resources. (Also, while gardening or playing golf might sound like a great idea in the abstract, doing it every day for months or years on end might be a different story.)
On the other hand, at least the desire to engage in active pursuits was found to have increased with age, while the desire for passive activities decreased with age. (A possible explanation for this, the researchers suggest, is that people might start off in their retirement spending more time at home or watching more television, making up for what they missed during their working years. But eventually they find that engaging in more social activities provides more happiness.)
The desire for more meaningful activities may also help explain why, as the workforce continues to age, the share of Americans working in their 70s has also increased.
Meanwhile, the study found that engaging in activities that could lead to social isolation was consistently associated with poor health and low well-being in older individuals, as well as increased risk of premature death and poorer cognitive functioning.
The study suggest that retirees of any age can benefit from being given simple resources, like a list of volunteer opportunities, tools that help them track their time use and health, and life-planning and retirement coaching. And the researchers, whose work was published in the Journal of Financial Planning, suggest that financial planners should be thinking about these things and about their clients’ mental states in retirement, and not just focusing on how people manage their savings.