A lot has happened in 2020, from the novel coronavirus and its effects on the economy to Congress adding trillions to the national debt for economic relief. Many financial advisors see the situation now as a major opportunity for tax planning.
Recent market drops allow them to take advantage of reduced retirement account balances and to do Roth conversions. Their clients would save on the amount of taxes due, thanks to the lower account balance.
With national debt approaching new highs, advisors believe that an increase in tax rates is inevitable. Not only that, the CARES Act, passed by Congress for coronavirus relief, also put a pause on required minimum distributions for 2020.
For advisors, the opportunity for tax planning is ripe. But on the flip-side, many financial professionals also disagree about how and when is the best time to go about these strategies.
In an article on InvestmentNews.com, many advisors shared their thoughts on how they were coordinating tax strategies for their clients. Read More
If you really think about it, there is risk in almost everything we do. As journalist and economist Allison Schrager has noted, people often manage risk in their lives and careers in surprising ways.
The description of a book that she wrote on risk management says it well: “Whether we realize it or not, we all take risks large and small every day. Even the most cautious among us cannot opt out–the question is always which risks to take, not whether to take them at all.”
Now, for retirees, one of the major risks to financial security is sequence risk. What is that?
It’s the probability of having losses early in retirement or just before you retire. Financial pundits fondly call this period the “retirement red zone.”
Even a 15% loss can throw a retirement plan off track, especially if you are already taking money from your accounts for income. Then it simply compounds the losses.
It’s a challenging time for retirees, who now are taking a triple-hit. Never-before-seen market swings are reducing the value of their portfolios. The novel coronavirus pandemic is shutting down many workplaces, which means that workers don’t have regular income to save.
Many retirees who are still working were likewise affected. And low interest rates continue to be unfriendly to retirees with fixed-interest holdings.
Meanwhile, Michael Finke, professor of wealth management at The American College of Financial Services, points out another area to keep an eye on: how the pandemic is affecting the probability of success of our retirement plans. Read More
The novel coronavirus pandemic has impacted all of us in some way. Almost overnight, the U.S. was hit hard with record unemployment.
Many household incomes have been abruptly shut off. Several industries have slowed down to a crawl or else been shut off.
Millions of former workers have been forced to dip into their savings accounts in order to pay their monthly bills. Some have even been forced to take distributions from their retirement savings in order to make ends meet.
Of course, there is no question that better days will be ahead at some point. The U.S. economy is strong, and we will emerge all the stronger for it.
Even so, those without the benefit of continuing income from full-time employment or those with a shorter window before retirement may want to take a step back. It’s prudent to take stock of the situation, seeing what they can do to protect themselves. And that can helpful especially if something like this ever happens again.
How can this black-swan event affect seniors and baby boomers nearing retirement? In an April column of the Retirement Income Journal, a former International Monetary Fund official lays out some of the medium-term and long-term possibilities. Read More
At some point or another, you may have heard of the “Four Percent Withdrawal Rule,” but what exactly is it? And why does it matter for your retirement?
The four percent rule is the brainchild of south California financial planner Bill Bergen. Simply put, the rule states that a retiree can withdraw 4% of their initial retirement portfolio balance, and thereafter, adjust their amount for inflation each year. This approach would give the retiree a reliable “paycheck” that lasted for 30 years.
Back in 1994, Bergen had many clients worrying about safe withdrawal rates. They were anxious about how much they could spend in retirement without running out of money. Searching for answers in financial textbooks, Bergen found that no educational materials at the time gave a definitive answer.
With that, Bergen went to work on his computer. He ran analyses on data provided by no less than Roger Ibbotson, whose blockbuster research includes groundbreaking findings on indexed annuities as a retirement asset class.
The end result? Bergen’s now-famous four percent withdrawal rule. Today, it’s one of the most widely quoted and used rules of thumb in finance.
But those days had vastly different economic conditions than now. Given that, is the 4 percent rule still relevant for retirement investors today? Read More
Many working-age Americans have at least some idea of when they want to stop working and sail off into the sunset. But sometimes there can be a major gap between what we plan and what actually happens.
For many workers, one such gap is between the age at which they want to retire and the age at which you discover that you have to retire instead. A surprisingly large percentage of American workers are forced into early retirement for a variety of reasons. Those reasons include job termination, layoffs, personal health issues, or a need to care for elderly parents or other relatives.
Of course, early retirement can come with its own financial headaches. You might need to begin taking Social Security early for a reduced benefit. Or you might have to deal with not having enough savings to last for the rest of your life. Whatever the challenges, it’s a period of major adjustment.
Early retirement means that you will have fewer years to save for retirement. You will also have a longer period of time over which you must stretch your money.
What if you plan to work until age 65 or 70? It’s wise to create a financial projection of what your retirement will look like if you had to stop working at age 55 or 60.
And don’t be surprised if you run into some sort of income shortfall. Not everyone is fully prepared to retire early when forced into retirement. So, to be ready for that possible outcome, you might have to make adjustments to your plan accordingly. Read More
People are living longer than before, leading many to ask: “How long could my retirement really last?” In generations past, retirement represented a relatively short period of time in most peoples’ lives. They would work until they were 60 or 65 and then live perhaps a few more years before passing away.
But this has become a thing of the past. Today, some retirees could live for as long as another 30 years after they finish with their careers. Many of them are now travelling around the world, starting new businesses, or doing charity work.
The answer to this question will depend upon many factors, such as your projected longevity, financial resources, and current health. If you come from a family of long-lived forebearers, then you may have a good chance of living that long yourself. If you smoke or drink heavily, then your lifespan may not last as long as it would if you quit doing those things.
Thanks to advances in medicine, technology, and wellness, people’s lifespans are longer than before. The National Vital Statistics Report from the Department of Health and Human Services revealed that the average American’s lifespan has increased by 30 years over the past century. Read More
Uncle Sam can be one of your key partners in your retirement saving. If you have money in a traditional IRA or an employer-sponsored retirement plan, then that money automatically receives tax-deferred status in the eyes of the IRS. Other accounts like SIMPLE IRAs and SEP-IRAs also benefit from this tax-favorable treatment.
Generally, your contributions to those accounts are tax-deductible. The money inside the account grows tax-deferred, or without taxes on the earnings over time, as long as withdrawals aren’t taken.
But you can’t enjoy this tax-deferred growth forever. Required minimum distributions are one way that Uncle Sam ultimately collects his tax dues.
Once you reach your early 70s, the IRS sets required minimum distributions (or RMDs) for you, and when you start . You will be required to start pulling a certain amount of money out of your traditional IRAs and qualified plan balances every year.
The same goes for other kinds of IRAs with pre-tax money status. And this money will be taxed at your top marginal tax bracket, regardless of how long it’s been in the account.
Before wide-ranging retirement reform called the SECURE Act was passed, the age for starting required minimum distributions was 70.5. However, the SECURE Act, passed in 2019, moved the starting age for RMDs to 72 for those born on July 1, 1949, through and including December 31, 1950.
Then the SECURE Act 2.0, passed in 2022, backed up the starting age for RMDs to 73 for those born on January 1, 1951, through and including December 31, 1959. This RMD starting point is slated to rise to 75 in 2033, for that matter, unless the law is changed yet again.
There is no capital gains treatment available for traditional IRAs and qualified plans, save for one exception. The sale of company stock held inside a 401(k) plan can be spun off and sold separately under the Net Unrealized Appreciation (NUA) rule. Read More
Once a corporate giant, General Electric Corporation has found itself in a downward spiral in recent years. The former staple of American business has been working to clear some substantial debt off its books.
One of the company’s latest big moves? To reduce debt by freezing its employee pension assets. This means that benefits will not continue to accrue for its employees, even though they continue to work there.
But while this is obviously better than pension termination, where the pension plan is simply dissolved, it marks the latest casualty in the pension landscape in corporate America. Read More
When it comes to taxes, you can be sure that Uncle Sam will want his share. Retirement tax planning can help you make the most of your money. Tax-wise strategies let you maximize your income and keep more of what you have accumulated over a lifetime of hard work.
But while Uncle Sam’s tax collections are a certainty, what is less than clear for millions of retirees is their own tax bills. Many don’t know whether they are paying too much in taxes or not – and how, in turn, that affects their retirement income streams.
Fortunately, there are several ways that you can reduce your tax bill after you stop working through the proper use of annuities and IRAs.
The order in which you withdraw your assets can also substantially impact the amount of tax that you will have to pay. Studies have shown that a properly-structured withdrawal schedule can extend the life of an investment portfolio by as many as 6 years in some cases. Read More
While retirement has many hard-to-predict moving parts, like what your spending might look like, perhaps one of the most difficult questions to answer is this: “How long will you live?”
Thanks to advances in healthcare and technology, people are living longer. According to the Social Security Administration, the statistical average for a 65-year-old man is to age 84. For a 65-year-old woman, it’s 87.
Economists call the possibility of spending decades in retirement a “longevity risk.” Still, keep in mind those numbers are just averages. What someone’s longevity looks like on a personal level will depend on their family history, health status, and lifestyle choices over the years, among other things.
For many people, the uncertainty adds up to financial concern. In one survey, almost two-thirds of surveyed Americans said they worried about running out of money in retirement more than death!
However, if you are to have a Retirement Plan that guides you across the Arc of Retirement, you will need some guestimate of how long you might live. That way you don’t underspend or overspend your financial resources.
Here are five steps to help keep longevity risk at bay and tame the uncertainty. Read More