New Retirement Planning Strategies after the Tax Cuts and Jobs Act of 2017

Transcription

1 New Retirement Planning Strategies after the Tax Cuts and Jobs Act of 2017 Implications and Strategies all Retirees Should Consider March 17, 2018 William Meyer

2 William Meyer William Meyer, founder and CEO of Retiree Income, is a nationally recognized expert in portfolio withdrawal strategies. Together with Dr. Reichenstein, they founded Retiree Income to provide software, comprehensive education and marketing programs that help financial advisors grow their business and give advice. Meyer has been the featured speaker at national FPA, NAPFA, AICPA, and other practitioner events. In 2016, he testified before the U.S. Senate on retirement strategies and how the Social Security Administration could improve. Bill earned his Bachelors of Science degree in Psychology from UCLA and his MBA degree from the Anderson School at UCLA. He is a former Trustee of the Securities Industry Institute at Wharton and holds multiple securities licenses.

3 William Reichenstein Dr. William Reichenstein, CFA, is the Powers Professor in Investments at Baylor University. He has published more than 190 articles and several books including Social Security Strategies, 3 rd Edition, with William Meyer. His recent work concentrates in two areas. First, when should individuals begin Social Security benefits? Second, how can we add value to clients accounts using the tax code? He is a member of Wall Street Journal s The Experts panel.

4 IncomeStrategy.com NEW, Retirement Income Platform Detailed advice and planning software for both Social Security and retirement income planning. 3 Powerful and Intuitive Modules: Withdrawal Strategy See how to tap savings added longevity, more money Social Security Income Management One click button tells you what to liquidate Actionable guidance on how to drawdown Monitoring Real-time tracking of all savings accounts to the withdrawal strategy Dynamic alerts notifies client Retirement Income For the Do it Yourself investor developed by innovators of retirement research and technology

5 FREE Report for AAII Members Can you Get More in retirement? Leveraging Meyer and Reichenstein s research, see how much MORE money you can find by coordinating Social Security with how you generate income in retirement. Tapping your savings in a smart order can help you keep more of your hard earned money. We call this a withdrawal strategy that makes the most out of what you have saved. Go to IncomeStrategy.com to receive your FREE analysis!

6 Agenda Focusing on Areas you can control to find more money Social Security Strategy and Coordination Overview of 2017 TCJA Key Implications and Strategies 1. Strategies Given Larger Standard Deductions 2. Two Factors Causing Retirees Marginal Tax Rates to Substantially Exceed their Tax Brackets 3. Strategies if Today s Marginal Tax Rates will be Temporarily lower than future Marginal Tax Rates 4. Using QCDs to Minimize Medicare Premiums and Reduce Taxable Income 5. Separate strategies for Retirees Younger than 70 and Older than 70.5

7 Disclosure We are not affiliated with SSA These are our own views We will not be addressing the implication of new lower corporate and pass-through rates for consumers

8 Most Used, Highest Ranked #1 for Usability by WSJ, Most Published in Academic Journals Regularly quoted by the biggest names in media Validated by respected technology analysts and wealth management specialists

9 Recent Research and Media AAII April The Potential for High Taxes from Social Security Benefits and Medicare Premiums AAII March Retirement Planning Strategies following the 2017 Tax Act Journal of Financial Planning Roth Conversions and Recharacterizations Financial Advisor Magazine How to Beat the Conventional Wisdom Investment Wealth Monitor Why the Conventional Wisdom is Never the Optimal Withdrawal Strategy Journal of Financial Planning Redo Strategies: When Can You Redo a Prior Social Security Claiming Decision The Journal of Retirement Social Security Claiming Strategies for Widows and Widowers Financial Analyst Journal Tax-Efficient Withdrawal Strategies Journal of Financial Planning Social Security s Earnings Tests: A Primer for Financial Planners Journal of Financial Service Professionals Greatly Reduced Life Expectancy: How Should It Affect a Couple s Social Security Claiming Strategy? The Retirement Management Journal The Tax Torpedo: Coordinating Social Security with a Withdrawal Strategy to Minimize Taxes Retiree Inc. All rights reserved. For advisor use only. 9

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11 What We Solve Challenge 1: Help participants transition with education and awareness - How long money can last New process and focus on key components Ability to get more by coordination Challenge 2: Help participants make money last as long as possible Coordinating how and when to begin Social Security Create and compare withdrawal strategies Use asset location and allocation to participants advantage Manage Social Security taxes and Medicare surcharges

12 Retirement Income Next Gen Simple tools with accumulation focus are not enough Guaranteed Income and Target Date Funds are only one piece; not the ultimate solution Details will matter significantly Taxes are key Decumulation strategies will drive new product distribution and retain (aggregate) assets in Plan Social Security will be the cornerstone coordination with other assets to extend portfolio longevity 12 Retiree Income. All rights reserved.

13 The Opportunity The ENTIRE industry is using flawed retirement income rule of thumb for drawing down Conventional wisdom of withdrawing taxable accounts, then tax deferred accounts, then tax exempt accounts We can beat it every time! All retirement income strategies dependent on Social Security claiming strategy Largest impact on longevity, topography of SS income delineates how much and where to withdraw

14 How We Solve Our solutions help employees make the most of what they have whether it s a lot or a little. We help them Get More, Keep More by coordinating Social Security strategy with how to spend down other assets. Social Security Analysis and Planning A smart Social Security strategy can mean substantially more money for employees; for some, it s hundreds of thousands more Withdrawal Coordination Putting it all together by managing the right ingredients properly can mean substantially more in portfolio longevity or retirement income: *Asset location *Asset allocation *Social Security and Medicare *Withdrawal sequencing All of these components are controllable by employees and don t involve increased risk or the purchase of expensive financial products.

15 Value Proposition A strategic withdrawal strategy coordinating Social Security and Medicare with how you tap your savings makes your money last longer $800,000 $700,000 $600,000 $500,000 $400,000 $300,000 $200,000 $100,000 $- Household Assets Begin at 62 $215,000 More Lasts 7 More years SOCIAL SECURITY OPTIMIZATION WITHDRAWAL STRATEGIES 15

16 Social Security Simple? NOT! Still up to 10,000 combinations of ways to claim benefits. The rule changes in 2015 didn t simplify anything about Social Security planning. The quality of the advice you give matters substantially. Coordination Social Security is the foundation to a retirement income plan adding longevity and impacting withdrawal strategy 16

17 Coordination The next step in retirement income planning Refers to carefully combining an optimal Social Security claiming strategy with a tax-efficient withdrawal strategy to extend the life of the portfolio. 17

18 Does our research still apply? What is the impact of new SS rules on portfolio longevity? Journal of Financial Planning How Social Security Strategy Impacts Portfolio Longevity $800,000 $700,000 $600,000 $500,000 $400,000 $300,000 $200,000 $100,000 $- Household Assets Begin at 62 Begin at 66 Begin at 70 Social Security Solutions, Inc. All rights reserved. Social Security Solutions, Inc. is not affiliated with or endorsed by the Social Security Administration.

19 Breakeven Age is Later For Many New rules create changes in breakeven ages. Selecting the best strategy may not be obvious. Breakeven analysis helps determine if maximizing strategy is indeed the optimal strategy for a client. For some clients, a slightly higher projected lifetime benefit based on life expectancies may not be worth the much lower lifetime benefits if one spouse dies early. 19

20 Case Study 3 Ben & Kathy Ben: Kathy: Age 61 Age 61 PIA of $2,600 PIA of $0 Life expectancy 90 Life Expectancy 90 Old breakeven: 82 yrs 11 mos Difference between two strategies under new rules is only $12,480, and the breakeven is almost 89 years. That is, both spouses would have to live to about 89 for beginat-70 strategy to produce higher lifetime benefits. New breakeven: 88 yrs 11 mos Is it worth delaying until 70 when the breakeven age is so high? Social Security Solutions, Inc. All rights reserved. Social Security Solutions, Inc. is not affiliated with or endorsed by the Social Security Administration. 20

21 What is the Conventional Wisdom? Suppose a retiree has funds in taxable accounts, tax-deferred accounts like a 401(k), and Roth accounts. The conventional wisdom (CW) says a retiree should 1) withdraw all funds from taxable accounts until exhausted, 2) then withdraw all funds from tax-deferred accounts (TDAs) until exhausted, and 3) then withdraw all funds from tax-exempt Roth accounts until exhausted. 21

22 IncomeStrategy.com Confidential All Rights Reserved 22

23 IncomeStrategy.com Confidential All Rights Reserved 23

24 Managing Money in Retirement is Different Each area (attribute) is complicated and confounded with other areas: Challenge Impact Area to Monitor Easy to get out of balance as you withdraw assets Coordination with Social Security and Medicare Tapping assets Updating plan based on change Asset Allocation and Asset Location Tax Thresholds Premiums Overall tax drag and investment performance Plan and strategy inputs and financial/tax environments WARNING - Rules of Thumb and conventional wisdom do NOT work for retirement guidance as next level of detail is required. Examples: 4% rule, withdrawal sequences, etc. are good for education only. 24

25 Social Security Solutions, Inc. All rights reserved. Social Security Solutions, Inc. is not affiliated with or endorsed by the Social Security Administration. 25

26 Real-Time Assessment of Value 26

27 Example of how a withdrawal strategy adds value 2 key lessons: SS and withdrawal strategies impact portfolio longevity Case Overview: Married Couple 62 and 58 Husband PIA of 2,600 $2 million assets ($750k taxable, $1.25M TDA) $8,000 monthly spending All bond portfolio 1. Optimal SS claiming strategy adds 5 years and $641, Tax-efficient withdrawal strategy adds 3 years And $193, Together they add 8 years and $834, Retiree Income. All rights reserved.

28 Key Elements and Implications of TCJA Higher Taxable Income Thresholds for Many Married Couples Essentially no Changes to Capital Gains Taxes Higher Standard Deductions Other Modifications Social Security Medicare

29 Federal Income Tax Bracket Comparison

30 Historical and Projected Tax Rates for Married Couples Filing Jointly Taxable income Current $19,050 10% $77,400 12% $165,000 22% $315,000 24% $400,000 32% $600,000 35% Taxable income 2017 Tax Foundation Projection Worse case 1981 $19,050 10% 14% 20% 18% $77,400 15% 25% 25% 32% $156,150 25% 28% 35% 49% $237,950 28% 33% 40% 59% $424,950 33% 40% 50% 64% $480,050 35% 40% 60% 68% Source for 1981 tax rates: Tax Foundation, 2011

31 From: RetirementManifesto

32 Historical tax rates for income levels shown

33 Capital Gains Comparison

34 Standard Deduction Comparison

35 1. Strategies Given Larger Standard Deductions Under the Tax Cut and Jobs Act, fewer taxpayers will be inclined to itemize their tax deductions, thanks to a higher standard-deduction amount and new limits on other deductions. But there are two strategies investors can use to raise their itemized deductions above the higher standard deduction. So how can a taxpayer navigate these new limits?

36 Example: Double-Up Strategy Consider a married couple that owes $7,000 in state and local taxes each year. In addition, they typically donate $10,000 per year to qualified charities. The sum of $7,000 in state and local taxes plus $10,000 in charitable contributions is less than the $24,000 standard deduction. So, it wouldn t pay for them to itemize deductions each year. Instead, they can use a double-up strategy. For instance, they may pay their 2018 state and local property taxes in January 2019 and pay their 2019 taxes in December In addition, they may delay their 2018 charitable contributions until January 2019 and make their 2019 charitable contributions by December So, in 2018, they would take the $24,000 standard deduction and in 2019 they itemize and deduct $30,000: $10,000 in state and local taxes plus $20,000 in contributions. This double-up strategy produces a two-year total deduction of $54,000, which is $6,000 more than the $48,000 total from taking the standard deduction each year. If they are in the 24% tax bracket, this double-up strategy could save them $1,440 every two years in taxes. They could repeat this double-up strategy every two-year period.

37 Example: Donor-Advised Fund Another tax-reducing strategy would be for this couple to set up a donor-advised fund. If they take the standard deduction each year, their total deduction for the three years ( ) will be $72,000. Instead, in 2018 and 2020 they take the $24,000 standard deduction. In 2019, they contribute $30,000 to a donor-advised fund and, as in the double-up strategy, they pay their 2018 and 2019 state and local property taxes in calendar year Their itemized deductions for 2019 would be $40,000: $10,000 in state and local taxes plus $30,000 in contributions. The three-year total of deductions would be $88,000. This is $16,000 more than if they take the standard deduction each year. If they are in the 24% tax bracket, this donor-advised fund strategy could save them $3,840 every three years in taxes. They could repeat this three-year sequence every three years. The example above assumes this couple wants to contribute three years of charitable contributions to the donor-advised fund every third year. Other possibilities include contributing four years of charitable contributions to the donor-advised fund every fourth year, contributing five years of charitable contributions to the donor-advised fund every fifth year, and so on. The longer the period, the larger is the average annual tax advantage.

38 2. Two Factors Causing Retirees Marginal Tax Rates to Substantially Exceed their Tax Brackets 1. Taxation of Social Security benefits 2. Income-based Medicare premiums

39 Table 1. Single, $30,000 in Social Security Benefits: Marginal Tax Rates Based on 2018 Tax Brackets (Prov. Income = MAGI + 0.5*SS + tax-exempt interest; st ded = $13,600) Modified Adjusted Gross Income Tax bracket Taxable SS/$ Marginal tax rate $0 to $12,400 0% % $12,400 to $18,750 10% % $18,750 to $19,000 12% % $19,000 to $34,568 12% % $34,568 to $43,706 22% % $43,706 to $70,600 22% % $70,600 to $145,600 24% %

40 2018 Monthly Medicare Premiums Levels Increase as 2016 MAGI Increases (MAGImed = AGI + taxexempt Interest) Singles Couples Part B Part D Additional annual premiums $85K $170K Standard Premium (SP) Plan Premium (PP) Couples taking Parts B and D $85K to- $107K $170K to $214K SP + $53.50 PP + $13.00 $1,596 $107K to $133.5K $214K to $267K SP + $ PP + $33.60 $4,020 (+$2,424) $133.5K to $160K $267K to $320K SP + $ PP + $54.20 $6,444 (+$2,424) >$160K >$320K SP + $ PP + $74.80 $8, (+$2,421.60)

41 3. Strategies if Today s Marginal Tax Rates will be Temporarily Lower than Future Marginal Tax Rates Based on TCJC, most taxpayers will face a lower tax bracket from 2018 through 2025 than afterwards because tax brackets are scheduled to revert to 2017 levels after COLA adjustments beginning In addition, tax brackets may rise before 2026, especially if Democrats gain control of Congress and the presidency. Furthermore, the nation s huge deficit suggests that future tax rates may be higher. Separately, as we just showed, many retirees marginal tax rates will be much higher than their tax bracket after retirement. Implications if today s marginal tax rates are lower than they will be in the future include: A. Roth conversion strategies (for taxpayers who will not be on Medicare in two years): fill in low 24% tax bracket, $315,000 for married couples and $157,500 for singles B. Roth conversion strategies (for people who will be on Medicare within two years)

42 A. Roth conversion strategies for taxpayers who will not be on Medicare in two years As we saw, many retirees have marginal tax rates that substantially exceed their tax bracket. For pre-retirees, their marginal tax rate is usually their tax bracket. Consider the Reichensteins: a 60-something couple that will not be on Medicare in They have substantial savings in TDAs. Thus, they will have substantial RMDs beginning at At the end of 2018, they plan to convert sufficient funds from a TDA to a Roth IRA to fully use the 24% tax bracket. The top of the 24% tax bracket in 2018 is $315,000. This same strategy would apply for a single individual and married couples in their 30s, 40s, 50s, or early 60s, especially if they have lots of funds saved in TDAs.

43 B. Roth conversion strategies for taxpayers who will be on Medicare in two years Consider households who will be on Medicare in Their 2018 Roth conversion decision should consider 1) how this Roth conversion would affect their 2018 taxes, 2) the impact, if any, of this 2018 Roth conversion on their 2020 Medicare premiums, and 3) the impact, if any, of this 2018 Roth conversion on Medicare premiums beyond 2020.

44 IncomeStrategy.com Case, Couple $1.3 Million --Roth conversion controlling for Medicare premium -- Varying withdrawal sequence, varying thresholds, and varying time segments Copy Right Retiree Inc. 44

45 Advanced Case: $1.3 million Married Born: 1954 and 1957 Life expectancy: 85 and 90 Primary Insurance Amount: $2,000 and $250 COLA of 2% Spending; $8,000 per month Assets: $650,000 in Taxable and $750,000 in TDA Target Asset Allocation of 60% Equities and 40% Bonds Copy Right Retiree Inc. 45

46 Case Results SS contribution Portfolio longevity Total Value Remainder in port. Conventional Wisdom and SS at years $3,061,071 $277,071 Conventional Wisdom and SS at FRA 29 years $3,141,458 $357,458 Conventional Wisdom and SS at Best (70) 29 years $3,206,139 $422,139 Only controlling for Social Security adds $145,068 in cumulative benefits. Ability to hedge longevity risk by passing along higher monthly survivor benefits that will last as long as the survivor continues to live. Copy Right Retiree Inc. 46

47 Copy Right Retiree Inc. SS contribution no brainer 47

48 Case Results Vary Sequence Total Value CW with Roth 22% $3,460,829 CW with Roth 12% $3,502,656 2 phases CW with Roth, Multiple Accounts at RMD $3,509,547 Roth to MAGI 2 nd Threshold $3,512,945 CW with SS at Best $3,206,139 +$306.8K Finding the right level of income to do a partial Roth conversions to is not always obvious. Withdrawing from multiple accounts adds value. Filling up low tax brackets adds value. Picking the right threshold to do a partial Roth conversion to is important. Don t assume it is always a tax bracket. Running Optimization in helps you identify strategies you may not have considered. In this case, multiple sequences across different time segments is best Copy Right Retiree Inc. you have to know what you are doing or rely on software to help you. 48

49 Copy Right Retiree Inc. 49

50 Copy Right Retiree Inc. Coordination Adds Value show a personalized assessment for all your clients and prospects 50

51 3. Using QCDs to Minimize Medicare Premiums and Reduce Taxable Income The contributor must be at least 70.5 to make a Qualified Charitable Distribution (QCD) directly from his or her IRA to a qualified charity. This contribution counts toward required minimum distributions (RMDs). QCDs from IRA to minimize future Medicare Premiums and potentially reduce taxable income. This strategy helps higher-income retirees minimize MAGI for Medicare (MAGImed = AGI + tax-exempt interest) and thus future Medicare premiums. Consider a couple that wants to contribute $10,000 per year to charities. In a QCD, this $10,000 would not show up in IRA distributions on 1 st page of Form 1040 and it would not appear in itemized deductions. Thus, their AGI and MAGImed would be at least $10,000 lower, which may reduce the size of their future Medicare premiums. Separately, this QCD may reduce the taxable portion of their SS benefits by up to $8,500 and thus their MAGImed and taxable income by an additional $8,500. Also, suppose they made a $10,000 contribution directly to a charity (instead of via a QCD) and it raised their itemized deductions $4,000 above their standard deduction. Then, the QCD strategy would lower their taxable income by an additional $6,000.

52 IncomeStrategy.com NEW, Retirement Income Platform Detailed advice and planning software for both Social Security and retirement income planning. 3 Powerful and Intuitive Modules: Withdrawal Strategy See how to tap savings added longevity, more money Social Security Income Management One click button tells you what to liquidate Actionable guidance on how to drawdown Monitoring Real-time tracking of all savings accounts to the withdrawal strategy Dynamic alerts notifies client Retirement Income For the Do it Yourself investor developed by innovators of retirement research and technology