Path to a Secure Retirement
A disturbing percentage of Americans fear that they will never be able to retire. Many baby boomers are nearing retirement age in shaky financial shape. This is a big change from their parents’ post-war generation, which was blessed by fixed government and company pensions that provided guaranteed benefits on top of social security.
A recent Wall Street Journal analysis concluded that more than 40% of households headed by people aged 55-70 lack sufficient income and savings to maintain their standard of living in retirement. The percentage of retiring families with outstanding debt has risen substantially. Even households with 401(k) investments have a median total balance of only $135,000 in tax-advantaged retirement accounts, despite the stock market tripling in value since 2009. These don’t sound like people on the cusp of their golden years. It’s not surprising that a recent survey found that Americans’ biggest fear concerning retirement (especially for women) is that they won’t be financially able to retire at all.
It may not be too late for many nearing retirement age. For those who have fallen behind, the optimum time to catch up on retirement savings often is when the children leave home. Rather than assuming it’s too late to make a difference, people in the empty-nest phase should seize the opportunity. Here are eight financial ideas to consider when charting a course for a secure retirement:
1 | Save six to 12 months’ living expenses in an emergency fund.
2 | Save at least 10% of your income every year, investing it regularly in a diversified portfolio.
3 | Take full advantage of any tax-privileged 401(k) options available to you, especially up to the employer match. This is the best way to both save on income taxes and build a retirement nest egg.
4 | Add the additional “catch-up” allowance of $6,000 annually to your 401(k) contribution if you are age 50 or older. An employee over 50 can now save up to $24,500 annually.
5 | Take appropriate investment risks, and don’t be too conservative with asset allocation. Consider a balanced investment objective if you are either in or near retirement.
6 | Avoid shifting funds designated for retirement savings to college funding or other purposes—even worthy ones such as helping adult children or parents.
7 | Build a nest egg of both tax-privileged and taxable accounts. A good goal is to have multiple buckets of financial assets available from which to draw income in retirement.
8 | Look at all possible options regarding social security benefits. If you’re healthy, try to delay drawing benefits until at least normal retirement age or even age 70.
At Trust Point, we are aware of the financial issues facing retirees. We have experienced financial planners who can help a lot. Give us a call!
Supreme Court Decision on Internet Sales
A U.S. Supreme Court decision South Dakota v. Wayfair recently blessed a new state sales tax in South Dakota on internet sales. Look for other states to enact similar laws. That would mean no more shielding of online sellers with no physical presence in the buyer’s home state from the requirement to collect sales tax. Since Congress is divided on almost everything, don’t expect federal lawmakers to help virtual retailers navigate state sales-tax laws.
Tax Questions Regarding 529 College Plans
The new federal tax law extended tax-free treatment of distributions from 529 plans up to $10,000 if used for elementary and secondary education. More than 30 states, including Wisconsin, have declared that they will follow the new federal law. Several states, including Minnesota, have not adopted the Federal law and will tax these distributions.
Minnesota Trust Income Tax Case
Minnesota’s Supreme Court recently ruled (Fielding v. Commissioner) that a state statute treating certain irrevocable trusts as Minnesota residents for income tax purposes is unconstitutional. This decision could have significant tax ramifications for certain trusts, including the potential for income tax refunds for any open years. If you would like to discuss how this decision may affect an irrevocable trust for which you are a trustee or beneficiary please give us a call.
IRS Finally Blesses Back-Door Roth IRA
The IRS recently approved the back-door Roth IRA approach that we have been using for many clients for almost a decade. The “back-door” Roth evolved because of the income limits for making a contribution to a Roth IRA. Since there are no income limits on Roth conversions or on contributions to non-deductible IRAs, the process is to first contribute to a non-deductible IRA and then immediately convert those funds to a Roth IRA. The IRS has finally given its explicit blessing to the back-door Roth strategy.
November Elections Outlook
In the U.S. House of Representatives, Republicans have a solid majority of 240-191, with four seats vacant at this time. However, a couple of factors suggest that Democrats should be cautiously optimistic about taking control of the House this November:
1 | Historically, the party controlling the White House typically loses seats in mid-term elections.
2 | A significant number of House Republicans (around 40) have announced retirement, including speaker Paul Ryan from Wisconsin.
It appears likely that Democrats will pick up a few seats; however, there is plenty of uncertainty about whether the House actually will flip. The election could go down to the wire. The last time Democrats won the House from the GOP was in 2006.
In the Senate, Republicans have only a 51-49 majority. However, it appears they are in good shape since Democrats already occupy 26 of the 35 Senate seats contested in November. That leaves few opportunities to make gains. Republicans may possibly maintain or even add to their majority. Stay tuned, and remember that a lot could happen before November.