Monday Morning Quarter-Buck: “Improvements” to Retirement Planning

“Improvements” to Retirement Planning

By Financial Planner Kim Anderson, CPA

Fargo, North Dakota

The U.S. House of Representatives recently passed the “Secure Act” legislation and it’s widely expected to move forward in the Senate.  In part, the legislation’s purpose is to make it easier for employers to offer 401ks to their employees and to let workers guarantee how much income their retirement savings will produce by using their assets to purchase annuities.  It removes the IRA age limitation and increases the RMD age to 72.

I want to address each of these “improvements” to America’s retirement savings problem.

401ks offered by employers can be a good thing, but they are not necessary to be prepared for financial independence/retirement.  A few years ago my (then) employer offered a 401k where I could enter the plan only after completing one year of service, then only in the quarter after that.  If I missed that deadline, I had to wait until the beginning of the following quarter. On top of that, the employer did a ZERO match. Unfortunately for the employer, the 401k plan put in place was not well utilized by the employees and therefore the allowed contributions by the owner (for his own retirement nest egg) were quite low due to discrimination testing.  As you can see, even though the employer DID offer a 401k, for most of his employees the 401k was not a “benefit” and in turn, was not much of a benefit for the owner either.

Fast forward to last week when I had the opportunity to look at annuities for a retired couple who, in 2017, purchased three annuities.  I asked them how it came about that they purchased three of them. “Well, we were offered a free dinner.” After that, the salesman called and set up a one-on-one appointment and told them how wonderful the products were.  During our discussion what the couple learned was that the surrender fees were HUGE – starting with 10% or so the first year, 9 point something percent the following year, and declining a percent or so per year each year for 10 years until the surrender charge went away.  Given the cost of annuities is this really the best our lawmakers can do?  Just for fun, plug some information into this annuity calculator to see how much a single premium annuity would cost to deliver guaranteed income to you.  Keep in mind that once you give up that lump sum of money to fund the annuity, should you need say, $50,000 or so to pay for your kitchen remodel, you will need to save it to the tune of $5,000 per month for 10 months.  Meanwhile, if you are saving that money for a kitchen remodel, what are you going to use to live on? The good news about annuities is that they provide a steady stream of income but the bad news is that they are expensive, you lose flexibility, and unless you purchase a COLA rider for an additional cost, your $5,000 per month now will be $5,000 per month 20 from now when prices for goods and services have likely increased.

To continue the annuity conversation, Bankrate.com tells us that the average 401k balance rose to $103,700 in Q1 2019.  How much of a guaranteed income via an annuity do you think that will buy?  Plug that 401k balance into the USAA annuity calculator provided above to find out.  Combine that steady stream of income with the average $1,200 per month Social Security check then subtract your monthly expenses (don’t forget about health care expenses that run the average retiree about $6,000 per year).  Now tell me how much you have left for travel to see the grandkids….

However, that’s not to say that all annuities are the wrong answer, for some people they create income that is the proper solution.

As for the ability to contribute to an IRA until the day you stop working, well, it’s a small fraction of people that I work with who want to work until age 72.  In fact, I have a hard time talking them out of starting social security at age 62. So if people want to start drawing social security at age 62 and completely quit working at age 65, is it really a benefit or incentive to be able to contribute to your IRA until the day you die?

So how do we deal with the lack of retirement savings problem?  Do we have an income problem? Or is it more of a spending problem?  If it is a spending problem, is it also a spending priority problem? If someone is not willing to give up (at least temporarily) a $150 per month “extra” expense in order to put that money toward an emergency fund or retirement savings, is the national lack of retirement savings problem really going to be solved by moving the RMD age to 72 – or by any of the above “solutions” created by Congress?

Rooted Planning Group’s Financial Coaches are in the business of helping people live intentionally.  Our clients gain control of their money and their lives by telling their money where to go rather than letting it aimlessly wander in and out of their checkbook.  Our clients learn to be intentional about how they’re spending money so that you can enjoy life now AND later.

Getting your retirement fund into shape is like trying to get your body into shape. You make the decision to take steps every day to take care of your body, and over time, those choices add up to a slimmer, healthier you. The same applies to retirement savings. Take steps every day—and over time, you’ll discover that your retirement fund is taking shape!

This is your retirement wake-up call! Don’t base your future on the assumption that Congress will ensure you have the money to retire – contact a Rooted Planning Group Financial Coach today to start living intentionally.