Fong Law Group

New Law Makes Big Changes to Retirement Plans

President Trump has signed a spending bill that makes major changes to retirement plans. The new law is designed to provide more incentives to save for retirement, but it may require workers to rethink some of their planning. 

The Setting Every Community Up for Retirement Enhancement (SECURE) Act changes the law surrounding retirement plans in several ways:

• Stretch IRAS. The biggest change eliminates “stretch” IRAs. Under current law, if you name anyone other than a spouse as the beneficiary of your IRA, the beneficiary can choose to take distributions over his or her lifetime and to pass what is left onto future generations (called the "stretch" option). The required minimum distributions are calculated based on the beneficiary’s life expectancy. This allows the money to grow tax-deferred over the course of the beneficiary’s life and to be passed on to his or her own beneficiaries. The SECURE Act requires beneficiaries of an IRA to withdraw all the money in the IRA within 10 years of the IRA holder’s death. In many cases, these withdrawals would take place during the beneficiary’s highest tax years, meaning that the elimination of the stretch IRA is effectively a tax increase on many Americans. This provision will apply to those who inherit IRAs starting on January 1, 2020.  
• Required minimum distributions. Under prior law, you have to begin taking distributions from your IRAs beginning when you reach age 70 ½. Under the new law, individuals who are not 70 ½ at the end of 2019 can now wait until age 72 to begin taking distributions. 
• Contributions. The new law allows workers to continue to contribute to an IRA after age 70 ½, which is the same as rules for 401(k)s and Roth IRAs.
• Employers. The tax credit businesses get for starting a retirement plan is increased and the new law makes it easier for small businesses to join multiple-employer plans.
• Annuities. The newly enacted legislation removes roadblocks that made employers wary of including annuities in 401(k) plans by eliminating some of the fiduciary requirements used to vet companies and products before they can be included in a plan.
• Withdrawals. The new law allows an early withdrawal of up to $5,000 from a retirement account without a penalty in the event of the birth of a child or an adoption. Currently, there is a 10 percent penalty for early withdrawals in most circumstances. 

Given these changes, workers need to immediately reevaluate their estate plans. Some people have used stretch IRAs as an estate planning tool to pass assets to their children and grandchildren. One way of doing this has been to name a trust as the IRA’s beneficiary, and these trusts may have to be reformed to conform to the new rules. If a stretch IRA is part of your estate plan, consult with your attorney to determine if you need to make changes.

To read the legislation, click here.  For more on the new law, click here and here.

How Much Will You Really Spend in Retirement?

“It’s the question at the heart of so much retirement planning: How much money will I need in savings when I’ve stopped working?”

To get at this number, people look at a few different sources, including online calculators, and articles like this one from The New York Times titled “The Myth of Steady Retirement Spending, and Why Reality May Cost Less.”

Sooner or later, they learn about the 4% rule, a popular rule that says if you invest in a mix of 40% bonds and 60% stocks, your retirement will be fine, if you just spend 4% of your savings every year. Your nest egg will stay intact, and you will be financially fine for three decades. That’s assuming you retire at age 65 with $1 million and you withdraw $40,000 every year, until you run out of money at age 95. It also assumes that you’ll supplement your own retirement savings with money from Social Security and any other income sources. If you need any more than that, cut your spending or keep working.

Could it be that simple? No, not really.

The truth is, retirees don’t always spend the same amount of money every single year. Having to keep working for several years after you would have liked to retire, just so you can get to that magic $1 million number may not be necessary for everyone.

Some retirees find that they spend a lot more in the early years of their retirement. They may need to help their own aging parents, or adult children. Others spend big on travel, seeing the world while they still have their health and mobility. However, those expenses usually slow down as we age.

There are different phases of spending in retirement, just as there are different phases of spending in your younger years. Statistics from the Bureau of Labor Statistics confirm this spending decline. The mean spending for households headed by people ages 55 to 64 in 2017 was $65,000. For those between the ages of 65 to 74, spending declined to $55,000. After 75, it dropped to $42,000. That is with housing costs remaining the same and health care costs increasing. The categories of entertainment, transportation, clothing, food and drink all dropped.

A study by Morningstar contends that retirement spending resembles a smile: starting off high, then declining, then increasing towards the end of life. The increases at the end of life are directly related to health care costs. However, generally speaking, retirees in their 70s and 80s tend to spend less.

Whether you follow the 4% rule are not, there are always unexpected costs to be considered in retirement. Your retirement may last more than two or three decades. Withdrawing too much from investments during a sharp market downturn, could cause your overall portfolio to shrink and possibly never recover. A retirement budget that takes inflation and market fluctuations into consideration, is necessary at any asset level.

Reference: The New York Times (Nov. 29, 2018) “The Myth of Steady Retirement Spending, and Why Reality May Cost Less”

What Comes First: College Expenses or Your Retirement?

“About one-third of Americans with children under 18 say they plan to use retirement savings or "could use if needed" to help pay for their children's education, according to a recent survey by Sallie Mae, one of the nation's largest student loan lenders.”

Here’s the biggest difference between retirement savings and college expenses: you can get a loan for college. No financial institution will give you a loan for retirement. Therefore, when it comes to finding money for college, financial planners and estate planning attorneys agree, as does this article from the Star Tribune: “Do your kids a favor: Pick retirement savings over tuition.”

The number of people who are making that decision are on the decline. The 2016 edition of that survey is down from 39%. It’s good that more parents are thinking twice about making this financial mistake.

Paying for college expenses from a tax-advantaged employer retirement account, like a 401(k), can become very costly. Here’s why:

• How does a 10% tax penalty on early withdrawals, if you’re under 59½ sound? Not good.
• The money you withdraw is taxed as income.
• You’re losing the tax-free growth of your savings. Remember, these retirement accounts grow tax-free.
• You lose the benefit of compounding, so your growth potential is losing ground.

The “least worst” option, say experts, is to fund a Roth IRA. Unlike qualifying contributions to a 401(k) or traditional IRA, the Roth IRA contributions are not tax-exempt. As a result, there are fewer restrictions on early withdrawals.

However, you’re still losing out in many ways. This includes when you get further along into your retirement years and you don’t have enough money to support yourself. Take a very long-term perspective on what will happen in the future.

Parents must understand that while it’s nice that they want to sacrifice to help their children through college, they may actually be generating far more stress for their children when the kids have to help Mom and Dad during retirement years. That’s likely when their kids are having children of their own, paying a mortgage and saving for their own children’s college expenses.

One last, major consideration is: college aid. Your withdrawals from retirement funds will be counted by financial aid offices as ordinary income. If it pushes your total wages up too high, your college-bound student may not qualify for assistance.

Retirement accounts are not counted, when considered if your student qualifies for financial aid. Therefore, your best bet is to continue funding retirement accounts. If you start cashing them out to pay for college expenses, everyone loses in the long run.

Reference: Star Tribune (Nov. 6, 2018) “Do your kids a favor: Pick retirement savings over tuition”

Making Social Security Work with Your Retirement Accounts 讓社會保障與您的退休賬戶互相配合 (中英對照)

“Most Americans enter retirement age with access to Social Security benefits. Many people also have Individual Retirement Accounts, including those that were funded by transferring money from workplace 401(k) plans.”

One trick to a successful retirement is to make your Social Security benefits coordinate optimally with your Individual Retirement Accounts (IRAs), says AZ Central in the article “Retirement planning: Connecting the dots between Social Security and IRAs.”

Not everyone takes a step back to think this way.  However, it is a smart thing to do. With proper planning, your retirement could lead to better results for your investments and a better decision on when to take Social Security benefits.

First, viewing Social Security as part of your investment portfolio is easy to do but not that widely followed. If you think of your Social Security benefits as a conservative portion of your overall investment portfolio, it may give you a little leeway to be more aggressive with investments than you might otherwise be. Remember to acknowledge your comfort level with the amount of risk, so you can sleep at night.

Social Security retirement benefits are very low risk, since they pay steady, government backed income with no market fluctuations. You don’t want to make a dramatic portfolio shift based on this, but you might change up your equity exposure by 5% to 10% of your portfolio, assuming that you’ve been risk averse up to now.

If you already have ample growth investments, thinking of Social Security as part of your overall portfolio might give you reason to trim your equity holdings. By using Social Security as your backstop, your investments may not need to work as hard and you don’t have to put yourself in a risky position.

How about tapping IRAs early, to avoid claiming Social Security benefits until as late as possible? It’s not a bad idea, since the payout from Social Security grows at 8% each year you wait, up to age 70. Most retirees start taking Social Security earlier, then get locked into a lower benefit.

If your income is lower in your 60s, your income taxes will be lower, so the level that your IRA withdrawals will be taxed will also be lower.

What about the stability of Social Security? It’s not certain that Social Security will remain fully funded, without some government intervention. The latest annual report from the Social Security trustees estimates that if no changes are made, the system will be paying most but not all promised benefits by 2034, when the “trust fund” money runs out.  However, as long as Americans are working and payrolls are generating money for Social Security, benefits will be available to pay future retirees.

Reference: AZ Central (Aug. 26, 2018) “Retirement planning: Connecting the dots between Social Security and IRAs”

“大多數美國人進入退休年齡並獲得社會保障福利。很多人有退休賬戶，包括那些通過從工作場所401（k）計劃轉移資金而獲得資助的人。”

成功退休的一個訣竅是讓您的社會保障福利與您的個人退休賬戶（IRA）進行最好的配合，AZ Central在文章中說 “Retirement planning: Connecting the dots between Social Security and IRAs.”( 退休計劃：連接社會保障和IRA之間的點)

不是每個人都會退後一步來思考問題。但是，這樣做是聰明的。通過適當的規劃，您的退休可以為您的投資帶來更好的結果，並更好地決定何時獲得社會安全福利。

首先，將社會安全金視為您投資組合的一部分，這是很容易的，但做法並不普遍。如果您認為您的社會安全福利是您整體投資組合中保守的一部分，那麼它可能會留給您一點餘地，讓您在其他投資方面更進取。記住確認您的風險等級的舒適程度，這樣你才可以晚上睡覺。

社會安全退休福利的風險非常低，因為他們固定付款，有政府的支持，沒有市場波動。您不希望在此基礎上進行大幅度的投資轉移，但是如果您到目前為止一直都避免任何風險，您可以將您的投資組合的5％到10％放在股票。

如果您已經有足夠的增長投資，那麼將社會安全金視為整體投資組合的一部分可能會讓您有理由削減您的股票投資。通過使用社會安全金作為您的後盾，您不需要過份依賴您的投資組合，而將自己置於危險的之中。

儘早從個人賬戶 (IRA) 提取金錢，可以延遲申請社會安全福利。這不是一個壞主意，因為您每延遲一年拿社會安全福利，您的安全金就會每年增長8％，直到70歲。大多數退休人士提早申請社會安全金，他們便拿到較低的福利。

如果您的收入在60歲時較低，您的所得稅將會降低，因此您的IRA提取稅的水平也會降低。

社會保障的穩定性如何？如果沒有政府的支援，社會保障將無法獲得充分的資金支持。社會保障受託人最新的年度報告估計，如果沒有做出任何改變，要到2034年，“信託基金” 的資金才會用盡時，該系統將支付大部分但不是所有的福利。但是，只要美國人在工作，他們工資的一部分就會注入信託基金，未來退休人士便可獲得福利。

參考: AZ Central (Aug. 26, 2018) “Retirement planning: Connecting the dots between Social Security and IRAs”

Forget That 4% Withdrawal Rule and Instead, Focus on Flexibility

“There is a longstanding 4% rule of thumb that was developed in the mid-1990s, outlining how much a person could safely withdraw from retirement savings each year and still have a nest egg to last a lifetime (aka 30 years).”

Scratch that rule, advisors are now saying, because there are too many other factors to consider. The old 4% rule, reports Forbes in the article “Here’s How to Refresh Your Retirement: The 4% Rule of Thumb,” doesn’t work anymore, in light of increasingly high healthcare costs, jobs that can be done well into one’s later years and a longer life expectancy.

It is now thought that the 4% rule is a decent base line.  However, you’ll need to go deeper into the details to plan for your retirement. Your spending also has a lot to do with what you expect from retirement and how expensive a lifestyle you choose.

One key factor today is tax-deferred investing. The importance of being taxed at the highest rate versus paying a lower tax rate can be misleading. Many people defer taxes on their investments, because they don’t want to pay 30% to 40% income taxes when they could defer to a higher bracket, if tax laws change.

Some are considering investment in single family rental properties. If you buy a rental house with a small capital investment, the house will ideally appreciate over time on a tax-deferred basis. Owners benefit by depreciating expenses on their tax returns. The single-family rental home can be paid off in 15 years to 20 years and create income for the owner—predictable income that could also increase from year to year.

Another strategy is to create an investment portfolio that combines diversified stocks and high-quality fixed annuities, paired with a systematic withdrawal plan and a built-in buffer strategy to reduce risk in the case of severe stock market swings.

One advisor noted that if a retiree today relies on a traditional 60/40 stock/bond portfolio, they could be looking at a financial disaster. The yields on bonds are at historic lows and a 4% withdrawal is just asking for trouble.

An effective tax reduction strategy has the potential to raise a retiree’s safe withdrawal rate even higher.

The best advice is to have a plan in place that works for the lifestyle that you and your spouse want and being prepared to adjust, if necessary. Your plan may include working, until you both reach full retirement age, working part time during retirement, moving to a location that is more affordable or aging in place.

Your plan should include putting your estate plan in place, by working with an experienced estate planning attorney. At the very least, you’ll need a will, power of attorney and a medical directive. Depending upon your situation, you may need more complex planning tools.

Reference: Forbes (Aug. 7, 2018) “Here’s How to Refresh Your Retirement: The 4% Rule of Thumb”