Written by: Robert Powell, Retirement Columnist. April 18, 2017
Retirement savers, beware.
The government seemingly has designs on making it harder for you to save for retirement. In recent weeks, for instance, President Donald Trump signed a resolution eliminating an Obama-era regulation that allows states to create retirement accounts for low-income workers.
Plus, the benefits of contributing to a 401(k) could be frozen or scaled back under tax reform being discussed in Congress.
What’s an investor to do?
Write to your congressmen and senators
At present, some 55 million Americans currently lack access to retirement savings plans at work, according to AARP. And in the absence of those plans, workers tend not to save for retirement.
That’s why states, 30 at last count, and local governments were starting to offer citizens access to government-sponsored retirement plans. The new resolution, however, puts the kibosh on local governments offering such plans and some fear the new administration will try to stop states from offering retirement plans, as well.
That’s why experts suggest writing to lawmakers asking them to propose laws that help Americans save for retirement, not inhibit or limit access to these new state-sponsored and local government-sponsored retirement plans.
“America is speeding toward a retirement savings crisis, and we need to do everything we can to enable and encourage Americans to save more,” said David McClellan, a financial adviser with Forum Financial Management. “Too many Americans don’t have access to defined contribution savings plans through their employer. Preventing states from offering retirement accounts to low-income workers endangers the retirement security of millions of Americans. When it comes to retirement savings, we need belts and suspenders.”
Others share this point of view. “I find this (eliminating state- and local government-sponsored retirement plans) as a bad move — and not for political reasons,” said Jorge Ruiz-Menjivar, an assistant professor at the University of Florida. “I can understand how the no compliance with ERISA may be an issue here, but the fact that these plans have the potential of a required automatic enrollment of thousands of employees in retirement plans would be — is — something to regret.”
He noted that behavioral economics literature suggests that availability or access to retirements alone is not likely to fix the “retirement savings crisis.”
“But a comprehensive set of measures such as ‘availability of retirement options — that is, access to a plan — auto-enrollment, automatic investment choices and automatic increase in contributions or savings’ may be a more pragmatic framework to remediate or at least attenuate the problem,” he said.
Americans should also write lawmakers asking that they not reduce or freeze the current tax benefits of contributing to a 401(k) or similar retirement plan. Among the reasons, workers would be less inclined to save for retirement.
“So many of my clients engineer their savings using ‘out-of-sight, out-of-mind’ payroll deferrals,” said Kerry Uffman, a financial adviser with TWRU CPA’s and Financial Advisors. “If the paycheck reductions are eliminated and the ‘extra cash’ hits their checking accounts, very likely it will be consumed. Accordingly, my experience with clients, is the deferral mechanisms are the major source of any saving they do.”
Americans also ought to urge the administration and lawmakers to approve some of the more innovative ways for Americans to save for retirement. For instance, Robert Merton, a professor at MIT, and Arun Muralidhar, co-founder of Mcube Investment Technologies, have advocated for the creation of MMM Plans. “One part of that innovation is the creation of new financial instruments to help not only ensure retirement security, but also fund infrastructure (Retirement SeLFIES). If the current administration works on these ideas, things could improve for all citizens, especially the poor who depend on Social Security and safe outcomes in defined-contribution plans.”
And, lawmakers might also look for ways to provide incentives for people to save more. “To me what it is alarming is the low percentage of American households that actually max out their annual 401(k), (403b) contribution,” said Jorge Ruiz-Menjivar, an assistant professor at the University of Florida. “Incentives to have more households hitting the max on their contributions should be a focal point, and hopefully implemented in the near future.”
Increase the size of your nest egg
Focus less on the things you can’t control — whether laws will or will not get passed that make it harder to save for retirement — and more on the things you can control. “My best advice is to build a robust strategy not predicated on the belief that current rules and policies or tax treatments will be sustained,” said Merton. “And there are two broad directions to improve one’s chances of achieving a good retirement.”
One, increase the size of your nest egg at retirement. According to Merton, there are only three ways to do that: one, save more and consume less; two, work longer; and three, take more risk and be prepared for the consequences if the risk is unfortunately realized.
As for saving more, those who have an employer-sponsored at work and who are already saving for retirement, Ruiz-Menjivar recommends “maxing out” your 401(k) (403b) contributions. “If you participate in a employer-sponsored program, you may be missing the chance of potential ‘matching’ contributions,” he said.
And if you have “maxed out” your contributions, Ruiz-Menjivar said investors ought to look into other options such as Roth IRAs, if eligible.
Now, if you have designs on increasing the size of your nest egg and you don’t have an employer-sponsored retirement plan, consider opening an IRA account and funding it on a regular basis. Among other reasons, if you don’t start saving for retirement on your own you might face the prospect of living on Social Security alone. “The removal of the Obama-era regulation only hurts those that are not looking out for their retirement, so those workers will not be automatically enrolled in retirement accounts,” said Stuart Michelson, a professor at Stetson University. “Those workers will need to be cognizant of the fact that they will only have Social Security when they retire, which will likely not be enough to live on during their retirement.”
Of note, Meton said, “risk taking is not mitigated by even a long horizon. There is no ‘free lunch’ of higher expected returns for the same risk. Finance experts are already working as hard as they can to get the most expected return for the risk borne and thus there is no further way to ‘dial’ that ratio higher, at will.”
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Consider annuities and a reverse mortgage
The second thing Merton recommends doing is increasing the retirement income benefits one can get from a fixed amount of retirement assets available. “The only instruments, I am aware of, for doing this, which can really ‘move the needle’ for working and middle-class people,” are annuities and a reverse mortgage, he said.
According to Merton, the annuity, which like the traditional pension payout of the old defined benefit plan, pays you a stream of income for as long as you need it (for life) in return for surrendering those assets — to the annuity provider — when you no longer need income because you have gone somewhere — better — where you no longer need those assets (after death).
The reverse mortgage, said Merton, which is called Home Pension in Korea and is a much better descriptive name, allows one to live in their house as long as they live in the house with no payments of either interest or principal, and to receive in return a sum of money or a monthly addition cash payment for as long as one lives in the house.
“Since the house is typically the largest asset that working and middle-class families have at retirement, indeed is often the only personal savings the household has done, the amount of extra retirement benefits gotten from this can be very substantial,” he said. “I would note that I believe that we can design and offer a much better reverse mortgage than is offered now, but in any case the current offering is better than doing nothing.”
“In sum, do not speculate on future legislation, but instead take charge of what you can control,” said Merton.
And, most of all, he recommends assessing how you are doing in your retirement funding progress by computing how much of retirement income — annuity — you could purchase today at market interest rates versus the income goal for a good retirement.
“The ratio is called the funded ratio…and indeed it is the funded ratio which has always mattered in terms of progress and risk for corporate defined benefit pension fund asset management and measuring the health of a plan in terms of ability to deliver on what benefits have been promised,” Merton said. “And that is no different for the defined contribution structure.”
*Reverse Mortgages are a brokered loan product. This material is not provided by, not approved by the Department of Housing & Urban Development (HUD) Or by the Federal Housing Administration (FHA)
” The information provided herein has been prepared by a third party company and has been distributed for education purposes only. The positions, strategies or opinions of the author do not necessarily represent the positions, strategies or opinions of Guild Mortgage Company or its affiliates. Each loan is subject to underwriter final approval. All information, loan programs, interest rates, terms and conditions are subject to change without notice. Always consult an accountant or tax advisor for full eligibility requirements on tax deduction. ”