How Will the New Tax Law Affect You?
While most of the new tax law – the Tax Cuts and Jobs Act – has to do with reducing the corporate tax rate from 35 percent to 21 percent, some provisions relate to individual taxpayers. Before we get into the details, be aware that almost everything listed below sunsets after 2025, with the tax structure reverting to its current form in 2026 unless Congress acts between now and then. The corporate tax rate cut, however, does not sunset. Here are the highlights for our readership:
- Estate Taxes.If you weren't worried about federal estate taxes before, you really don't need to worry now. With the federal exemption already scheduled to increase in 2018 to $5.6 million for individuals and $11.2 million for couples, the Republicans in Congress and President Trump have now nearly doubled this to $11.18 million (estimate) and $22.36 million (estimate), respectively, indexed for inflation. The tax rate for those few estates subject to taxation remains at 40 percent.
- Tax Rates. These are slightly reduced and the brackets adjusted, with the top bracket dropping from 39.6 percent to 37 percent.
- Standard Deduction and Personal Exemption. The standard deduction increases to $12,000 for individuals, $18,000 for heads of household and $24,000 for joint filers, all adjusted for inflation. Personal exemptions largely disappear.
- State and Local Tax Deduction. Now referred to as "SALT," this is now subject to a cap of $10,000,
- Home Mortgage Interest Deduction. The limit on deducting interest on up to $1 million of mortgage interest stays in effect for existing mortgages. New mortgages taken on after December 15, 2017, are subject to a $750,000 limit. The deduction for interest on home equity loans disappears.
- Medical Expense Deduction. After much outcry in response to the House version of the tax bill, which would have eliminated the medical expense deduction, it survived. And, in fact, it was enhanced by permitting medical expenses in excess of 7.5 percent of adjusted gross income to be deducted in 2017 and 2018, after which it reverts to the 10 percent under existing law.
- 529 Plans. These accounts permitting tax-free accumulation of capital gains and dividends to pay college expenses can now be used for private school tuition of up to $10,000 a year.
Depending on your income and the amount of state and local taxes you have been paying, you may get a small tax cut. The bigger question is how the projected reduction in tax revenues of $1.5 trillion over the next 10 years will be paid for. This amount may simply be added to the deficit, or it may be used as a justification for “entitlement reform,” i.e., cutting Medicare, Medicaid or Social Security. It may also squeeze out other spending, such as investment in infrastructure.
Tips to Avoid Outliving Your Retirement Income
You’ve worked hard your entire life to get ready for retirement and the last thing you want to do is outlive your retirement income.Tips to Avoid Outliving Your Retirement Income
Don’t want to run out of money later in life? Consider the following tips.
1. Save as much as you can for as long as you can.
Start with your employer-sponsored retirement plans at work and make sure you’re making the maximum contributions to the plans. If you’re under age 50, your current-year yearly maximum is $18k; if you’re over age 50, you get to contribute an additional $6k in catch-up contributions for a total of $24k, yearly.
If you have money left over after you make the maximum contributions to your employer-sponsored plan, you should add to your emergency savings account, then a Roth IRA (if you qualify) or a Traditional IRA (if you don’t qualify for a Roth) and then a taxable brokerage account.
2. Build a budget. Then break it and start over to build another budget.
Your biggest expenses in retirement are likely going to be fixed costs – things like your housing and transportation. You need to get an idea about what you need to do now, to prepare for all these costs.
Write everything down – entertainment, medical expenses, mortgage or rent, travel and utilities – whatever you’re spending money on, on a regular basis. Live on that budget for a while, then go back to your spreadsheets, figure out where you made mistakes and rebuild the budget. If your budget isn’t working now, you have a chance to fix some things while you still have regular income hitting your account.
3. Set goals.
Goals are not “beating the S&P 500” or “doing better than your know-it-all brother-in-law.” Real goals are things like how you want to live throughout your retirement or when and where you want to retire.
Write down your and your spouse’s goals, then talk about them and figure out what your needs, wants and wishes are for later in life. It’s important you classify your ideas and your goals like this because later – when you’re building your long-term plan – you’re going to need to know the difference between the “gotta-haves” and the “nice-to-haves.”
4. Know your risk tolerance.
If you don’t want to outlive your income, you’re going to need to try to protect your investments from inflation. One of the better ways to do that is by holding stocks in your investment accounts and that means becoming a bit more comfortable with the ups and downs of the market. Problem is, many people just don’t know how much stock to hold – or, more specifically, they don’t know how aggressive they need to be in the market over the long term.
My job as an advisor is to find the least amount of risk necessary for my clients to be able to reach their goals. There are a number of online tools that you can use to start to understand your risk tolerance. Don’t be afraid to use a couple of these tools, then compare/contrast the results.
5. Build a plan.
Used to be, “building a plan” meant figuring out how to buy and hold some mutual funds then withdrawing 4% per year to fund your retirement. Those days are long gone. Unfortunately, a number of Americans don’t have a long-term plan of any kind: past or present.
“Building a plan” now means bringing together your estate, long and short-term health care, strategies for investing, pensions (if you’re eligible), Social Security, taxes, etc. It also means reviewing and updating that plan on a regular basis – the long-term plans I build for clients aren’t plans they place on a bookshelf and forget about for the next few years: these are plans that we change, discuss, re-evaluate and update each time we meet.
6. Pick the right investments, not the “best” investments.
The world is filled with investment firms and media wanting you to believe that they have a line on the next hot investment that you must have. All they often push is performance. Don’t fall for it: what’s hot and a must-have right now may not be what’s hot in a week, month or year.
What are the investment qualities you want? Lower costs; solid long-term performance and risk histories; liquid and tradeable (funds and ETFs, yes; non-traded REITs and complicated annuity products, no).
Plus, remember that what makes sense for you to hold right now may not be what’s best for you to hold down the road – don’t be afraid to change the investments and the allocation to keep pace with the changing market environment and your goals.
7. Optimize your Social Security strategy.
Social Security may be one of the more complicated systems out there. It has thousands of rules governing benefits and in some cases, there are hundreds of claiming strategy options for a married couple aged 62 or older.
- You can claim as early as age 62, but you’ll receive reduced benefits for life
- You can claim at your Full Retirement Age and see no reduction in benefits
- You can wait to claim until age 70 and receive 8% more benefits per year than you would have received at your Full Retirement Age.
You need to make sure you claim benefits via a strategy that makes sense for you (and your spouse) and not just claim benefits based on what your parents may have done or based on what someone from work is saying you should do.
Not doing this means you could be leaving thousands of dollars in Social Security benefits on the table.
8. Be able to answer, “Monthly payments or lump-sum buyout?” if you have a pension.
Actually, make that 5 questions:
How’s my health and what’s my family medical history? If you’re in good health and your family members tend to live into their 90s, taking monthly payments may be the way to go.
Is my company’s plan well-funded? Take a look at your employer’s annual report to see what the pension funding ratio is. If it’s 80% or higher, the plan is in good shape – but if it’s lower, the plan may be in trouble.
What’s my break-even point? Figure out how long you can expect your money to last if you take the lump-sum buyout (and be sure to consider potential money earned from investments in this calculation). Then, consider whether you think you’ll live beyond this date. If so, monthly payments may be a better option for you.
How important is it to me to have control over my money? If you’re interested in making investments or leaving money from your pension for others when you’re gone, taking the lump-sum buyout could be the more attractive choice for you.
9. Build health care costs into your long-term plan.
People are living longer, meaning higher healthcare costs and more time in retirement. The sooner you begin to plan for your healthcare costs in retirement, the better chance you have of not derailing your financial plan. Unplanned healthcare costs in retirement can be a primary reason many people fail to meet their retirement goals and objectives. Healthcare costs now represent the second-largest retiree expense (behind housing) and are the number-one cause of bankruptcy in retirement.
A 65-year-old healthy couple retiring this year, and covered by Medicare Parts B, D, and a supplemental insurance policy, will average lifetime retirement healthcare premium costs of $266,598. If you were to include their total health care (co-pays, dental, vision and all out-of-pockets), their costs would be $394,954. The problem is that most people believe that healthcare costs through retirement will only total somewhere between $50k and $200k.
Build these costs into your long-term plan – either as a separate cost goal or as an inflation-adjusted monthly expense – and make sure you update these costs with each revision of that plan.
10. Work with a fiduciary advisor.
It can help to work with an advisor. Just make sure that advisor is a fiduciary.
A fiduciary is someone who is legally-obligated to act in your best interests. When it comes to your investments, money and your retirement, you deserve to work with someone who is going to look out for you and your family at all times throughout the relationship.
- Want to know if your advisor is a fiduciary? Just ask, “Are you a fiduciary?” You want to hear one word – “Yes.”
- Then ask, “Do you receive any type of compensation in addition to what I’m paying you?” You want to hear one word – “No.”
- Finally, “Have you ever been cited by a professional or regulatory organization for disciplinary reasons?” You’d like to hear one word – “No.” However, if there are issues, look up the advisor’s records on FINRA’s BrokerCheck to find out if they have any complaints – and keep a close eye out for complaints related to providing financial and advisory services.
Planning for retirement is difficult enough – living in retirement turns out to be the real challenge for many Americans.
Consider the 10 items above and be sure to ask a professional for help when you need it to not outlive your retirement income.