Fiduciary Is Fun!
(a.k.a. I heart taxes)
(a.k.a. I heart taxes)
I saw some recent research from ValuePenguin that suggested 63% of Americans do not understand how a 401k plan works. This is as recent as May of 2019. Does this surprise you?
Last week I did a number of enrollment meetings for a client of mine. They are a Charter School here in Indianapolis and recently hired about 50 new teachers for the upcoming school year. They are technically a public school which allows them to sponsor a 403(b) plan. I started each meeting by asking for a show of hands of how many in the room understood what a 403(b) plan is. What do you think was the percentage of hands that went up? If only 37% of Americans understand a 401k plan, I can assure you that even less understand a 403(b) plan. In fact, most people in the room were surprised to learn that both types of plans get their name from the corresponding section of the Internal Revenue Code.
For my part, I do not find it surprising that the majority of employees do not fully understand how a corporate retirement plan works. After all, why should they? It’s not their job to understand how these work, it’s mine. And it’s my job to help them understand how to fully take advantage of these plans. A key challenge to doing this is a practical one – time. Most enrollment meetings are designed by the employer to last 20-30 minutes. It is enough time to cover the basics, but do you think that everyone walks out of the room with a full understanding?
What’s the best outcome that can come from an in-person enrollment meeting? For my part, the goal is not to provide a complete understanding of everything about the plan. My goal is to get the employees to take at least one step forward on their investing journey. Especially with younger folks, I encourage a modest percent of their income – 2 or 3 pennies on the dollar in the retirement plan. Once they get started, they can always increase. Certainly deferring to the match is optimal, but many employees starting out struggle with deferring 6% or so of pay. 2% or 3% is at least a start.
So after the meeting, what are the next steps? I encourage employees to contact me directly, and many do. I always find it interesting to visit with employees regarding their own situations. Exploring their own challenges allows for another learning opportunity to explain how the plan works and why they need to take advantage of it.
If you want an adviser for your employees that understands the financial future of your employees requires a long term journey and not just a 20-30 minute drive-by, give me a call!
Pete Welsh a/k/a 401kGuy
I was recently reading an article from the Pension Research Council of the Wharton School of Business and came across this little nugget from Olivia Mitchell from the School, “the baby who will live to be 200 has already been born.” Does anyone think this is a good thing?
Regardless of whether or not Ms. Mitchell is correct, the key point she is making is that people are living longer than they once did. On the whole, this is probably a good thing, right? However, it also raises some obvious issues. The first one, and one that has been noted many times in the financial press, is how are individuals going to plan for what could be a prolonged period of retirement? 100 years ago, retirement was a relatively short period of time. If Ms. Mitchell is correct, retirement in the future could last 100 years?!
The truth is probably somewhere in between, of course, but what will be the consequence for those who have not saved enough for a prolonged retirement, whether that be 20, 30, or even 40 years? Many people say they want to continue or will continue to work into the years that would otherwise be defined as their “golden years.” This is great, if they are able and allowed to do so. Let’s explore that last point
According to a study by ProPublica and the Urban Institute, between 1992 and 2016, 56% of older workers reported either being laid off or pushed out of a job at least once in their older years. Once reemployed, only 1 in 10 reported earning at or above the rate they were making. Rehiring older workers has always been a challenge, and remains so today, even though there are more and more older workers desiring to work!
What’s it going to take for employers to get more comfortable hiring older workers? Obviously there will be a large pool of such older workers available who need and want to work in the future. If we continue to harbor a bias against older workers, how are these individuals going to support themselves in their older age? This situation is going to get uncomfortable for all parties in the not too distant future
We can’t change society in a blog post, but we can at least take accountability for ourselves. If the thought of a prolonged retirement has you concerned and working into retirement is not your first option for several reasons, it is probably time to put together a plan. After all, no one wants to be 150 and standing in line for a job
Give me a call.
Pete Welsh a/k/a 401kGuy
Every employer wants satisfied employees. After all, the opposite doesn’t sound very appealing, does it? How an employer works to create satisfied employees can take numerous avenues. Some of the obvious Management 101 principles include having a boss that cares about their employees’ growth and development, providing an appropriate work/life balance, properly recognizing a job well done, and providing a healthy work culture. These are just a few means of valuing employees on which an employer should focus if the goal is to create satisfied employees.
Nevertheless, even when an employer tries to do everything possible to support employees, not all are satisfied. Some new research from the LIMRA Secure Retirement Institute sheds some interesting light on how you can tell if your employees are Satisfied, Settled, Resigned, or Restless (this last one is not good, by the way).
What I found interesting about this research is that it didn’t just simply ask employees how satisfied they are with their employers, but rather looked at specific things employees do and value after they have been identified as Satisfied, Settled, Resigned, or Restless. Satisfied employees are defined as Enthusiastic, Passionate, Positive, and Proud. Just the kind of employee we all want! What is particularly useful about this employee classification is that employers are able to look at the behaviors and values of their employees and get a sense of how successfully the employer is creating Satisfied employees. So, what were some of these behaviors and values that Satisfied employees have that less-enthusiastic employees don’t?
Well, 99% of Satisfied employees feel that workplace benefits are critical to their financial security. And, not surprisingly, Satisfied employees are twice as likely to be participating in the company’s retirement plan. The first takeaway here – if you have many employees not participating in your retirement plan, they might be Restless. Restless employees are unengaged in the employer’s mission and have one foot out the door.
If you find yourself with several employees not involved in your retirement plan, working to improve their satisfaction with your company is a good place to start. Getting them involved with the retirement plan is also a positive sign. Restless employees are more financially stressed than Satisfied employees and tend to be less secure about their future. Helping these Restless employees become more financially secure and involved in the retirement plan is one step an employer can take to move Restless employees toward Satisfied employees.
Want to learn more about how to build a staff of Satisfied employees? Give me a call!
I have long given up believing that investors are “rational” as I was taught in college. As a Finance major, I learned that investors are rational and make decisions in their own best interest. People don’t voluntarily make decisions that do not favor them, I was told, but rather “optimize” their decisions to benefit themselves. HA!
Some new research from Bankrate.com would leave some college professors scratching their heads. The survey asked 1,000 individuals about their investing preferences for 2019 for money that they would be investing for more than 10 years. Obvious categories were Stocks, Cash, Real Estate, Gold, etc. (Real Estate was #1 for 2019, by the way). What was really interesting, however, was a question about how falling interest rates would affect their investing decisions. Now for a “Rational Investor” falling interest rates should have a profound effect on where they put their money for 10 years or longer, just as rising interest rates should affect such a decision. Entire financial empires wobble on whether the Federal Reserve Board will raise or lower interest rates by even tiny percentages, for example. Certainly, a rational investor would factor declining interest rates into their investment decisions for the long term, right?
Nope. Not going to happen. According to BankRate.com’s research, the survey respondents would make almost no changes to their investments in a declining interest rate environment. It appears that people pick a preferred investment and then decide to stay with it regardless of what is happening around it that would impact their long-term returns. In fact, only 33% of the respondents said that if interest rates were declining would they put more money into the stock market. 67% of the respondents are “not rational.” Surprise!
So, what can we make of this information? If people should be making changes to their long-term investments as a result of macro changes in the economy, and the vast majority won’t, we obviously can’t rely on people making their own decisions in their best interest. Rather, the obvious takeaway for me is that investors need to have some distance from their investments and the decisions on those investments. What does this distance look like? To me, it looks like a competent investment advisor. Someone skilled in taking the emotions out of the decisions and applying financial analysis to the situation. It looks like someone who will act in your best interest. I guess, it looks sort of like me. Give me a call so we can discuss your situation.
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?