Control over the U.S House of Representative shifted from Republicans to Democrats on January 3, 2019. Republicans in the U.S. Senate increased their majority and maintained control. Rep. Richard Neal (D-MA), a genuine retirement policy expert, is the new chairman of one of the two key House committees overseeing retirement law and regulation. Senator Charles Grassley (R-IA) is the new chairman of the counterpart committee in the Senate. And a host of proposed retirement-related bills—some bipartisan, and others not—await action.
How should these changes in Congress affect how you plan for your retirement? How should financial advisors adjust the advice they provide?
The best answer is, not much. Done properly, retirement planning is a long-term endeavor: accumulating money over a long period by saving regularly; investing those savings prudently with advice from an expert so their value grows without letting them “leak”; and choosing a plan for “decumulating” (i.e., taking money out of) those savings to supplement your Social Security benefits and make certain they will last for the rest of your life. I spelled out six “starter steps” for retirement planning in another post on the Studio, and also offered tips about overcoming five big challenges to retirement planning.
Absent radical changes in federal retirement law and policy, you should generally stay the course as you implement these long-term retirement strategies. Slow and steady wins this race. As I said in a recently published post entitled “The Future of Retirement Policy in the Next Congress,” radical change is not imminent. At most, important but incremental change may be coming.
Forthcoming congressional action, or continued inaction, may be relevant to some of the decisions you will make as you plan your retirement. In most cases, proposals under consideration make it easier to take, or even require taking, common-sense steps that already should be part of your retirement plan. Nonetheless, you can start thinking about how you might tweak your retirement plan before Congress acts, even if the need for action is not urgent, yet.
I will not address every proposal—there are dozens. Here are five tips about congressional retirement policy that could affect your retirement planning.
Social Security and Medicare
In “The Future of Retirement Policy,” I predicted that this Congress will not address financial shortfalls in the Social Security and Medicare trust funds. That’s not a good thing, but it is also not a crisis. Regardless, some members (and former members) of Congress will inevitably proclaim the sky is falling, Social Security and Medicare are dead, and we need to make radical changes or start over.
Tip #1 - Do not believe false prophecies of Social Security’s and Medicare’s impending demise. Continue planning to maximize your benefits.
Elementary political math tells us politicians, whose first job is to get reelected, will protect and preserve Social Security if only because it serves tens of millions of Americans who would be hungry for revenge against any elected official threatening a pillar of their retirement income. While inaction is more likely than action during this Congress, Congress will safeguard Social Security eventually. So, stick to your Social Security plan and get the most protected lifetime income possible, perhaps by heeding this advice.
Health insurance in retirement may require more planning. Medicare does not cover everything. This Congress will not change that fact. You may need a supplement, and perhaps a long-term care insurance policy. Your health, and health care costs that tend to rise with age, are important “known/unknowns” in your retirement planning. Regardless of the health care debates that are likely to rage in this Congress without reaching an end point, you should insure against as much of this risk as you can.
Protected Lifetime Income
Two pieces of bipartisan retirement legislation will facilitate retirement savers including annuities, and the protected lifetime income they can provide, in their retirement plans. The Retirement Enhancement and Savings Act (RESA) would make it easier for employer-provided retirement plans to offer annuities to their participants and make those annuities more portable. The Retirement Security and Savings Act (RSSA) would expand access to and incentivize annuities and their protected lifetime income, especially “qualified longevity annuity contracts,” which are important tools to protect against the risk of outliving your retirement savings.
Tip #2 – If your employer provides a retirement plan, tell your employer’s director of employee benefits you might be interested in annuities and a lifetime income illustration.
RESA is not yet law, but it is likely to pass in some form during this Congress. It is not too soon to begin the conversation about annuities that could be offered by your employer plan. There are many types of annuities, so it would be good to use this time to learn more about what kind of annuity, if any, might make sense for you and your co-workers as a means of adding protected lifetime income to your retirement plan.
RESA also would require that every retirement saver receive a lifetime income illustration with his or her benefits statement. Simply, these illustrations show how much income your current level of retirement savings would produce for the rest of your life if you annuitized those savings. That’s a valuable tool for planning. If you don’t already receive an illustration, ask your employer’s employee benefits staff to find out whether your retirement plan’s service provider can generate it for you and other participants, especially since Congress may soon require them.
"Forthcoming congressional action, or continued inaction, may be relevant to some of the decisions you will make as you plan your retirement. In most cases, proposals under consideration make it easier to take, or even require taking, common-sense steps that already should be part of your retirement plan."
Employer Plan Coverage
Tip #3 – If your employer does not provide a retirement plan, let him or her know that Congress is about to make it easier, or even require it.
RESA would provide more generous tax credits to small employers that establish retirement plans for their employees. It also would allow “open multiple employer plans” so that small and mid-sized employers can band together to create a shared retirement plan. Chairman Neal sponsored a bill called the Automatic Retirement Plan Act that would mandate employers (except those with very few employees) establish a 401(k) retirement plan and automatically enroll employees. It might be worth letting your employer know about these potential changes so that it can prepare, or even launch a plan before Congress acts. Of course, if you are the employer, you can start planning today without waiting for someone to ask.
Taxes and Retirement Savings
Tip #4 - Tax planning is an essential part of retirement planning, and the rules that affect your planning may change in the future.
Just like with your current paycheck, the amount you can spend in retirement is partly determined by how much money you have after taxes. Generally speaking, savings in bona fide retirement accounts, including those provided by your employer’s plan, are not subject to taxation until they are withdrawn. That’s also true of gains that accrue from investments in those accounts. So, keeping money in your retirement account avoids taxes and preserves your savings for a while. But the tax code includes “required minimum distribution” (RMD) rules that force withdrawal of a portion of your savings each year beginning at age 70½. So, the tax liability will come, albeit slowly.
Both RESA and the RSSA would change the RMD rules to allow some savers to protect their retirement savings from taxes later into their lives. Those with low levels of savings would have no mandatory withdrawals. The RSSA would make it possible to count protected lifetime income from your annuity as a “withdrawal” from your non-annuity retirement savings accounts. RESA also would allow contributions to traditional Individual Retirement Accounts (IRAs) beyond the current cutoff age of 70½ so those who keep working can also keep saving. So, there may be tax relief on the way for retirement savers, but don’t change your retirement plan until Congress changes the tax code. Instead, start the conversation with your financial advisor and tax preparer.
Working with your Financial Advisor
Tip #5 – Regardless of any legal changes, understand the nature of your relationship with your financial advisor and the rules governing it.
Because Republicans and Democrats disagree about it quite intensely, the Securities & Exchange Commission’s forthcoming Regulation: Best Interest—scheduled to be issued in 2019—likely will become law without congressional interference. In general, this regulation will modify the rules governing advice provided by broker-dealers and registered investment advisors to their clients about investments in securities, including variable annuities.
It should not matter to your retirement planning that there are sharp disagreements about the likely effectiveness of the SEC’s new regulation. You should have a blunt conversation with your financial advisor, as I suggested here, about the current rules governing your relationship, and how any new rules may affect you and your retirement planning.
In sum, don’t act quickly to change your retirement plan. Congress won’t. But you and your financial advisor should be aware that there may be changes on the horizon that will affect your retirement plan. You can and should start preparing now.
*What is an annuity?
Annuities are long-term, tax-deferred investments designed for retirement. Variable annuities involve risks and may lose value. Earnings are taxable as ordinary income when distributed and may be subject to a 10% additional tax if withdrawn before age 59½. Optional benefits are available for an extra charge in addition to the ongoing fees and expenses of the variable annuity.
Annuities are not for everyone. And, it’s important to remember that these products are meant to be long-term investments designed for retirement, so there are restrictions in place to discourage you from withdrawing all of your money at once or taking withdrawals before age 591/2. However, most annuities do allow for exceptions based on specific circumstances such as a terminal illness or other emergencies.
The opinions and forecasts expressed are those of the author and individuals quoted and should not be construed as a recommendation or as complete.