Personal Wealth Law News

Shocked? A recent series of articles in Forbes talks about the blessings and curses of family wealth. Well, the curse, I suppose, is that family members become unmotivated and give up trying to achieve something in life. One of the blessings is that it provides a cushion if someone tries but doesn’t succeed right away. Another blessing of wealth is the choices it offers. Of course, one still has to make a choice and we hope it will be a sensible choice. The author suggests that family wealth can be more of a blessing if the family can learn to work together, communicate openly and ask questions about what the family’s goals and (non-cash) legacy should be. Family wealth is a very good thing, certainly better than the opposite, but you still have to work to make it a wholly positive aspect of life.

For many years, federal tax policy has been designed to encourage retirement saving. The creation of individual retirement accounts in 1974 was only a first step in this process, and subsequent tax legislation has resulted in greatly expanded limits on the amount that may be contributed, on a tax-deferred basis, to retirement plans of all types. It’s disheartening to see that this ability to save in a tax-efficient way has not solved the problem of assuring a comfortable, or at least an adequate, retirement. A recent article in the Wall Street Journal adds some further statistics: 57% of US workers have less than $25,000 in total household savings and investments, excluding their homes. Part of the problem is that most retirement saving these days is voluntary, such as through 401(k) plans. Gone, for most people, are the days of pension plans that would act as a form of forced saving and offer a guaranteed income at retirement.

But be careful in drawing conclusions from the many statistics. It’s better to ask what savings people close to retirement have. But even that presents a dismal picture. Too many people have saved too little for retirement. Why? In some cases, the cost of living is such that saving just isn’t possible. For others, they are just living up to their incomes because instant gratification is more tempting than delayed gratification. Another article, this one in a recent New York Times, reports on the practice of retirees borrowing against their future retirement or pension payments, usually at very high interest rates. And another article points out that the wild card in planning for retirement is the growing and unknowable cost of health care. And be careful as well, when reading these stories, to consider who is offering the statistics and for what reason. There is in fact a great deal of money in retirement plans, in the trillions of dollars, and many people are looking for ways to profit from that horde of assets. We can expect to see many more advertisements about managing retirement, featuring folksy celebrities and ex-politicians. Some of these offerings will be helpful and some will not, but the fear is that those near or at retirement will grasp at whatever promises to relieve the problem of not having saved enough for retirement. And that retirement savings will become a political football for current politicians with their own agendas.

Taxpayers are gearing up to pay the new 3.8% tax on net investment income that is to offset part of the cost of the new healthcare law, the Affordable Care Act. The new tax does not apply to retirement plan distributions, but such distributions could increase the tax payable. Here’s how.

Retirement plan distributions are generally taxable income, except when they are distributions from a Roth account or are a return of after-tax contributions. Other than those limited situations, such distributions result in an increase in adjusted gross income. The new tax on net investment income is imposed on the lesser of net investment income or the excess of modified adjusted gross income over a specified threshold. So increasing adjusted gross income could push a taxpayer over the threshold and result in a tax on net investment income. Here’s an example.

Sally has net investment income of $10,000. Her income from wages is $50,000. For a single person, the threshold is $200,000, so Sally would pay no additional tax on her net investment income. However, if Sally also received retirement plan distributions that increased her adjusted gross income by an additional $150,000, she would have adjusted gross income that was $10,000 over the threshold, and her net investment income would be subject to the 3.8% additional tax.

(There is no difference between modified adjusted gross income and adjusted gross income for most taxpayers. The difference arises when someone uses the foreign earned income exclusion.)

A short article in the New York Times of February 9, 2013 discusses the five stages of retirement planning angst, as a takeoff on the five stages of grief. When told how much you need to save for retirement, at first you deny that so much is needed. Then, you are angry. Then, you start bargaining with yourself: maybe I can get along by saving less. Then, you’re depressed: how could this be happening to me? Finally, you accept what you must do. The author of the article concludes that you should do your best to save as much as you can for retirement, and then accept it.

The problem with many 401(k) plans is that it’s too easy to withdraw money. Money can be withdrawn in three ways- hardship withdrawals, loans that are not repaid and cashouts when participants change jobs and are entitled to a distribution. There are many reasons for the growth in “leakage” from 401(k) accounts, but the two most obvious are economic need and because the money is too easily available. When most people received a defined benefit pension at retirement, this was much less of a problem, but those plans are fading away at a rapid pace. The societal problem that arises is that the lost funds will not be available at retirement, demonstrating why 401(k)s as a leg of the retirement stool (the others being Social Security and other savings) are a shaky proposition.

A woman in Caserta, Italy has left her estate valued at two million euros to her dog, Kikko, despite having two-legged relatives in the form of children and grandchildren. Under Italian law, a bequest to a domestic animal is not valid, so her executor is to administer the funds for Kikko’s benefit. It’s not clear where the estate goes after Kikko’s death, but he would be well advised to look both ways before crossing the street.

On a more serios note, one of the effects Hurricane Sandy was many homeless pets. A recent article reminds that a trust for pets can help to care for them after the owner has passed on, and that a pet trust is not just for millionaires but can be funded with modest amounts of money.

The National Retirement Risk Index is compiled by the Center for Retirement Research at Boston College. Using a variety of measures and complex methodology, the Index measures, essentially, how well-prepared people are for retirement. A recent report, from October 2012, concludes that today’s working households will be retiring in much different environment from that their parents faced. As people live longer, they need more retirement income. The rate at which working income can be replaced in retirement is falling because of the extension of the full retirement age under Social Security and fairly modest balances in 401(k) plans and IRAs. As of 2010, median 401(k)/IRA balances for those nearing retirement were at $120,000. In addition, because rates of return on assets in general have remained low, that source of income will be lower. Add to that the financial trauma of the recent recession, and the retirement situation looks troubled. The authors conclude that, as of 2010, less than half of households will have enough to maintain their pre-retirement living standard, even if they work to age 65, which is longer than people are working, on average,

A recent study shows the effect of several years of economic unrest on the spending habits of baby boomers (born 1946-1964). They are spending more money on education. Of the one trillion dollars of student loan debt, one third is held by people over the age of 40. Not surprisingly, baby boomers are spending more on medical care. They are also supporting children, and many of them continue to have large amounts of mortgage debt. Retirement savings rates are nowhere near the 10% recommended as a share of income that should be dedicated to such saving.

It isn’t just a matter of which states have the warmest weather or the most sunshine or golf courses. It’s importantly a matter of the availability of good medical care and proximity to cultural centers. As well, it’s a question of tax policies. Some states have no state income tax, but a number of them rank lower in quality of life issues. Other states have no sales tax, but that’s probably less important for senior citizens, who are less likely to be making major purchases. A strong cultural and medical care environment combined with little or no income tax liability would appear to be the optimum solution. One state in that category would be Pennsylvania, which does not tax retirement income, such as pension and retirement plan income and distributions from IRAs.

A recent survey, and there are lots of them, adds more concern that people are not saving enough for retirement. A consulting group called LIMRA reports that of middle income people (incomes from $40,000-100,000), 22% are saving nothing for retirement; 19% are saving something but less than 3%; 24% at least 3% but less than 5%; 20% 5% up to less than 10%; and 15% are saving 10% or more. All seem to agree that they need to save more.