Retirement Planning

SECURE Act 2.0 enjoys widespread bipartisan support and builds on SECURE Act 1.0 by strengthening the financial safety net and encouraging Americans to save for retirement. Help clients understand what opportunities it offers them.

The Setting Every Community Up for Retirement Enhancement Act of 2019, popularly known as the SECURE Act, was signed into law in late 2019.

Now called SECURE Act 1.0, it included provisions that raised the requirement for mandatory distributions from retirement accounts and increased access to retirement accounts.

But it didn’t take long for Congress to enhance the landmark bill that was enacted barely three years ago.

Tucked inside a just-passed 4,155-page, $1.7 trillion spending bill are plenty of goodies, including another overhaul of the nation’s retirement laws.

Dubbed SECURE Act 2.0, the bill enjoys widespread bipartisan support and builds on SECURE Act 1.0 by strengthening the financial safety net by encouraging Americans to save for retirement.

9 key takeaways on SECURE Act 2.0

1) Changing the age of the required minimum distributions. Three years ago, SECURE Act 1.0 increased the age for taking the required minimum distribution, or RMD, to 72 years from 70½. If you turn 72 this year, the age required for taking your RMD rises to 73 with SECURE Act 2.0.

If you turned 72 in 2022, you’ll remain on the prior schedule.

If you turn 72 in 2023, you may delay your RMD until 2024, when you turn 73. Or you may push back your first RMD to April 1, 2025. Just be aware that you will be required to take two RMDs in 2025, one no later than April 1, and the second no later than December 31.

Starting in 2033, the age for the RMD will rise to 75.

Employees enrolled in a Roth 401(k) won’t be required to take RMDs from their Roth 401(k). That begins in 2024.

In our view, the SECURE Act 1.0 and 2.0 updates were long overdue. The new rules recognize that Americans are living and working longer.

2) RMD penalty relief. Beginning this year, the penalty for missing an RMD is reduced to 25% from 50%. And 2.0 goes one step further. If the RMD that was missed is taken in a timely manner and the IRA account holder files an updated tax return, the penalty is reduced to 10%.

But let’s be clear, while the penalty has been reduced, you’ll still pay a penalty for missing your RMD.

3) A shot in the arm for employer-sponsored plans. Too many Americans do not have access to employer plans or simply don’t participate.

Starting in 2025, companies that set up new 401(k) or 403(b) plans will be required to automatically enroll employees at a rate between 3% and 10% of their salary.

The new legislation also allows for automatic portability, which will encourage folks in low-balance plans to transfer their retirement account to a new employer-sponsored account rather than cash out.

In order to encourage employees to sign up, employers may offer gift cards or small cash payments. Think of it as a signing bonus.

Employees may opt out of the employer-sponsored plan.

4) Increased catch-up provisions. In 2025, SECURE Act 2.0 increases the catch-up provision for those between 60 and 63 from $6,500 in 2022 ($7,500 in 2023 if 50 or older) to $10,000, (the greater of $10,000 or 50% more than the regular catch-up amount). The amount is indexed to inflation.

Catch-up dollars are required to be made into a Roth IRA unless your wages are under $145,000.

5) Charitable contributions. Starting in 2023, 2.0 allows a one-time, $50,000 distribution to charities through charitable gift annuities, charitable remainder unitrusts, and charitable remainder annuity trusts. One must be 70½ or older to take advantage of this provision.

The $50,000 limit counts toward the year’s RMD.

It also indexes an annual IRA charitable distribution limit of $100,000, known as a qualified charitable distribution, or QCD, beginning in 2023.

6) Back-door student loan relief. Starting next year, employers are allowed to match student loan payments made by their employees. The employer’s match must be directed into a retirement account, but it is an added incentive to sock away funds for retirement.

Additional provisions

7) Disaster relief. You may withdraw up to $22,000 penalty-free from an IRA or an employer-sponsored plan for federally declared disasters. Withdrawals can be repaid to the retirement account.

8) Help for survivors. Victims of abuse may need funds for various reasons, including cash to extricate themselves from a difficult situation. SECURE Act 2.0 allows a victim of domestic violence to withdraw the lesser of 50% of an account or $10,000 penalty-free.

9) Rollover of 529 plans. Starting in 2024 and subject to annual Roth contribution limits, assets in a 529 plan can be rolled into a Roth IRA, with a maximum lifetime limit of $35,000. The rollover must be in the name of the plan’s beneficiary. The 529 plan must be at least 15 years old.

In the past, families may have hesitated in fully funding 529s amid fears the plan could wind up being overfunded and withdrawals would be subject to a penalty. Though there is a $35,000 cap, the provision helps alleviate some of these concerns.

Sources: Secure Act 2.0 Act of 2022;
SECURE 2.0: Rethinking Retirement Savings;
Congress Passes Major Boost to Retirement Savings;
The 401(k) and IRA Changes to Consider After Congress Revised Many Retirement Laws

It’s a touchy subject, but a life expectancy analysis is the best way to ensure you will have enough money to live your later years in comfort and ease.

What do people fear the most in retirement? Outliving their income. And what variable has the largest impact on whether or not they will outlive their income? Life expectancy. Your ability to successfully plan for retirement is largely dependent on how well you can estimate your life span.

Longevity is the new buzzword in retirement planning, and rightfully so. It wasn’t that long ago when most people retired at 65 and maybe lived another five to 10 years if they were lucky. Those days are over, which makes current retirement planning a much more challenging endeavor. People are living much longer, and their retirement nest eggs must live much longer as well. Not only are life spans increasing, but statistics tell us that the longer people live, the longer they will live.

Longevity estimates According the Social Security Administration, a man who reaches the age of 65 today is estimated to live until he is 82.8 years old. A woman turning 65 today is expected to live, on average, until she is 85.4 years of age. In addition to that, 25% of all 65-year-olds will ive past 90 and 10% will live beyond 95. This dramatic increase in life spans is also expected to continue well into the future.Longevity planning is becoming a larger and larger component of successful retirement planning. In order to ensure you do not outlive your income, maintain a comfortable lifestyle, and have choices in retirement, you must be as accurate as possible in estimating your life expectancy.Unfortunately, estimating longevity is not even close to an exact science. The traditional approach for most advisors is to rely on actuarial tables for a best estimate. However, with life expectancies increasing practically every year, the mortality tables may no longer be enough.Overestimating life expectancy is almost as bad as underestimating it. You may think a safe response to the whole longevity question would be to simply assume death at the age of 105. While the former could result in you outliving your income, overestimating can affect your quality of life during retirement by being forced to spend less than you could.

Individual life expectancy analysis To increase the probability of success in estimating your life span, consider working with us to develop an individualized life expectancy analysis. Everything you do in planning for your retirement revolves around this number. Therefore, it is critical to the success of your retirement plan that you are able to estimate your life span as accurately as possible. Only then can you begin to develop a plan that will adequately provide for that life span. Areas you’ll want to consider when doing individualized life expectancy analysis are: medical history, family history, and lifestyle habits. The following are some questions you might want to think about.

Medical and family history

• Have you ever had a heart attack or been diagnosed with any kind of heart disease?
• Are you or have you ever been on cholesterol medication?
• Have you ever been diagnosed with high blood pressure?
• If so, are you on medication?
• Have you or anyone in your immediate family—parents, grandparents, siblings—ever had a stroke?
• Have you or anyone in your family ever had any type of cancer?
• Are your parents still alive?
• If not, what did they die of and how old were they when they passed away?
• Are all your siblings still alive?
• Have any of your siblings experienced any serious health problems?
• Lifestyle habits
• On a scale of 1-10, with 10 being a health nut and 1 eating at McDonald’s every day, how would you rank your diet?
• Do you exercise regularly?
• How many times a week?
• What kind of exercise?
• Have you ever smoked?
• Did either of your parents smoke?
• How many days a week on average do you consume alcohol?
• Do you always, sometimes, or never wear a seat belt?
• On a scale of 1-10, with 10 being you could go postal any second and 1 you’re in a pleasant coma, how would you rank your daily stress levels?
• Do you get enough sleep?
• Do you participate in high-risk sports and other activities, i.e. football, skydiving, etc.?

It’s probably best to go through these questions with us so we have all the necessary data directly from you. We will then review your answers together with the actuarial tables to determine the life expectancy you’ll be using when developing your retirement plan.

Once the expectancy tables have been reviewed, you can decide whether years should be added or subtracted from your life expectancy based on your answers to the questions above. A large number of “bad” answers, especially the parents’ age at death, would justify lowering your estimate, while a preponderance of “good” answers would suggest a higher estimate is appropriate.

The parents’ age at death is generally considered an anchoring data point for most longevity estimates, unless death occurred by other than natural causes.

SOURCE: Horsesmouth

While working, people generally have employer-sponsored insurance. Some 58% of people in the U.S. today get their health insurance through an employer, either their own, a spouse’s, or a parent’s, if they are under 26. Employers subsidize the premiums, so employees pay far less than the full cost of the insurance. Premiums for family coverage averaged $19,616 in 2018, according to the Kaiser Family Foundation 2018 Employer Health Benefits Survey, but employees paid just 29% of that, or $5,547 ($462 per month). The subsidy was even greater for single coverage: employees paid just 18% of the $6,896 annual premium, or $1,186 ($99 per month). These are averages, so any one situation could be different.

Retirement before age 65

If you retire before the Medicare-eligible age of 65, you may have several options:

• Retiree insurance. Only 18% of large firms offered retiree insurance in 2018, compared to 66% in 1988, according to the Kaiser survey. Of those that do offer retiree insurance, it’s mainly for early retirees (91%), as opposed to Medicare-eligible retirees (67%). Because of the employer subsidy and quality of the coverage, retiree insurance is usually a good deal for those lucky enough to have access to it.
• A spouse’s plan. If clients lose employer coverage due to retirement, and if their spouse is still working, they may be able to get onto the spouse’s plan. Again, the employer subsidy and quality of the coverage usually make this a good deal. If both retiree insurance and spousal coverage are available, compare the two. Consider premiums, deductibles, co-payments, and coinsurance to determine potential out-of-pocket costs under each plan.
• Individual insurance. If employer insurance is not available, one can buy individual insurance on the exchanges. It won’t be cheap. The average unsubsidized premium for a silver plan for a 60-year-old is $1,140 per month. For a gold plan it’s $1,300.

Once early retirees turn 65, they become eligible for Medicare.

• If you have chosen retiree insurance, you will enroll in Medicare Parts A and B at 65. If you can stay on the retiree plan, it will serve as supplemental insurance (plan terms will change now that Medicare becomes the primary payer). If a medical bill is incurred, Medicare will pay first according to its plan limits, and the retiree plan may fill in some of the gaps, such as the deductible and the 20% coinsurance. If the retiree plan also offers creditable prescription drug coverage, individuals may not need to enroll in Medicare Part D (the plan will let them know if Part D enrollment is necessary) and may get better coverage than Part D plans available on the open market. (But it never hurts to shop around to be sure.)
• If you are on a spouse’s plan when you turn 65, and if the spouse is still working, they may remain on the employer plan. If the spousal plan covers 20 or more employees and is a good plan, with an employer subsidy and comprehensive coverage, you do not need to enroll in Medicare at age 65. you can stay on the employer plan and delay enrolling in Medicare until you go off that plan. However, once people turn 65, they can enroll in different parts of Medicare depending on how it rounds out (or replaces) the employer plan.

For example, they can enroll in Part A only, which is free and may offer better hospital coverage than the employer plan. They might even enroll in Part B and pay the $135.50 monthly premium, especially if the plan deductible is rather high. (The Medicare Part B deductible is only $185 in 2019.) Depending on their drug regimen, they might find a Part D drug plan on the open market that beats the employer’s drug coverage. (Note that if they enroll in Part D, they must also enroll in at least Part A.)

Each part should be looked at separately, and the employer plan compared to plans available on the open market. There are two caveats: (1) If the employer plan is paired with an HSA, once they enroll in Medicare, there can be no further HSA contributions. (Note: Because Medicare offers better coverage than the high-deductible plans that are usually paired with HSAs, it may be worth giving up the HSA to get Medicare.) (2) The Part B monthly premium may be more than $135.50 if joint income is over $170,000 and subject to the income-related monthly adjustment amount (IRMAA). Be sure to take these additional costs into account.

• If you have individual health insurance when you turn 65, you will be ecstatic to go onto Medicare. You should apply for Parts A and B three months before your 65th birthday; Medicare will go into effect on the first day of your 65th birthday month. You should decide whether you want Original Medicare with a Medigap plan and standalone drug plan, or a Medicare Advantage plan; you must do the required shopping in time to enroll in the chosen plan(s) by the first of the month that you turn 65.

Retirement at or after age 65

If you are still working when you turn 65, you may stay on the employer plan if it covers 20 or more employees. It is illegal for employers with 20 or more employees to force age-65 employees onto Medicare by offering them a lesser plan than the one offered to younger employees. But now that Medicare is available, each person turning 65 should compare the employer plan to Medicare.

Whereas the employer plan is subsidized by the employer, Medicare is subsidized by the government. In most cases the health care itself—that is, where the client goes to seek health care services—need not change. What’s different is who pays and how much they pay. Actually, with health care pricing as crazy as it is, no one really knows how much insurance pays. That’s why our focus is on how much each person pays—that is, how much he will pay out-of-pocket for premiums, deductibles, copayments, coinsurance, and the full cost of noncovered services and drugs.

Note: If you are covered by a plan that covers fewer than 20 employees when you turn 65, you should enroll in Medicare. Plans that cover fewer than 20 pay secondary to Medicare, and the individual must be enrolled in Medicare in order for the plan to pay its share. In other words, if Medicare does not pay primary (because one is not enrolled in Medicare), the plan may not pay anything at all.

Some of these plans volunteer to pay in the absence of Medicare, but they are not required to do so, and they could back out of that agreement at any time. After enrolling in Medicare, you should check with the insurer to see if it offers a plan that can serve as Medicare supplement insurance, then compare that plan to what you can get on the open market.

Before going into the analysis between employer plans and Medicare, the first thing to check is the spouse’s coverage under either option. Is the spouse on the client’s plan? Does the client need to stay on the employer plan in order for the spouse to be covered? If you go off the employer plan and onto Medicare, does the spouse have other options, such as their own employer insurance?

The spouse may be able to go onto COBRA for as long as 36 months after you leave the plan to go onto Medicare, but this would require the spouse to pay the full, unsubsidized premium. Also, COBRA may not be available to the spouse if the employer plan covers fewer than 20 employees. If the spouse’s only option would be individual insurance under the ACA, those extra costs would need to be factored into the analysis.

Insurance vs. Medicare after 65

Employer insurance is generally considered to be more comprehensive than Medicare, and many simply assume they will stay on the employer plan after age 65 if they are still working. But it behooves everyone turning 65 to compare the employer plan to what they can get on the open market with Medicare.

For example, the average employer plan in the Kaiser survey has a cost-sharing premium (i.e., the employee’s share) of $99 per month and a deductible of $1,573. The average copayment is $25 to see a primary care physician and $40 to see a specialist. If outpatient surgery is needed, the average coinsurance rate is 19% and the average copayment is $151. If hospitalization is needed, the average coinsurance rate is 19%; the average copayment is $284 per hospital admission, and the average per diem charge is $327. For prescription drugs the average copayment is $11 for first-tier drugs, $33 for second-tier drugs, $59 for third-tier drugs, and $105 for fourth-tier drugs.

What makes employer insurance hard to analyze is that out-of-pocket costs will depend on how sick a person is. Someone healthy whose plan allows for no-cost screenings and checkups could conceivably pay no more than the monthly premiums—$1,188 per year, on average. At the other extreme might be a serious health event that pushes one into the plan’s out-of-pocket maximum of $7,350 (the maximum for nongrandfathered plans under the ACA).

Medicare is designed for those with health issues

Medicare, when supplemented with additional insurance, is designed for people to be sick. The monthly premiums are higher, but when someone is fully covered, out-of-pocket costs are minimal. For $375 per month ($135.50 for Part B, $200 for Medigap Plan F and $40 for a drug plan), or $4,500 a year, pretty much all health care costs are covered, except for the things Medicare doesn’t cover, such as dental, vision, and hearing. It is possible to pay less with a Medicare Advantage plan—some plans have zero premiums but charge copayments or coinsurance if services are utilized. Medicare may cost more if the client is subject to the IRMAA.

What if the employer plan is an HSA paired with a high-deductible health plan (HDHP)? These plans are definitely designed for healthy people: the premiums are low, and if little or no health care costs are incurred, the money can stay in the HSA to keep growing tax-free. Under IRS rules, HSA contributions cannot be made for a person enrolled in Medicare. This means healthy individuals who love their HSAs should not enroll in Medicare.

However, once they start any kind of Social Security benefit, they are required to enroll in Part A and HSA contributions must stop. This means everyone age 70 or older—assuming they won’t want to leave Social Security money on the table—may not contribute to an HSA. Individuals who were born before January 2, 1954 and eligible to file a restricted application for spousal benefits when they turn full retirement age may also want to give up their HSAs in exchange for the Social Security income. They can keep the HSA and use it for qualified medical expenses; they just can’t contribute to it after starting Social Security and going onto Medicare.

Indiviuduals who have chosen to stay on their employer plan after age 65 should periodically re-evaluate the plan in light of Medicare availability. Worsening health, or a change in the employer plan, could subject one to hefty coinsurance amounts. People can switch to Medicare at any time after turning 65. They do not need to wait until they leave employment. Each year, when they are presented with their employer plan options, they should also look at Medicare to see how it compares.

Eventually, nearly everyone enrolls in Medicare—unless they keep working forever! As individuals prepare to retire, they should plan to have their Medicare start when the employer coverage ends so there are no gaps in coverage. This means enrolling in Medicare three months before they want it to start and lining up supplemental insurance and drug plan (or Medicare Advantage plan) so it starts at the same time.

Although terminating employees can take advantage of COBRA to maintain employer coverage for up to 18 months, this is not a good idea. For one, unsubsidized COBRA premiums are much higher than the government-subsidized Medicare premiums, even when supplemental insurance is added.

Also, the special enrollment period that allows people over 65 to delay enrollment in Medicare ends eight months after leaving employment. People who comes off COBRA after 18 months will be outside their special enrollment period and will need to wait until the next general enrollment period (January 1 to March 31) to enroll in Medicare, and coverage won’t start until the following July. HR people who are not aware of these rules often advise terminating employees to go onto COBRA; make sure you go onto Medicare instead.

Again, consider the spouse. If your spouse has been covered on your plan, and if you retire and go onto Medicare, your spouse will need to arrange for separate insurance. As noted above, spouses may have their own employer insurance. Or they may be over 65 and eligible for their own Medicare. Or they might go onto COBRA or buy their own health insurance in the marketplace. Just make sure your spouse gets their insurance lined up before you retire.

Source: The HorsesMouth

Funding a 30-year retirement will take financial planning prowess as you juggle the effects of inflation, distributions, taxes, asset allocation, and expenditures. Are you up to the task?

George Forman, the boxer-turned-spokesman for portable grills, may have best summed up the retirement conundrum facing baby boomers: “The question isn’t at what age I want to retire; it’s at what income.” The amount you’ll need each year to maintain your desired standard of living is the most critical variable to identify in the retirement planning process. No rule of thumb will suffice. If you are like many boomers, your spending will not drop significantly at retirement. In the beginning, you’ll be fulfilling the many dreams and desires you postponed during your career and child-rearing years. Later on, the cost of health care will become a significant factor in determining your income needs.

How long will you need it?

Longevity is perhaps the greatest challenge for boomer retirement planning. Most boomers seriously underestimate their life expectancy. Perhaps this is due to a misunderstanding of what mortality age really means. In fact, half the population will outlive their life expectancy.

When the mortality table tells us that a 65-year-old man has a mortality age of 82, it means that half of all men who are 65 today will die before age 82, and the other half will still be alive. The mortality tables also include the entire population, not just those who receive the level of nutrition and health care that you probably enjoy.

Another frequent misunderstanding about mortality age is the statistical increase in mortality age that occurs when calculating joint mortality. A male age 65 has a 50% chance of living to age 82. A female age 65 has a 50% chance of living to 85, but as a couple, they have a 50% chance of one of them living to age 92. In fact, as a couple, they have a 25% chance that one of them will still be alive at age 97. A worker retiring early at age 55 may need to generate more than 50 years of retirement income. This is the basis for the new definition of long-range planning.

The double bite of inflation

The increased longevity that boomers can expect contributes to the serious risk of inflation, which is the long-term tendency for money to lose purchasing power. This has two negative effects on retirement income planning. It increases the future costs of goods and services that retirees must buy, and it potentially erodes the value of their savings and investments set aside to meet those expenses. Even at a modest inflation assumption of 3% annually, the effects of inflation over a half century of retirement could be devastating.

In prior generations, inflation was not such a worry, since retirees were not expected to live much more than five or 10 years past the age of 65. In fact, when the Social Security retirement age of 65 was enacted in 1935, the average mortality age for a man was 64.

The planning process

Explore any and all sources of guaranteed income available when retirement begins. Social Security, pensions, and any other income sources must be quantified as to how much, from what source, and for how long. Pay careful attention to whether benefits index with inflation or continue to a surviving spouse, since survivor planning is an important part of retirement income planning. Develop three cash-flow models — both spouses living, husband dies, wife dies — to identify any gaps in cash flow that need to be addressed by additional savings or insurance.

Next, inventory all assets that will be used to generate retirement income. This is where the traditional financial planning tools are needed to project future values and income streams from various types of assets. Be alert to the differences in taxation during distribution among various types of assets. Retirement accounts will generate less spendable income than investment accounts, because of the taxes due on distributions from retirement plans.

Be cautious about considering your primary residence as an investment asset. You may be thinking of downsizing later, but experience tells us that people are often reluctant to leave a familiar home in their advanced age. Be zip-code flexible when making your retirement plans. Many areas of the country have low to no income tax, and there can be significant differences in the cost of housing and health care.

The risks involved

Health insurance, disability insurance, life insurance, and long-term care insurance should also be evaluated as part of any retirement plan. These policies can be expensive, and some of them may not be necessary if you have significant assets. However, they can provide an important safety net in the absence of such assets, so ask your advisor to review your insurance needs.

If you work in a professional field, litigation is a very real risk to your retirement assets, and professional liability insurance is a must. Divorce is another landmine that can blow up even the best retirement plans, but to date there is no insurance policy available to reduce this risk other than a well-drafted prenuptial agreement.

Asset allocation: Between a rock and a hard place

The double whammy of longevity and inflation creates an asset allocation dilemma for boomers. The old adage of subtracting a person’s age from 100 to obtain the optimal percentage of equities just doesn’t hold for a five-decade retirement portfolio. Invest too conservatively, and your money may not grow enough to last your lifetime considering the erosion of long term inflation. Invest too aggressively, and you run the increasing risk of outright capital loss without adding significant years to your plan under average market conditions.

Working with your advisor, determine an appropriate exposure to equities, then design an allocation within those equities to ensure meaningful diversification among asset classes and investment styles. Cash and fixed income will play a larger role in retirement portfolios, since provisions must be made for the orderly withdrawal of assets.

Have your advisor set up regular portfolio transfers to your bank account to enable you to manage your income just as you did when paychecks were funding your expenses. This tends to dampen overspending by imposing some discipline on the withdrawal process.

Otherwise the portfolio could easily become an ATM machine.

Setting a realistic withdrawal rate

Most of the evidence seems to point to 4% as being about right for a sustainable withdrawal rate for

decades of retirement. The withdrawal rate is the one variable over which you have the most control — not your mortality, not your health, not your investment returns, not inflation — just your withdrawal rate. You must understand that this is the lever you will need to pull when things don’t go

as planned. Being realistic about what you can spend and keeping a sufficient contingency reserve fund will ease the pressure that withdrawals put on retirement portfolios.

The challenges facing boomer retirees are significant, but not insurmountable with some realistic and prudent planning. You will need to consider what you own, what you owe, what you will make, and where it will go in order to develop a workable retirement income plan. A financial advisor can help you to plan ahead!

Where can a couple live for $2500 or less a month, including health care? And still enjoy a mild climate, modern amenities and plenty of English-speaking people?

International Living magazine has released its 2019 Annual Global Retirement Index, where in-country correspondents describe and rate the retirement lifestyle of dozens of overseas destinations.

The table below shows the top 10 for this year, ranked on a scale of 100. See the original article for in-depth descriptions and to view other pages of the table.