The Markets October 28, 2020

Americans Are Worried About Inflation in Retirement, But Few Are Taking Action to Prepare

Experts say there are things pre-retirees and retirees can do to prepare for a retirement that could last 20 to 30 years.

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Fifty-seven percent of Americans are worried that inflation will make basic retirement expenses unaffordable, Allianz found in a survey that formed the basis of its “2020 Retirement Risk Readiness Study.” Furthermore, 48% of retirees and 62% of non-retirees have no idea how much they currently spend or will spend on health care in retirement.

Despite these concerns, only 24% of Americans are discussing the impact of inflation with a financial professional, and a mere 21% say they will look for a financial product that can increase their income to help address inflation.

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Kelly LaVigne, vice president of consumer insights at Allianz Life, tells PLANADVISER that inflation should be a concern for every retiree. “Even if it averages 3% over the course of retirement, within 24 years, a retiree’s cost of living is going to double. Everyone knows that inflation makes things more expensive over time, but few seem to appreciate that rising costs can also bring more complexity, which is particularly concerning as we age and our cognitive ability declines,” LaVigne says. “It is already challenging to establish and maintain reliable sources of retirement income. The additional pressure of managing increased expenses can pose a risk to financial security if people don’t have a strategy for increasing income built into their retirement plan.”

LaVigne says there are steps people can take to mitigate inflation risk. “The first is working with a financial adviser, who can have a better handle on their needs,” he says. Allianz learned in its survey that people are afraid to talk about their concerns, so it is critical that if someone goes to the trouble of hiring an adviser that they are straight with them, LaVigne says.

The next thing people should do is wait as long as they can to take their Social Security benefit, LaVigne says. “If you think about it, Social Security is one of the few guaranteed sources of income that is supposed to last your lifetime,” he says. “It also has a cost-of-living adjustment [COLA] built in.”

Social Security benefits can increase in value by 25% to 30% with a delayed start date, he notes.

The third thing people can do is to invest in products that keep up with inflation, such as an immediate annuity with a COLA rider, or guaranteed income that promises to keep up with inflation, LaVigne says.

Steve Vernon, president of Rest-of-Life Communications, says he wholeheartedly agrees that delaying taking one’s Social Security benefit is key. People can live off of what they have saved for retirement in the interim, Vernon says.

For those who are wary of purchasing an annuity, there are platforms that can bid an inquiry out to multiple insurers to find the most attractive contract and price, Vernon says. Two examples of this are immediateannuities.com and spia.direct, he says.

Compliance October 28, 2020

Trump and Biden Differ on Social Security, 401(k) and Tax Policies

What both candidates have proposed as it relates to the retirement industry. 

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With the presidential election days away, American workers are casting their ballots and researching the policies each candidate has introduced and supported, including their proposals on Social Security and 401(k) and tax reform. 

Social Security

The Trump administration has remained tight-lipped about plans to reform Social Security taxes and benefits. Aside from President Donald Trump’s executive order on payroll tax deferrals in August, the president hasn’t offered specific plans on how his administration would handle Social Security and its potential future uncertainty. In early August, Trump called for forgiveness on the employee payroll tax deferrals he approved from September 1 through December 31. Leading up to the Republican National Convention in August, the Trump administration released a set of vague proposals, one being to “protect Social Security and Medicare.”

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John Lowell, an Atlanta-based partner at October Three Consulting, says he expects that if Trump is re-elected in November, the country will see many of the same current policies. “The Trump administration, thus far, has really not had a focus on retirement policy, as has frequently been the case,” he says.

Democratic nominee and former Vice President Joe Biden, on the other hand, has revealed plans to reinforce Social Security. In his proposals, Biden says he would expand Social Security and impose additional taxes to pay for the benefits. Currently, American workers pay Social Security taxes on the first $137,000 of wages. Biden’s plan would reimpose a 12.4% Social Security payroll tax for earners who gross more than $400,000 a year.

“It would almost be a surtax and not count on additional wages throughout the year,” says Jeffrey Levine, director of advanced planning at Buckingham Strategic Wealth in Long Island, New York. “It would not boost benefits for those individuals; it would effectively cost them more. That’s how a lot of this would ultimately be paid for.”

Levine says Biden has another proposal that would increase benefits for retirees who have collected Social Security for 20 years or longer. “While Social Security does receive cost-of-living adjustments [COLA], you can talk to any Social Security beneficiary, and they’ll tell you that they haven’t seen their checks increase in line with what their expenses have over in the last decade, as expenses have gone up so much more than Social Security benefits have,” he adds.

401(k) and Tax Reform

While Trump has yet to release details on second-term tax plans, the president has said he wants to pass a second economic relief package should he be re-elected. It’s unclear if there would be a second stimulus check for many Americans in the package or how much the check would be.

In the August agenda, the Trump administration said it wanted to enact “‘Made in America’ tax credits,” and cut taxes to “boost take-home pay and keep jobs in America,” if Trump is re-elected.

In Biden’s Emergency Action Plan to Save the Economy proposal, the candidate proposes another round of stimulus checks, but does not specify how much each check would offer.   

Lowell says Biden’s multiple proposals for tax restructuring include a potential nationwide retirement plan. Biden’s plan would offer tax credits for small businesses to help cover the costs.

“Part of Biden’s platform is that he wants availability of 401(k) or a plan that looks like a 401(k) to be automatic,” explains Lowell. “If you’re in the workforce, either your employer will offer you a 401(k), or if your employer doesn’t offer you one, there will be some sort of governmental plan.”

Lowell likens the proposal to a retirement version of the Patient Protection and Affordable Care Act (ACA) enacted under the Obama administration in 2010, in which employers could still offer health care plans as long as they met minimum criteria, despite the creation of a public option. “If you look at the way the ACA played out, employers still had the opportunity to continue offering health plans, so long as they met these standards,” he says. “They had mandatory types of coverage, maternity care, certain pediatric coverages, etc.

“With the Biden 401(k) proposal, if the employer didn’t offer some minimum, so for example something like dollar-for-dollar match, then your employees would have the right to opt in to a national plan,” Lowell continues.

Lowell predicts the national plan would be funded in one of three ways: enacting tax increases, cutting some existing policy or mandating employers that do not offer a 401(k) plan to chip in.

Other proposals in Biden’s tax policy include increasing the top corporate tax rate from 21% to 28%; creating a new minimum tax on corporations with “book profits” in excess of $100 million; taxing capital gains and qualified dividends at the ordinary income tax rate for those who make more than $1 million in income; restoring the Pease limitation, which capped the value of itemized deductions for taxpayers; and shifting 401(k) deferrals from an income deduction to a tax credit.

The last proposal would convert deductible contributions to a 26% refundable tax credit for each $1 contributed in a 401(k), individual retirement account (IRA) or other traditional retirement vehicles. This tax credit would be listed as a matching contribution in a participant’s retirement account. Aside from simplifying complexities for participants, the proposal aims to incentivize lower-paid workers to save money for retirement.

Lowell offers an example of the proposal’s benefits: “If a worker is currently in the 10% tax bracket and is saving $5,000, then that’s worth $500. It’s only worth $500 to the extent that there is a tax bill. If this became a refundable tax credit, then that $500 becomes worth $1,000 or more.”

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