Fiduciary Is Fun!
(a.k.a. I heart taxes)
(a.k.a. I heart taxes)
Milliman, an actuarial and consulting firm (and a very good one by the way), recently released a report suggesting that the “average” healthy 45-year-old couple that retires at age 65 can expect to pay $1.4mm out of pocket in their retirement years for retiree healthcare. Before anyone gets excited, let’s think about this.
Milliman is full of excellent actuaries who are skilled at “running the numbers.” The problem with running numbers out over many years is you can get some crazy results. I would like to suggest that the results of this report are indeed crazy. I am not going to argue with the way the numbers were calculated; Milliman’s actuaries are much better at math than I. Rather, I am going to suggest the numbers simply don’t make sense from a practical standpoint.
Milliman suggests that the average couple will have $1.4mm in just retiree healthcare costs. However, I can tell you that the average retiring couple will not have $1.4mm in TOTAL, let alone for just healthcare costs. I can appreciate the point being made which is healthcare in retirement is going to cost A LOT of money. Got it. But it’s not going to cost $1.4mm per couple on average because on average couples don’t have $1.4mm.
So, we have come to an impasse. Milliman calculates $1.4mm in cost per couple, but most couples don’t have this amount of money. What do we do? Something has to give, right? And don’t forget, these costs are after Medicare has paid because we are talking about a retired couple. Nothing like pointing out a problem without offering a solution.
I’m not going to suggest that I have the answer to this one, but I can tell you that couples are not going to pay what they don’t have. What is the best that you can do today to plan for this less than rosy future? You can certainly start maxing out your Health Savings Account (“HSA”) assuming you have one. This might be one of the best long-term vehicles to fund retiree healthcare costs. You can also start planning for Long Term Care needs, as a significant portion of retiree healthcare costs are expected to fall into this category.
Want to learn more about how to prepare? Give me a call and let’s have a conversation.
Apparently, we do. At least you should talk about your parent's retirement with them, according to some new research from TIAA. The research just released last month indicates that 53% of Gen Xers and 66% of Baby Boomers are concerned about their parents’ financial security in retirement. The reason why this is a concern is because we get STRESSED OUT about our parents financial situations as they age. I suppose we didn’t actually need any survey to tell us this.
However, the more worried we get, the more it takes a toll on our own health and financial preparedness. The research seems to suggest a trickle down effect showing the more we are concerned about our parents, the more likely we are to lack confidence in our own retirement prospects. And I wouldn’t be surprised if this lack of confidence that we develop flows down to the next generation.
Is there any hope to break out of this cycle? The good news is yes, and it’s not that complicated, but it’s not that easy either. Evidently, we need to talk about our parents retirement WITH THEM. Having a discussion, and the sooner the better, allows both the parents and the children to understand the realities of retirement better. Discussing begets understanding, which begets planning, which, when done well, can alleviate our concerns. It’s not always a full proof strategy, but it is better than doing nothing and presuming the worse.
Now I said those discussions while simple on paper might be difficult in reality. How might such a conversation begin? I would recommend engaging with a good financial planner to who can assist leading a multi-generational discussion at a neutral location. These types of conversations are never easy, but better to have them with a financial professional than over Thanksgiving Dinner. Those never work out well.
Apparently, Required Minimum Distributions (“RMDs”) are a lot harder than you would think. A new survey from TD Ameritrade finds that only 38% of Americans actually know that RMDs are required from tax advantaged qualified retirement accounts, e.g. IRAs, 401ks. And if we are to believe that the Baby Boomers are retiring at the rate of 10,000/day, it’s safe to say that this could become an issue in the not too distant future.
Not taking RMDs is a problem because the penalty for missing one is 50% of the amount that should have been with withdrawn, in addition to the income tax due! If that seems like a pretty steep penalty, that’s because it is! The good news is that these accounts are generally at financial institutions that are aware of the need to make the RMDs and notify the individual of the amount that needs to be withdrawn. Nevertheless, this doesn’t necessarily always mean things go well
For example, do you know when you MUST begin your first RMD? The first one is due by April 1st of the year FOLLOWING the year in which you turn 70 1/2. That’s all well and good, and many people (or at least some people) actually know this. A problem can surface, however, if you wait until April 1st because delaying doesn’t mean you don’t need to take another distribution by December 31st of that same year. Consequently, you could get two distributions in one year which could do some things to your tax bill that you would rather not happen.
Another common challenge folks face is when they have multiple tax advantaged accounts – IRAs, old 401k balances, etc. Any idea how to calculate what is required there? The math isn’t necessarily that hard, but the actual distributions can be tricky. For instance, if you have multiple IRAs, you can take the total required distribution from 1 IRA or mix it up. No problem as long as the total for the IRAs is distributed. Does it work the same for 401ks? Nope, it does not. Each 401k account stands on its own. How about 403b balances left with old employers. Seems like they should be treated like 401ks, right? Wrong. Now we are back to the IRA method. Don’t worry, if you get it wrong the penalty is only 50%!
There is some legislation that will be changing the RMD rules again if it gets passed this year, which seems like a real possibility. Will the new rules make things less complicated? Maybe…maybe not. You should probably talk to a professional about this. You should probably talk to me.
Give me a call and let’s have conversation.
Pete Welsh aka 401kGuy
There are many ways for a small business owner to fund retirement. Although according to US News in a survey done in 2018, 34% of all small business owners had saved nothing for retirement. That’s not good. And interestingly, 42% of small business owners, according to The Motley Fool, June 2018, are counting on the sale of their business to constitute a major source of retirement income. That’s seems like a pretty big bet to me. Who is going to buy those businesses again?
So what might a small business owner do with respect to planning for retirement? In most pass-through tax entities – S-Corps, Partnerships, and LLCs – the most viable, tax advantaged way to plan for retirement is through a qualified retirement plan. The amount that can be contributed to a defined contribution plan is dependent, in large part, on the owners earned income, but can be as high, for 2019, as $56,000 or 25% of wages, whichever is less.
In working with smaller companies, I often see an owner trying to maximize the contribution at $56,000. Simple math says that $56,000 is 25% of $224,000. In other words, if an owner pays himself anything more than $224,000 in wages, he is not getting any benefit as far as his defined contribution plan is concerned. He would be better off taking amounts above $224,000 as passive income, if that is an option, and paying taxes at a lower rate.
However, if there is a spouse gainfully employed, or a spouse that could be so employed, there could be an argument that we should pay the spouse some of the income that might have otherwise gone to the owner above $224,000. Why would we do this? Those additional wages going to the spouse are now earnings that can be considered for our 25% limitation. We can’t give our owner any more contribution, but if we pay the spouse $100,000, for example, we could make a contribution of up to $25,000 into her account
As you might expect, there are many considerations that must be factored in before we rush to take the action noted above. The additional payroll taxes for the spouse might be steep. But then again, getting a benefit from Social Security might be good. Who knows? The additional $25,000 deduction good, right? Lots to consider. Make sure you work with someone qualified and experienced to walk you through the pros and cons around these scenarios.
In fact, work with me.
The 2018 tax filing year is over for most, but many owners, partners, and members of pass through tax entities are still on extension as they try to make sense of all the tax changes that went into effect for 2018. Many partners and LLC members are still trying to understand what the Tax Cut and Jobs Act of 2017 has done to their net income and taxes. While there were a number of positive changes for high income earners there were also some caps, particularly in the areas of State and Local Taxes (“SALT”).
For those individuals who might be looking at a tax bill that is larger than what was expected, the question could be asked “what can we do now?” The general answer is “not much”, but there is one area of planning that is still available post the close of the year, assuming you are on extension, and that includes making profit sharing contributions to your retirement plan. Such contributions can have a meaningful impact, potentially, on Qualified Business Income (“QBI”) and the available 20% income deduction. These situations are extremely fact dependent, obviously, and everyone’s situation does vary.
There are many ways to make contributions, but for partners and LLC members, the calculation is more than a little complex to say the least. The IRS did create a 21 Step Process for calculating your earnings and your deduction in Publication 560 to help make it a little easier for you. Suffice to say, however, it’s not that easy. But given the importance in getting this tax deduction contribution correct, you should consult an expert.
For those of you looking to explore your tax planning options with your retirement plan and to understand how those changes will impact your personal situation, please reach out to us for a free consultation. We work collaboratively with your tax and legal advisors to get you the maximum deduction.
Pete Welsh aka 401kGuy
Can you handle an emergency? What kind you might ask. What if I said it were an emergency that would cost you $400 from your cash or savings account. Could you handle that? According to a new study by the Federal Reserve that was published this May, 2019 if you are like 4 out of every 10 Americans, you could not. You couldn’t do it; couldn’t come up with $400. About 1/3rd of the people surveyed said they would need to borrow or sell something to raise the $400, and 12% said they couldn’t pay it all.
We are enjoying an unprecedented, strong economy (bull market for over 10 years), low inflation, strong jobs market, rising wages, and we still have 40% of Americans unable to cover a $400 emergency from cash. From my standpoint, this is troubling news, but do you want to hear the real head scratcher from my standpoint? According to the same report, over three quarters (75%+) of all adults report that they are “doing OK” or “living comfortably” when asked about their economic well-being. This is the same group of people that had 40% of them unable to pay a $400 emergency! News Flash – if you don’t have $400 for an emergency, you are not “doing OK”!
So, what should we do here? Should we shame these folks? Of course not. Should we pay them more money? Who thinks that is going to solve the problem? I guess we could simply ignore the problem and be thankful this is not us? Or is it? Wait let me check.
The better alternative is to teach solid money management skills. Few young adults get basic skills taught to them anymore and are left figuring these things out for themselves, where they have varying degrees of success. The challenge is how to do this in a cost effective manner? The answer – the workplace. If you are an employer interested in helping your employees learn some of the basics of cashflow and budgeting, give me a call and we can talk about setting something up. Afterall, do you find it concerning that 4 out of every 10 of your employees do not have $400 for an emergency?
The technology arms race for the financial attention of individuals and employees has never been greater. Not a day goes by that I do not see another press release or receive an email about how some financial services company is introducing a new website, or new tool, or new behavioral finance gobblegook that will revolutionize the way Americans “save and prepare for their retirement.”
To believe the hype is to believe that the average American is more engaged and prepared than ever before to save confidently on his journey to financial nirvana. Is that how it is?
According to some new research by the National Association of Retirement Plan Participants, an organization that makes “financial information transparent and universally accessible for the 145 million working Americans” we are still a wee bit away from nirvana.
Despite the plethora of new tools offered by financial institutions, it appears that only 11% of people have any generalized level of trust in them. Additionally, despite all these new tools, only 43% of employees are satisfied with the education services provided by their 401k provider and engagement is decreasing across all channels of website usage. Only 18% of employees feel comfortable planning for retirement, and only 33% of them have even tried to reduce debt or make a budget.
What the heck is going on here?! We are living in a golden age of new tools for people and across all mediums the tools are being used less and less resulting in greater financial stress and less confidence. The problem? Technology alone is not the solution.
Technology is part of the answer, but it can never be expected to be the total solution. When I see all these new tools, I concede they are great. But by themselves, they are only a starting point. Financial planning, indeed life, is too complicated to expect people to turn en mass to only electronic tools for answers.
A better solution? Pair these marvelous tools with a competent and skilled financial advisor if you really want to move the needle. The combination of advisor and technology can really deliver some powerful results. Want to learn how? Give me a call to discuss!
I saw that on a sign the other day. I smiled because it made me think of how most people view financial planning.
The whole process of planning, for almost anything, is opaque. There are help books and guidebooks for almost anything, but when we sit down and think about our current situation, it all seems unclear as to where to start. There is more “help” available on almost everything today than there was 20 years ago, and yet we seem to be able to do less and less on our own. My father built the homes he lived in, repaired the cars we drove, and made some of the furniture in our home. You think I can do any of that? Nope.
Interestingly, to me, one thing he never did do alone was plan for his (and my mom’s) financial future. He always used an advisor. An advisor can help even the best of the self-sufficient get started on their financial planning, and it appears most people are aware of this.
A new survey from Employee Benefits Research Institute (“EBRI”) finds that 70% of all workers would find it helpful to have a workplace educational/financial planning program available to them. What do workers most want out of such program(s)? It turns out that 70% of the ones that want a program want help/advice on how to manage competing financial priorities. Quickly behind this desire is the desire to have help with basic budgeting and day-to-day finances (65%). 45% of them want help specifically around their student loan obligations.
Financial planning can be opaque and it is certainly unclear where to start. But getting started is the most important thing! Surveys of retirees always highlight that retirees wish they had started their financial planning earlier in their careers. And what better place get started than with an advisor at the workplace.
If you are an employer who would like to learn more about how to get a financial planning benefit for your employees up and running, give me a call!
The word “Retirement” congers many different thoughts and images. I can tell you that after having spent 25 years working with companies and employees that “retirement” seldom means the same thing to two different people.
And the definition of retirement just keeps getting more jagged as the Baby Boomers reach their senior years. Research from AP-NORC Center shows that the idea of retiring on your own terms and putting your feet up for your remaining days is something that fewer and fewer people do. In fact, if that was ever the reality, it certainly is not prominent today.
A couple of stats from the research to get us started: over 1/3rd of Americans who consider themselves retired did not retire by choice. Most common reason people take early retirement? Health problems or disability. One out of every 3 people stop working not by choice. Find that surprising? I do. 43% of Americans over 50 say that the thought of retirement causes them to be more “anxious” than “excited.” That’s probably not good. And 56% of Americans say they expect to work past 65 with 27% of those saying they never expect to retire.
Now this last statistic may not be all that bad. Many people find purpose and enjoyment to work and working past age 65 is a choice that they welcome, not a need they bear. It’s an option, not a requirement. And that is worth keeping in mind. Rather than being forced to work beyond what your health can bear or what you need to do to provide for living expenses, isn’t it nice to think that your golden years might afford you the chance to continue to stay involved, find purpose and enjoyment without the financial requirement to do so?
What's the lesson here? It is critically important to promote savings, budgeting, and planning as early in one’s career as possible so that when those later years approach, they are not met with anxiety, but rather with hope and excitement of what can be.
If you want to work with an advisor who shares such a vision, please give me a call!
As of 2018, student loan debt is now the second highest consumer debt category – behind only mortgage debt – and higher than both credit cards and auto loans. According to Make Lemonade, a consumer finance company, more than 44 million borrowers have student loans and the collective debt is greater than $1.5 Trillion. The average borrower owes $37,172. And, of course, the largest group of borrowers is under age 30.
If you find these stats a little disconcerting, you should. How this debt is impacting our society is being felt in many ways. For those who are shouldering this debt, it means that many of the things they would otherwise be spending money toward must instead be used to pay off their student loans. When you consider that most of the individuals who have this debt are also just starting out in life and need to begin building a life separate from their parents or college, the financial hill they need to climb can be more than intimidating; it can be debilitating.
What’s this have to do with your retirement plan? For one thing, we are seeing more and more young people unable to contribute to their company’s 401k plan as they need to use those dollars for debt payment. At first glance, this might not seem like much of a worry for employers, but when you consider that the delay in participation could last for 5-10 years, the real impact to employees who are now falling behind in retirement savings can be huge. Moreover, think about the increased stresses these borrowers are feeling as a result of just trying to dig themselves out of this financial hole.
Is there something an employer can do? There are several things actually. A financial advisor can work with employees to help them with budgeting and cash flow management. A good advisor can also work with the employer to help craft a way via the retirement plan whereby the employer can still make some “matching contributions” to the plan for those employees who are paying down debt instead of making 401k deferrals. In fact, this idea is gaining so much momentum that legislation is even being proposed in Washington to codify how to do this.
Want to learn more about how to help your employees manage the student loan burden? Give me a call! I work a lot in this space.