Washington Isn't Helping Your Retirement

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According to polling data from the National Institute on Retirement Security, Americans are frustrated with governmental efforts regarding their retirement. In a recent, nationwide public opinion survey, 87 percent said Washington policymakers don't understand how difficult it is to prepare for retirement. In another telling statistic, 84 percent indicated they thought Washington should be doing more to help ensure retirement security.

Along with these public sentiments, the retirement landscape in America itself is complicated:

  • Greater amounts of people are reaching retirement than before in history. The biggest driver of this is the 76.4 million strong baby boomer population. According to Pew Research, each day 10,000 additional baby boomers turn 65 years of age, the traditional benchmark for retirement.
  • Retirement accounts were greatly impacted by the 2008-2009 financial crisis. Poor stock market performance led to retirement account losses of $2.8 trillion, or 32 percent of the accounts' prior value.
  • Many American households have inadequate retirement savings, according to the Boston College Center for Retirement Security. Their data shows as of 2013, more than 50 percent of American households possessed insufficient retirement funds to maintain current standards of living.

Given these dynamics, many Americans are hoping efforts can be taken in Washington, D.C. to assuage these challenges. But people shouldn't hold their breath. In fact, prior and current initiatives on retirement overhaul have been geared toward the opposite. Some of them have contained provisions which would be harmful to Americans' retirement.

In short, the best solution for achieving retirement security falls on investors themselves.

Why Is This the Case?
Consider the following. In February 2015, the current presidential administration submitted its Fiscal Year 2016 Budget for legislative consideration. The budget proposal included over a dozen provisions which would have directly affected Americans' retirement savings.

Here are a few quick highlights:

Retailoring Required Minimum Distribution rules for Roth IRAs – One of the provisions called for imposing required minimum distributions for Roth IRAs. This would align Roth IRAs more with other retirement accounts. It's a recommendation which would upset 17 years of strategic retirement savings by the American public.

In a nutshell, once they turned 70.5 years of age, investors would be required to take distributions from their Roth IRAs. In other retirement accounts, neglecting to take out the required distributions carries a hefty penalty. If you withdrew less than the required amount, the amount not withdrawn can be taxed at 50%.

Limiting Roth conversions to just pre-tax dollars – Under another budget provision, the after-tax dollars held in a traditional IRA or employer-backed retirement plan would be ineligible for Roth account conversion. Taxpayers who were unable to make direct contributions to IRAs – since their income surpassed the threshold – would be affected.

For years, these taxpayers have made contributions to traditional IRAs, of which a portion was after-tax dollars. Thereafter, they converted their account contributions to Roth IRAs. The provision would have eliminated this practice.

Capping potential retirement savings – Another noteworthy proposal would impose a “cap” on contributions to tax-favored retirement accounts. Under the provision, if someone were to exceed the cap, additional contribution amounts past the cap would be prohibited.

In short, the proposal would limit retirement savings to a sufficient amount for generating an annuity of $210,000 once a person turned 62. The cap would be with its limits: Adjustments could be made for cost-of-living increases. Plus total tax-favored retirement savings could surpass this amount, albeit only via earnings.

Given these proposals and others, it's important for people to chart out their own plan for retirement security.

What Should I Do?
We've covered a few steps for consideration in our “Keeping Retirement Plan Simple” post. A few things to keep in mind and ask yourself:

  • At what age would you like to retire?
  • What are you looking at as your goals and aspirations post-retirement?
  • How much currently do you have in retirement savings?
  • What are your current living expenses?
  • Assume an inflation rate of 3-5%. With this rate, what will be your future living expenses?
  • Will you be working part-time to further supplement your retirement income?

Determine your financial needs and goals. These will differ depending on whether you're an employee, employer, or company owner. Be sure to be fully updated in your knowledge of Social Security benefits and what it entails for you.

Also calculate your “Safe Money” – or the money you cannot afford to lose in retirement. There are a number of ways in which you can preserve this wealth. Many Americans have been looking at retirement vehicles such as fixed index annuities to preserve wealth, enjoy some growth potential, and generate a retirement income they cannot outlive. Always keep this in mind, though: No financial product is a one-size-fits-all solution for all investor needs.

If you're ready for personal guidance with planning for your retirement future, can help you. Use our Find a Licensed Advisor section to connect directly with an independent financial professional, and to request a personal strategy session to discuss your needs and goals. And should you have any questions or concerns, call 877.476.9723.

Author: Super User

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