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Archive for the 'Retirement Planning' Category

A Solution to the Retirement Income Challenge

Posted by Robert Louis on 15 Jun 2008 | Tagged as: Retirement Planning

A new book by Alice H. Munnell and Steven Sass, titled “Working Longer: The Solution to the Retirement Income Challenge”, published by the Brookings Institution Press, makes some important points about planning for retirement. Americans, they say, need to work longer because of a contracting retirement income system, the longer lifespans now enjoyed by many of us, and the rising cost of healthcare.

The aim, they suggest, should be to move the average retirement age from 63 to 66. This will increase Social Security benefits payable, permit workers to build up larger retirement balances and reduce the period during which they must rely on retirement assets. One way of encouraging this trend might be to increase the earliest age for receiving Social Security benefits, which is now age 62.

But here’s another one, which I have suggested in earlier posts: provide income tax incentives for workers to continue working beyond age 62. For instance, for those age 62 and over, the federal income tax rate on the first $50,000 of income could be set at 10%, with a 15% rate on the next $50,000. This would surely encourage people to continue working, adding more to Social Security trust funds and delaying the payout of benefits.

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409A Deadline Approaching

Posted by Robert Louis on 12 Jun 2008 | Tagged as: Retirement Planning

Section 409A of the Internal Revenue Code was enacted in reaction to concerns about the taxation of deferred compensation, especially some of the abuses uncovered in the failure in recent years of several large corporations, including Enron. The law was enacted in 2004, but several extensions were granted of the time to amend plans and arrangements to comply with the new law. Those extensions will come to an end on December 31, 2008. This year it is still possible to make certain types of changes in deferred compensation plans and arrangements without adverse tax consequences, but there will be significant penalties assessed if compliance has not been achieved next year.

This is a good time to review what deferred compensation plans and arrangements are now in effect, whether they need to be amended and how they will be amended. Deferred compensation can be a valuable tool for businesses to provide incentives to executives, but it’s important that the new law be satisfied.

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Social Security: Did We Solve That Problem Yet?

Posted by Robert Louis on 02 Jun 2008 | Tagged as: Retirement Planning

I know it was discussed extensively over the past few years, but is it no longer front-page news because the problem has been fixed? Apparently not. It’s more likely that the nation is suffering from attention deficit disorder and can only think about high gas prices right now.

But this problem isn’t going away, nor is the Medicare problem on the verge of resolution. Both of these programs face long-term funding challenges and waiting another few years to think about them again isn’t going to make their solution any easier.

An interesting Web site is maintained by the Center for Retirement Research at Boston College, and included on the Web site is a publication called the “Social Security Fix-It Book.” There are only a certain number of possible solutions to these problems, and the center has summarized them in 52 clearly written and entertaining pages. The publication begins with basic facts about how Social Security works and then makes the following fairly simple statement: The only two ways to fix the problem are to cut benefits or increase revenues. There is no magic formula that will painlessly make Social Security financially solvent for the indefinite future.

There are a couple of ways to cut benefits:

An across the board percentage benefits cut that affects everyone, including those now receiving benefits.
Raising the normal retirement age for full benefits, as has already occurred.
Freezing the purchasing power of benefits, which means that future benefit amounts would be lower than under the current law.
Freezing the purchasing power, but to a lesser degree for lower income earners.
Changing the cost of living adjustment for benefits.
Doing nothing and cutting benefits all at once in 2040

And, there are a couple of ways to increase revenues:

Increasing the payroll tax rate today.
Raising the cap on earnings subject to Social Security taxes.
Financing Social Security with revenues from the federal estate tax.
Transferring Social Security’s startup costs (from benefits paid in the early years of the program) to general revenues.
Increasing the rate of return on assets held in the Social Security Trust Fund.
Waiting until 2040 to raise taxes.

What to do? The publication ends by asking these three questions, the answers to which will determine how to fix Social Security:

Do we want to keep benefits about where they are now? If so, how should the burden be shared?
Do we want to keep taxes about where they are now? If so, how do we cut benefits?
Finally, should each generation pay about the same tax and get about the same benefits?

Republished with permission of The Legal Intelligencer.

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“You Kids Can Work It Out”

Posted by Robert Louis on 27 May 2008 | Tagged as: Estate Planning, Retirement Planning

This is what a father wrote in a will that was brought to me. It illustrates another fundamental point about estate and retirement planning.

The father had decided to make his estate planning easy. “I’ll just buy CDs in my name and in the names of each of my children. That way, when I die, each of them will have a CD now in his or her sole name.” So, to carry out this idea, the father bought one CD with Child No. 1’s name on it in addition to his, a second in the name of Child No. 2 and the father all the way up to five children. The trouble was, he forgot how much he had purchased for each child, so the amounts were uneven. One child would get $100,000, another $10,000.

But Dad planned how to solve that problem. In his will, he wrote: “If any of the CDs I bought aren’t equal among my children, I ask them to straighten it out.” What do you think happened? Wrong, they did straighten it out. In one of those unusual family situations, the children who got more recognized their obligation to the others and entered into a family settlement. Sometimes it snows in April.

It’s important to remember that a will isn’t the only document that determines how assets are distributed. Life insurance beneficiary forms, retirement plan beneficiary designations and joint title on assets are all forms of testamentary dispositions; that is, they are all wills. Most people don’t know where these forms of wills are, sometimes can’t remember what they say and usually haven’t put them together so that they understand what their estate plan is. But it’s important to do this, because not every family (and, in fact, very few) is as close and understanding as the one described above.

Republished with permission of The Legal Intelligencer.

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Is It Me?

Posted by Robert Louis on 13 May 2008 | Tagged as: Retirement Planning

Or does it seem that just about everyone in America is planning to retire in the next few years? If you watch television or read magazines of almost any kind, you will see constant stories about impending retirement: Are people ready for retirement; What can they do now to get ready; etc.

Of course, not everyone is retiring during the next decade. After all, there are still law firm associates. But the large cohort called the Baby Boomer Generation is approaching retirement and, just as in other times in the history of that generation, it will treat the circumstances it is facing as the most important in the nation’s history.

There are varying views as to what retirement will be like for the Baby Boomers and what effect it will have on the rest of society. Many reports in the popular media suggest a need for more saving and investing. But there have been scholarly studies suggesting that those about to retire are well prepared for it. Are they both right, or both wrong?

A study, to be published later this year in The Journal of Investing, was recently concluded by three individuals connected with Barclays Global Investors, and it provides some valuable insights on the status of retirement preparation and on the effects of changes in elements of that preparation.

The authors describe several ways of measuring the state of retirement preparation, including income replacement rates and comprehensive wealth analysis. They note several disturbing trends: the disappearance of defined benefit pension plans, the decline in personal saving rates and the large proportion of wealth represented by home equity. Not surprisingly, the result is to reduce the stability of retirement security for many people.

Given the long-term insecurity of government transfer programs and the importance of reducing dependence on home equity, the authors suggest several techniques for improving preparation for retirement. These include finding ways, such as automatic enrollment and default contribution rates in retirement plans to increase retirement saving and improving the investment choices made for retirement funds through lifecycle and targeted retirement strategies. Finally, the authors stress the importance of individuals taking a more active role in improving their retirement security. This is certainly the key point: Retirement security is the individual’s responsibility and problem. It is not a societal problem, as to which the individual can expect a societal solution. It’s up to the individual to ensure a comfortable retirement, even in the face of cutbacks in government programs.

Republished with permission of The Legal Intelligencer.

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Are People Saving for Retirement?

Posted by Robert Louis on 04 May 2008 | Tagged as: Retirement Planning

A new book by Roger Lowenstein, a well-regarded author on financial topics, raises some issues about a problem that is becoming more obvious as baby boomers near retirement- the question of whether they have saved enough. His book, While America Aged: How Pension Debts Ruined General Motors, Stopped the NYC Subways, Bankrupted San Diego, and Loom as the Next Financial Crisis, discusses the way in which pension issues have affected the institutions named. It’s certainly a serious problem, but I don’t believe it’s a problem that’s inherent in the nature of pension plans, and that this is a reason to move everyone to 401(k) plans. You will find in each of the pension crises discussed a failure of careful management that took place over a long period of time. The people managing these plans knew that they were following risky paths, and they chose to follow them because they were, at least for a time, more profitable, and as for the long run, well, that’s someone else’s problem. But these crises have affected what people will have for retirement, and placed more of the saving burden on individuals. This is certainly an era in which individuals must consider their own financial situations and cannot rely upon government or employers to solve their retirement problems.

We see much discussion of individual attitudes toward retirement saving. Many writers warn us that Americans are saving virtually nothing for retirement. It’s misleading to lump everyone together, of course, because many people have saved for retirement, and those nearest to retirement are reported, again on a general basis, to be fairly well prepared for it. But there is no doubt that many people fall outside this generalization.

In future entries, I will review the conflicting evidence about saving, because some of the methods used in determining saving seem to be misleading. But there seems little doubt that Americans don’t save as much as they could in our high consumption society, and this attitude will affect their retirements and their family and estate planning.

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Essential Planning for Retirement Distributions

Posted by Robert Louis on 14 Apr 2008 | Tagged as: Estate Planning, Retirement Planning, Income Tax

For many people, their largest financial asset will be the balance in their retirement plan. The growth in 401(k) plans and the increases in the limits on deductible contributions to retirement plans have resulted in growth of such plans to overall levels of trillions of dollars. This growth has generated a number of issues, but a requirement covering all such plans and raising many issues is the necessity of taking withdrawals from such plans beginning at a specified age and at a specified rate.

Why are there such rules, called minimum distribution rules and imposed by Section 401(a)(9) of the Internal Revenue Code, and a mountain of IRS regulations? The ability to deduct contributions to such plans causes a loss of tax revenue to the Treasury, and they want the money back…eventually. The longer the wait to get the lost tax revenue, the less value it has to the Treasury. So the specified age for beginning distributions is 70.5, and the rate can be over life expectancies or a specified number of years. The failure to comply with these rules can result in a penalty of 50 percent of the amount that should have been taken out but was not. This creates a powerful incentive to take distributions as required by law.

But the rules are complicated, and it’s easy to make mistakes and to forget to take distributions when they are required. This is especially true when the plan owner dies and leaves the remaining benefits to family members. The naming of individuals as beneficiaries, or trusts for a group of beneficiaries, or separate trusts for each beneficiary can lead to different requirements for minimum distributions. Several books have been written on the subject of retirement plan distributions, and even they don’t cover every situation.

In private letter rulings, the IRS responds to inquiries by and on behalf of taxpayers. The responses they give are to the particular taxpayer and fact pattern, and they cannot be relied upon as authority for other transactions. Despite this limitation, they are useful in showing the thinking of the IRS on difficult tax questions. A recent private letter ruling, No. 200811028, illustrates a solution to a problem of late distributions. In this ruling, a decedent’s IRA was left to a beneficiary. The IRA indicated that distributions were to be made to the beneficiary over his life expectancy, unless he elected a faster payout over five years. The beneficiary did not make such an election, but he also forgot to start taking distributions over his life expectancy. Those distributions should have begun a year after the year of death of the IRA owner, and the first few payments were missed. When this error was discovered, the beneficiary caught up on the late payments, and he paid the 50 percent penalty tax on the late payments. The IRS ruled that he could continue payments over his life expectancy, enjoying the stretched-out deferral of tax, despite having missed the first few payments. In effect, the IRS said that the failure to take the necessary payments was not an election of the shorter five-year payout method.

The lesson of this private letter ruling, and many others on the subject of required minimum distributions, is that considerable care is needed in choosing how and when retirement benefits are to be paid, especially to beneficiaries. But if the distribution process gets off to a rocky start, there are some techniques available to preserve the favorable tax treatment for retirement distributions.

Republished with permission of The Legal Intelligencer.

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A Retirement Planning Tragedy

Posted by Robert Louis on 04 Apr 2008 | Tagged as: Retirement Planning

Unless you’ve been on a deserted island for the past two weeks (today is April 3, 2008), you will know of the near-collapse of the investment bank Bear Stearns. Bear Stearns stock closed at $169.61 per share on January 12, 2007. The initial sale price to JP Morgan was $2 per share, since raised to $10, but this still represents a 94% decline from the high to the sale price. Many very wealthy investors in Bear Stearns are much less wealthy. Perhaps there isn’t a great deal of sorrow over their plight, but losses have been suffered by many people working at Bear Stearns who weren’t in the multimillionaire category, or in any case aren’t anymore.

Several lawsuits have already been filed as a result of the decline in value of Bear Stearns. One investor has sued, alleging that the company issued false and misleading information about its financial situation. A second was filed by a Bear Stearns employee, claiming that the company and its executives breached their fiduciary duty, causing losses to the employee stock ownership plan that is a principal shareholder of the company. A day later, another employee sued on similar grounds. Many people at Bear Stearns who had much of their retirement funds in Bear Stearns stock are facing a grim retirement picture, and it’s almost certain that more suits will be filed. Sometimes it’s a good idea to put all of your eggs in one basket, but if you drop the basket, it might be difficult to find more eggs.

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Megatrends in Trusts and Estates

Posted by Robert Louis on 31 Mar 2008 | Tagged as: General, Estate Planning, Retirement Planning, Income Tax, Family Business

Megatrends is a name given to important changes in the economy or in the behavior of many people. People write books and articles about megatrends, hoping to identify them before others do and to benefit in some way (usually by selling more books). There are several megatrends that have a definite impact on trusts and estates work, and that will be discussed in future blogs:

People are becoming wealthier, even with the current stock market setbacks. This is a worldwide phenomenon and contributes to the international flavor of much estate planning.
A large number of people (the always demanding baby boom generation) are getting close to retirement and to a “final” disposition of their assets.
There is a strong interest in business succession planning, particularly in this part of the country, where there are so many family-owned businesses. To deal with these issues, trusts and estates lawyers often have to act like psychologists, or at least hire them.
People want to protect their assets against litigation and divorce, among other threats.
There is and will continue to be a need for increased tax revenues, which leads inevitably to more complex tax laws and the need to plan for them. When Congress talks about tax simplification, tax lawyers go car shopping.

The combination of these megatrends demonstrates the growing importance of the broad practice area of trusts and estates, often referred to by more general names such as personal wealth, private client or wealth transmission, and ensures that this will be an area of growing importance for lawyers, one that focuses not on death but on the enjoyment of life.

In the next blog, we’ll review the campaign to repeal the federal estate tax and the likely future of the tax and the exemption from tax, as well as efforts to repeal the Pa. inheritance tax.

Republished with permission of The Legal Intelligencer.

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Archive for the 'Retirement Planning' Category

A Solution to the Retirement Income Challenge

409A Deadline Approaching

Social Security: Did We Solve That Problem Yet?

“You Kids Can Work It Out”

Is It Me?

Are People Saving for Retirement?

Suggested reading for investors

Essential Planning for Retirement Distributions

A Retirement Planning Tragedy

Megatrends in Trusts and Estates

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