How Tax Reform Might Affect Your Retirement

How Tax Reform Might Affect Your Retirement

During his campaign, President Trump promised a significant overhaul to the federal tax code. If he comes through on his promises, the seven federal tax brackets would be streamlined to just three: 12, 25, and 33 percent.

Under such a plan, taxpayers who make between $48,000 and $83,000 would see roughly a $1,000 reduction in income taxes per year. High earners—America’s 1 percent—would enjoy an average reduction of $214,000. But not everyone will pay less.

For instance, removing the head of household filing status, as Trump proposes, would force single parents to pay more in taxes. So, it’s important to assess how these tax policies could affect what you pay. Because you could end up with more or less money in your hand each year.

With all that said, a new tax plan like the one White House leadership wants will impact your retirement as well, especially if you change tax brackets. Here’s what you need to know:

The possibility of lower taxes equals more options for retirement

As mentioned, Trump’s tax plan will save many folks money each filing season. Overall, taxes would decrease by $2,940 per filer on average. That extra money can be spent on retirement investments, like life insurance, stocks, mutual funds, or real estate, rather than a new TV or car.

If a new tax plan is implemented, and your taxes are reduced, start planning for what to do with the extra cash you save. You want to make the right investments for your retirement, which involves taking a look at how the entire tax plan affects where you should put your money.

Pre-tax investments may become less attractive

One of the advantages of a pre-tax investment, like a traditional IRA or 401K, is that it reduces your present tax burden. You can let that investment grow and then pay taxes on it when you retire.

But if you have less tax to pay, then it becomes less beneficial to save money on those taxes today. It may actually be smarter to pay the taxes now and then invest the money (especially if you believe taxes will go up in the future).

Consider this scenario:

  • In Trump’s proposed plan, a married couple with $100,000 in taxable income would pay $12,000 in taxes (a 12 percent rate).
  • Previously, a married couple having $100,000 in taxable income would have paid $25,000 in taxes (a 25 percent rate).

Clearly, it makes less sense to toss money into a traditional IRA or 401K to decrease your taxes. What you’re able to save is reduced because you’re already paying less in taxes (at least in this case).

Also, since pre-tax investments would become less attractive for most, after-tax investments, like a Roth IRA or annuity, would become more attractive. For most people, it might be wise to pay taxes on income now since rates are lower, and invest in something like a Roth IRA account to ensure money can be withdrawn tax-free in retirement.

Cutting Medicare surtax would benefit the wealthy

The Affordable Care Act helped fund Medicare partially with a surtax on investment income of 3.8 percent for those in the highest tax bracket. Trump and the GOP plan to eliminate this surtax, which would give high-income investors significantly more return on their investments.

The capital gains tax rate for them would decrease from 23.8 percent to 20 percent.

Opponents say this surtax would reduce federal revenues by $117 billion over a decade and accelerate Medicare insolvency, all the while putting an incredible amount of money back in the pockets of the wealthy. This could result in Congress raising Medicare’s eligibility age from 65 to 67 or higher. It also could lead to a reduction in benefits from Medicare, which is seen as a bedrock of health care coverage.

You should pay serious attention to what goes on with the Medicare surtax and even the Medicare employer tax (which could change).

Other factors to consider

Although President Trump has promised to protect Social Security, no concrete plans have been put forward. Some research institutions estimate Social Security will be insolvent by 2035, and there may be changes in the tax code that will impact the program. Pay serious attention to this, especially if you’re going to depend on that income in retirement.

Additionally, Medicare isn’t the only medical issue you need to consider. The Trump administration has talked a lot making Health Savings Accounts (HSAs) more accessible for Americans. Plans include increasing contribution limits, establishing easier ways to pass HSAs on to beneficiaries, and making the accounts more portable.

HSAs, which are tax-deductible, will definitely become a more useful option if the Medicare surtax is repealed and the Cadillac plan is canceled. That plan, starting in 2020, would impose a 40% excise tax on high-cost employer-sponsored plans.  

Wait to see what happens—then make the right move

Tax policies change with every administration, so it’s always best to observe what’s being changed and how it affects what you’re doing for your retirement.

Analyze your personal situation and do your research. See what investment vehicles suit you best—and make those investments. Watch out for changes in the tax plan that will affect Social Security and health care in retirement—and prepare accordingly. Doing all this will put you in a better spot for retirement.

How to Navigate Student Loans in Retirement

How to Navigate Student Loans in Retirement

Student debt is at an all-time high; about 44 million Americans hold almost $1.4 trillion in outstanding debts. The issue was hotly debated during the presidential elections, and higher education institutions have been soul-searching for innovative ways to help students deal with rising costs of education.

While the topic has gotten a lot of attention, though, the perception of those affected usually fits a certain stereotype: young millennials just starting down the road to a long-term career, with many years ahead of them to pay down their debt. The reality is more complicated. Currently, 6.4% of student loan borrowers are age 60 or older. That number is expected to grow as young Americans carry their debt further into their futures. Borrowers would do well to understand the resulting implications and the best ways to approach student debt as they get older.

Setting favorable terms for loan repayment

Some borrowers mistakenly think that their student debts will automatically be forgiven after a certain age. There is indeed precedent for this line of thinking; in the U.K., for example, federal student loans are forgiven when the borrower reaches age 65.  This is not the case in the U.S., and federal loans are only cancelled upon the borrower’s death.

While this fact may be grim, it can still be used to the borrower’s advantage. Because older Americans are usually living on a set fixed income and federal loans are nullified upon death, it often makes sense to reduce monthly payments by arranging to stretch out the loan term. While this increases the total amount of interest paid, it serves to keep monthly payments to a minimum which can assist with budgeting purposes. Also, if the borrower passes away before the loan is completely paid off, the resulting loan forgiveness would end up reducing the total lifetime costs.

Additionally, borrowers should be aware that some loan servicer providers automatically enter borrowers into a repayment plan where costs start low and increase gradually, in anticipation of a recent graduate starting with a lower salary and slowly increasing their income. This arrangement clearly does not make sense for older borrowers on a fixed income, who should work with their servicer to arrange an alternate agreement that is a better fit for their predicted future income.

Forgiveness programs do exist

Although an automatic, one-size-fits-all forgiveness program does not exist, borrowers should be aware that there are still other avenues to help lessen their debt. Some older borrowers may be eligible for programs that help limit total payments.  

While three-fourths of older borrowers with student loan balances are only holding balances on their own education, the remainder are holding balances on a child or other relative’s education. The latter may be eligible for an Obama-era repayment program called the Pay as You Earn PAYE program, which limits required payments based on earnings. Borrowers can check on the Federal Student Aid website to determine eligibility.

Another federal program of interest is the Income-Based Repayment (IBR) program, which caps maximum monthly payments at 15% of discretionary income. One of the most appealing aspects of this program is that after 25 years of continuous repayments, borrowers may be eligible for loan forgiveness for the remaining balance.

Be prepared to pay a Social Security offset

In 2005, the U.S. Supreme Court upheld the principle of “administrative offsets” that allow the government to collect on unpaid student loan debts by withholding Social Security benefits. The amount of the offset can range up to 15% of the borrower’s disability and retirement benefits, which may come as a surprise to elderly Americans who are depending on the income.

Many people are caught off guard is that Social Security used to be off limits for student loan offsets. Until 1991, there was a 10-year time limit on the government’s ability to collect student loan debt through administrative offsets. And until 1996, those offsets could not include Social Security. Now, though, 173,000 Americans received reduced Social Security checks because of unpaid student loan debts.

These factors are important to consider early so that Americans with student loan debt can be aware of the costs that may lie ahead.

Communicate with your loan servicer

The best repayment arrangement always depends on the specific circumstances of each individual borrower. To avoid getting lumped into terms that may not be the best for you, make sure to communicate with your loan service provider frequently and update them on any major changes. Open and frequent communication is the best way to help them help you.

 

Three Biggest Regrets of Baby Boomers Once They’ve Retired

Three Biggest Regrets of Baby Boomers Once They’ve Retired

As the adage goes, “a life without regrets is a life not lived,” but it is also “better to regret what you have done than what you haven’t.” The three biggest regrets of retired baby boomers center on the things they have not done and teach the next generation to make more informed choices.

1. Not Saving for Retirement Earlier

A rare absolute rule of finance is that people should start saving for retirement as early as possible, with the best time to start being in one’s twenties. Life expectancies are growing and show no signs of slowing down, so more money is needed to be stretched out for a longer period of time. Starting to save and invest as soon as one enters the full-time workforce can make a dramatic difference in the amount of money that accumulates by the time a person is ready to retire.

Many baby boomers failed to start saving on time and properly because they did not understand just how much money would be needed for their retirement. Some also did not know that receiving social security benefits or taking money out of retirement accounts before it is needed can have tax consequences that can substantially lower savings. Finally, many people tend to forget to adjust for inflation when considering whether they are satisfied with the rate of return on their investments.

2.Not Working Less and Traveling More

A study of 2,000 baby boomers commissioned by British Airways revealed that one out of five boomers regrets not doing more traveling around the world. The survey data also indicate that only 9% of American workers get more than nine vacations days per year and that only 37% of Americans took all of their vacation days in 2015, suggesting that working too much may be an issue whose scope extends far beyond just the baby boomer generation.

A 10-year research project conducted by Karl Pillemer, Professor of Human Development at Cornell University, into the lives of 1,200 people aged 65 and older also revealed that lack of travel during one’s youth is a common regret. He writes, “To sum up what I learned in a sentence: When your traveling days are over, you will wish you had taken one more trip.”

3. Not Working More

It might sound surprising given the decades of work they’ve done, but more than two-thirds of middle-income baby boomer retirees wish they had worked longer, and not for expected reasons. One might assume that people would want to continue working to keep earning their salaries, but for many baby boomers, wanting to keep working is about the work. People who are passionate about their careers and enjoy their work want to keep doing it. For this reason, many baby boomers return to the workforce on a part-time basis or as consultants. A number of baby boomers also enjoy working during their later years because they find that it keeps them mentally sharp, physically fit, and gives them a sense of purpose.

Goldstone Financial Group: How to Recoup from Drawing Money from Your Savings

Goldstone Financial Group: How to Recoup from Drawing Money from Your Savings

Life is full of unexpected situations that may have required you to pull from your retirement savings to cover pressing, unanticipated expenses. Although such situations can present challenges to the integrity of your retirement fund, there are several things you can do to reinvigorate your savings.

First, identify what caused the drain in your retirement savings. This step may seem obvious, but it’s important to take time to evaluate the factors that led to your emergent situation so that you can take steps to avoid them again in the future. With time and careful consideration, you can prepare for future unexpected situations.

Generally, it is advisable to save cash reserves to cover expenses for anywhere between three and six months. If you’re a homeowner, you should be able to cover six to 12 months. In addition, you should keep the amounts of the deductibles for your homeowners, flood, car, and health insurance. As an added precaution, set aside 1 percent of your home’s value each year for repairs.

Next, cut expenses and prioritize retirement. Because people spend the majority of their careers thinking that retirement is far away, other more immediate expenses often take priority over saving for a seemingly distant eventuality. However, dipping into retirement savings to cover an emergency signals that spending less on lower priority expenses may be necessary in order to recoup your losses. To help you accomplish this, refer back to the first step and evaluate what expenses you can minimize or maybe live without (at least for a while). Finding tax preferential vehicles such as municipal bonds, MLPs, and real estate in addition to the retirement accounts you already hold can help you get back on track as well.

Start saving small amounts to develop good saving habits and begin replenishing your retirement fund. Easing into monthly saving can help you get your retirement savings back on track without presenting you with a harsh burden. Starting by saving just 1 percent of your annual income in a company retirement plan helps you form a habit of saving. The 1 percent amount is small enough that it won’t be missed but big enough to keep the need to save for retirement fresh in your mind. It also helps you to save more as time goes on. By increasing the amount you save by an addition 1 percent of your income every other month, you will quickly be on your way to substantially rebuilding your retirement savings.

Eventually, you should increase your contributions to company retirement funds to the maximum amounts allowed by your 401(k)s and IRAs. Taking advantage of matching employer contributions will also be beneficial. If you are aged 50 or above, you can also potentially take advantage of up to $1,000 in catch-up IRA contributions and up to $6,000 for catch-up 401(k) contributions.

Pursue an extra job or income-generating side project to help fill in the gap.

Picking up a second job or an extra client or two can help generate additional income that can be set aside for retirement without impacting present-day expenses. If your spouse or partner does not work, having him or her join the workforce can be a great boon. Alternatively, if you are already retired, consider turning a hobby into an income-generating project. Or, apply to a big company, whose employee insurance plan can help cover healthcare costs. However, if you are unable to pursue any of the examples above, even simple things like tutoring or helping neighbors with some yard work can help supplement other income.

Delay retirement and social security to make sure you have more money for later. The best way to improve a retirement portfolio’s longevity is to delay drawing on it. Delaying retirement allows more time to build greater savings and also ensures that saved funds that you have accumulated will last longer into the future because they are being drawn on later in time. If you delay your social security benefits until after retirement age, your benefit grows with each year of delay.

If you’re a homeowner and your home has sizable home equity, consider a reverse mortgage. A reverse mortgage allows people aged 62 and over to receive tax-free cash in a lump sum or fixed payments. Moreover, the mortgage does not need to be paid until the homeowner moves out or dies. However, there are closing costs associated with this type of mortgage, and the homeowner must maintain the home. Although seniors often consider a reverse mortgage to be a last resort, it is a viable option provided that it is obtained from a reputable lender and that the homeowner understands how the mortgage works.

Goldstone Financial Group: 4 Reasons Why Considering the Impact of Spending Is Just as Important as Saving

Goldstone Financial Group: 4 Reasons Why Considering the Impact of Spending Is Just as Important as Saving

Many economists agree that the personal savings rate in America is too low. Even though it climbed to 5.7% in late 2016, it’s still behind most other developed countries.

For instance, Switzerland households save 13.4% of their income. In Japan, workers have averaged a savings rate of 11.74% from 1970 to 2016.

For those looking to save more, what’s the solution? Obviously, making more money helps, but that may not be entirely possible for everybody.

What anyone can do right now is manage their budget better. Smarter spending equals higher savings—a good step towards ensuring a secure financial future. Here are 4 reasons why considering the impact of spending is just as important as saving.

1. A penny saved is still a penny earned

Benjamin Franklin’s famous quote is simple but profound. Anybody that’s worried about their financial well-being should remember it. Say it out loud, “A penny saved is a penny earned.”

Though most are familiar with this quote, it’s not being put into practice the way it should be. According to research from GOBankingRates, one in three Americans don’t have any retirement savings.

Cameron Huddleston, an expert columnist at GOBankingRates, believes this can be fixed. “There are plenty of obstacles Americans claim are in their way when it comes to saving for retirement,” she says. But things likes student loan debt, low wages, and a child’s education “don’t necessarily make it impossible to save for retirement.”

For those on a strained budget, the best way to save more money is to look at how you’re spending. There are many easy ways to save a few or even hundreds of dollars a month, from cutting the cord on cable to bargaining at flea markets.

2. Overspending carries future financial consequences

According to a study published in the Journal of Consumer Research, consumers overspend due to impatience and not thinking about long-term consequences. Examples of this play out every day.

For instance, 30-year olds probably don’t think about how buying a super-expensive TV today could negatively impact their quality of life at 65. That’s just so far away, and that TV can offer immediate pleasure.

This is what motivated the study’s researchers, Daniel M. Bartels and Oleg Urminsky, to look for ways to change this behavior. The two University of Chicago professors found that the solution is more complex than just thinking about one’s future self. While spending money, people must also care about their financial future. If someone doesn’t care, then spending less and saving more becomes less likely.

As Bartels and Urminsky say, “The best way to help consumers avoid overspending is to get them to both care about the future and recognize how their current behaviors affect the future.” Thinking and caring about the future is key to spending wisely today.

3. There is waste everywhere

Think of something like lean management in business. The core idea is to eliminate waste and improve efficiency. People should be applying this philosophy to the way they spend money.

Many may argue that saving is tough because all their income is spent on essentials, but research doesn’t necessarily support that claim. A survey by 24/7 Wall Street found that Americans spend roughly 15% on non-essentials (which means $15 out of every $100 doesn’t necessarily need to be spent).

Some common non-essentials include the following:

Pets
Travel
Eating out at restaurants

It’s worth noting that things that can be classified as “non-essentials” offer necessary relief from the stresses of life. Yet the fact remains that this is the primary area where wasteful spending occurs. Cut down any wasteful spending here and savings rates rise immediately.

4. Overspending leads to debt

It shouldn’t be a surprise that student loan debt can delay saving for retirement. It’s hard to stash away cash when lenders need those monthly payments.

For those that overspend and get caught in debt, the same idea applies. Habitual overspending makes getting out of debt—and saving—quite difficult.

It’s rather alarming that the average credit card per U.S. household is around $16,000. This indicates consumers are buying things without having the ability to pay in full. Carrying a credit card balance is necessary sometimes when the unexpected arises. But for many, high balances are simply a result of bad money management (overspending).

Also, since credit cards have higher interest rates, this means people are getting burnt by interest payments. That interest money could have been savings instead.

Saving more by spending wisely

In the end, it’s not necessarily about being stingy. It’s about spending more wisely. This means buying things at the lowest possible prices, staying away from unnecessary purchases, keeping credit card balances as low as possible, and more. If more folks start to pay attention to the impact of their spending, they’ll see their savings rise.