Fiduciary Is Fun!
(a.k.a. I heart taxes)
(a.k.a. I heart taxes)
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Not taking RMDs is a problem because the penalty for missing one is 50% of the amount that should have been with withdrawn, in addition to the income tax due!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
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
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!
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.
We all pay into it. We are all expecting to receive it. But do we all understand it? Apparently not. New research from Nationwide Retirement Institute suggests that many Americans have either false expectations as to what they can expect from Social Security or a false reality of their own retirement.
The research has so much data that I can’t possibly cover it all in this blog, but here are just a couple of the more glaring misconceptions: 70% of pre-retirees (those within 10 years of retirement) believe they will be eligible for full benefits at age 63. Wrong. And 26% believe that even if they do claim benefits early, that the benefits will rise once they reach full retirement age. Wrong.
In fact, there are so many things about Social Security that pre-retirees get wrong, it almost makes you wonder what they get right. They certainly don’t get the amount right. The vast majority believe they will receive $1,805 per month in Social Security benefits, when the actual number is closer to $1,408 per month. That a difference of 28%. That’s a BIG difference. Many people, for some reason, forget that Medicare is not actually free and that premiums are withheld, on a monthly basis, from the Social Security benefit. And it can be a meaningful amount.
Is there some hope? Of course. It appears from the research that only 22% of pre-retirees have a formal written retirement plan, but that if you work with an advisor the likelihood of increasing your Social Security benefits goes up. In fact, 76% of those surveyed say that if their advisor did not, or does not, speak to them about maximizing Social Security benefits, they will switch advisors.
So what should you do? Make sure you have a good advisor who works with you to put a solid plan together for your retirement. Are you looking for such an advisor? Give me a call!
I just picked up a new client and the reason might be a bit surprising. The client was quite happy with their 401k Recordkeeper and made it clear from the outset that they were making no changes with them. Rather, they did not feel that their advisor was moving the needle with employees and it was time for a replacement. They decided to interview prospective advisors, including me, but were not sure what they wanted other than “better engagement with employees.”
After 25 years of working with corporate retirement plans, I did not find this prospect/client to be much different than most. They felt like something was lacking with their existing advisor but couldn’t clearly see what needed to be done to improve things. It’s not their fault. Their job is to run their business not understand everything there is to understand about their 401k plan.
When meeting with a prospect like this, I find it always helpful to inquire as to their wish list and when they invariably struggle (again, not their fault) that is the point where I am able to offer some possible suggestions. What I generally recommend as one of the first items on the list is that it be shown how the plan will be improved through objective data by hiring me. Data should drive our analysis around improvements and serve to justify initiatives, but outside of actual investment performance returns, most companies struggle with defining how the plan is objectively improved.
The first step in showing improvement is to get an analysis of where we are today. For this client, the reason they awarded me the business was my ability to actually baseline today the state of the employees’ financial security and roll that up to an overall corporate score. From here, we will target individuals and groups for financial training and measure the results of actions taken. Over time, we will benchmark the plan again and be able to measure improvements.
This doesn’t sound all the complicated, right? Nevertheless, you might be surprised how few people understand how and why benchmarking current state is so important. To learn how I can help you and your employees, please give me a call!
Are you like most Americans who dream of a comfortable retirement that will start sometime in your mid-60s? For most Americans, they can’t even imagine another scenario. However, new data suggests that the dream is becoming less a reality and more of a pipe dream.
According to a new report by United Income, the percentage of Americans who are over 65 and still working is at the highest level in 57 years! Over 20% of all Americans who are at or above retirement age, i.e. 65 or older, are still working. In 1985 it was 10%. Additionally, according to some research from the New School for Social Research, the median savings for a “middle class employee”, someone earning more than $40,000 but less than $115,000, is $60,000. $60,000! It’s no wonder that more and more employees are continuing to work beyond age 65...they have little other choice!
If you are an employer who finds this information interesting, but unconcerning, I would encourage you to think more broadly. These numbers are national numbers, but are they so much different for your employees? If you have employees who are working after 65 wouldn’t you rather they be doing so because they want to instead of have to work?
The answer to this problem lies in getting involved with your employees early to promote a culture of savings and financial wellness. Helping employees understand how to budget, save, and invest for an adequate nest egg is critical to not only a healthy retirement for the employee, but also for the health of the employer.
Give a shout to learn more about how we can help your firm.
For far too long, some might say from the very beginning, employers and employees have viewed their workplace benefits in silos. The company's Retirement Plan stood on one side and the Health Plan on the other. Separate and distinct with no overlap. Is that really how they should be viewed?
Probably not. When employees are financially secure, the positive benefits manifest in several areas. And it makes sense that they would. To presume that employees who are financially stressed outside on the job would leave all those stresses in the parking lot when they walk into work each day is simply naive. Moreover, those financial stresses can take on a physical toll.
Research from Prudential Retirement shows that financially stressed employees are
* 190% more likely to be depressed
* 88% more likely to be stressed overall
* 50% more likely to experience a disability claim
* 32% of Americans say that lack of money prevents them from living a healthy lifestyle.
What do these and other statistics like them mean for employers? Ignoring your employees Financial Security will harm you in other ways including increased health insurance costs as well as workers compensation costs. What's the answer? Pay people more money? Actually, no. The answer is to help employees gain control of their financial lives through better budgeting, planning, and other tools to put them in a better place.
Want to learn how? Give me a call!