As usual, this new year will see a few updates to some of your clients’ most important retirement programs. Social Security’s cost of living adjustment will boost benefits by 1.7 percent, the 401(k) contribution limit will increase from $17,500 to $18,000, and a few of the largest Medicare Part D drug plans may raise their premiums.
Aside from these predictable changes, though, there are a few major considerations pre-retirees will need to make as they plan, save and invest in 2015. From recent legislation regarding retirement account rollovers to new options for workers without employer-sponsored plans, this year brings host of changes that could alter your clients’ ideal strategies. There are also a few options that have long been available, and that are more important now than ever as retiring Baby Boomers plan to fund decades-long retirements.
IRA Rollover Reductions
Up until now, planners could use multiple IRAs as short-term loan vehicles. The rule may have allowed for only one rollover per IRA per year, but someone with several IRAs could simply withdraw from each one and face no penalties as long as the funds were deposited back into the account within 60 days.
Due to a recent tax court decision, the IRS now only allows one 60-day rollover per individual per year. Direct transfers from one account to another are not affected.
Aside from making it more difficult to free up large sums of money, the change also complicates IRA CD distributions. “A lot of these CDs were structured in the past to cash out and roll over into the same IRA within a CD,” said Jamie Hopkins, American College Professor of Taxation. “Techniques for doing that are going to have to change, and if an IRA is going to mature within the year, make sure you’re going to meet the new rollover rules.”
A new type of retirement account called the “my Retirement Account” — myRA — is now available to workers whose employers don’t sponsor retirement plans. The myRA is essentially a Roth IRA that can be opened with no start-up costs and no maintenance fees, and there are no minimum contribution requirements. Unlike other plans, however, it only allows for investments in government savings bonds, offering less risk and less chance of return. “People who don’t have other options might want to start putting money into a myRA through payroll deduction,” said Hopkins.
Due to both impending market volatility and the general need to reduce risk in retirement, rebalancing assets away from the stock market may be a good bet in the new year. “So far in 2014 and 2015, U.S. large-cap stocks and global real estate have been the asset classes that have led the way,” said Steve Elwell, Schroeder, Braxton and Vogt vice president. “At this point, though, people need to review their target allocations and probably start to rebalance some of it out of those assets.”
Dave Richmond, president of Richmond Brothers, Inc., agrees. “The markets have done incredibly well since their recovery in 2009, but if you don’t rebalance, you’re just building a bigger roller coaster,” he said. “As you save more, you have to make sure you’re building a bigger safety net along the way.”
Delaying Social Security
Social Security recipients have long been able to boost benefits by delaying collection, but with lifespans and retirements growing longer each year, securing a high, lifetime guaranteed payout is now more important than ever. And, unlike many other assets, Social Security has built-in inflation protection via the cost of living adjustment. “Every year you delay you get an approximately 8 percent higher benefit, and I don’t think the average American realizes it’s that high,” said Elwell. “From an investment standpoint, an eight percent guaranteed return in today’s interest rate environment is hard to pass up.” Social Security agents are neither trained nor instructed to give advice on collection strategies, however, so it’s up to advisors to help their clients make the right choices.
Catch-up contributions to 401(k)s and other retirement plans are also growing increasingly important for pre-retirees. According to the Bureau of Labor Statistics, only about half of the civilian work force is making regular contributions to their retirement plans, but people with potentially fewer remaining work years than retirement years can’t afford to skimp. As of 2015, workers 50 and older can contribute an additional $6,000 to a 401(k) and $1,000 to an IRA. “If a client doesn’t adjust their savings amounts as they earn more money, they’re ultimately saving a lower and lower percentage of their income,” according to Richmond. For clients who spend more as they make more, the catch-up contribution could be crucial for maintaining their lifestyles in retirement.
Handling Market Volatility
“Everyone I read suggests this will be an even more volatile year than last year, perhaps the first 10 or 15 percent correction,” said Richmond. “You’ve got to prepare your clients and set expectations.” Given impending market volatility and the need to create cash flow for upwards of 20 years, soon-to-be retirees will need to build larger guaranteed income streams while also avoiding emotional investment decisions. “The most important thing is to make sure you’re building a bigger safety net as you build a bigger pie,” Richmond added. “People’s portfolios have grown in the last five years, and the question is how we’re preparing to handle the next downturn. In order to realize the positive, you have to get people to hold through things, and building a bigger safety net is the bet way to get people to hang in there.”