Thursday, December 26, 2019

End-of-Year Thoughts on Retirement Planning

Happy Holidays to you and yours. Here are just a few thoughts I want to share at year's end.

First, I would direct you to the post I wrote this time last year, My Year-End Review and Planning Regime, about steps you might want to take for a year-end review. As I warned then, don't bother being overly precise with your adjustments. This isn't an exact science.

I recall one reader whose adviser was suggesting she sell stocks and incur taxes just to correct an asset allocation by a percentage point or two. The process isn't that precise. It's impossible to know with any accuracy what your asset allocation should be unless you have a crystal ball that tells you next year's asset class returns. (If you do have a crystal ball, just allocate 100% of your assets to the asset class that will outperform all the others. But first, call me!)

I suspect that most retirees overthink the year-end adjustment process.

Next, President Trump signed the SECURE Act last week[1]. The age to begin RMD's was increased from 70.5 to age 72 beginning in 2020. However, "Americans who turned 70.5 years old in 2019 will still need to withdraw their required minimum distributions this year, and failure to do so results in a 50% penalty of their RMD", according to Jamie Hopkins, the director of retirement research at wealth management firm Carson Group.

Also, annuities can now be offered in 401(k) plans, though it may be a while before they actually become available. Thirdly, stretch IRAs are no longer available.[2]

Not everyone is convinced that the changes are dramatic. “The SECURE Act is a nice thing — anything we can do on a bipartisan basis in this day and age is something of value — but my sense is the changes in the act are really quite modest,” said Alicia Munnell, director of the Center for Retirement Research at Boston College and a columnist for MarketWatch.

I won't write yet another post on the topic because there are so many out there. I'll place some links in the references below and recommend that you start with Mike Piper's excellent piece at The Oblivious Investor.[3]

Wishing you a happy and prosperous 2020.


[1] SECURE Act, downloads PDF.

[2] Hello SECURE Act, Good bye Stretch IRA | Ed Slott and Company, LLC, Ed Slott.

[3] Retirement and 529 Changes from the SECURE Act — Oblivious Investor, Mike Piper.

[4] The SECURE Act is changing retirement — here are the most important things to know - 

[5] SECURE Act And Tax Extenders Creates Retirement Planning Opportunities And Challenges, Nerd's Eye View blog.

1 comment:

  1. I find the hyperventilating in the media about the disappearance of the stretch IRA to be quite annoying because it is really only an issue that impacts a select few that are already quite financially well off. Some points on this:

    1. Most people are not maximizing their 401k/IRA/HSA contributions. By the time you add up the maximum for each of these they total over $25k per year and even more if the person is over 50 given catch-up contributions. So all of these can be funded to the max during the 10 years that the inherited IRA needs to be dispersed.

    2. 529 accounts can also be funded during this 10 year period.

    3. Money can be set aside in a taxable account so that the recipient can defer taking Social Security until age 70.

    4. Money can be set aside in a taxable account to provide for income until age 72 when the RMDs for the retirement accounts listed in Item 1 above need to start.

    5. Student loans and home mortgages can be paid off in full.

    6. An annuity (immediate or deferred) could be funded with the proceeds to provide for future income.

    7. Many of these inherited IRAs will be inherited by multiple people, so it takes a lot of money to be a substantial amount when divided by 2 or more people.

    By the time you add up all of these potential destinations for the disbursements from the inherited IRA, it would generally need to be $1 million+ in value before there isn't substantial benefit from the earlier disbursement schedule. That is only a very small percentage of retirement accounts.