IN MY ONGOING EFFORT to reduce our accumulated stuff, I was trolling through our collection of old thumb drives to see what I should download, save or toss. Among them, I discovered the 258-page presentation from a two-day retirement course that my old employer sponsored in 2006.
I wondered how the advice had—17 years on—stood the test of time. As I reviewed it, I found some excellent suggestions and some that were lacking, though I hesitate to fault the presentation’s authors.
I felt the course deserves an “A” for its detailed discussion of retirement lifestyle choices and investment planning. Company benefits were also exhaustively reviewed. We were told what benefits we were entitled to, and I recall employees and their spouses found those discussions comforting.
In addition, most—but not all—Social Security issues were thoroughly reviewed. The tradeoff between claiming early at age 62 or waiting until an employee’s full Social Security retirement age, which would be 65 to 67, was covered. The potential for higher benefits by delaying claiming until age 70 wasn’t highlighted, however. The benefits of the “file and suspend” strategy for married couples also weren’t discussed—but, then again, this loophole was eliminated before I retired in 2017.
I would give the presentation a “C” for its coverage of supplemental health and life insurance coverage. My employer later reduced those benefits, so these discussions are irrelevant now.
Four areas deserve only a “D” grade. The course spent little, if any, time on the so-called stretch IRA, withdrawal rates, sequence-of-return risk, and strategies for taking income from a mix of taxable, tax-deferred and Roth accounts.
What overall grade would I award the presentation? You might think it would average out to a “C” or maybe a generous “B.” But unfortunately, I’d give the course only a “D”—because, as time progressed, I simply couldn’t rely on much of the advice.
To be fair to the authors, many topics became outdated because of a surprising number of subsequent tax-law changes. It’s tough to execute a plan when the referees change the rules in the middle of the game.
For example, the presenters touted the net unrealized appreciation strategy when selling company stock. I find this strategy is of marginal value now because of the narrower spread between today’s income tax and capital gains rates—especially if the capital gains tax rate is topped off with a 3.8% Medicare surcharge on investment income.
Indeed, as I look back, it’s amazing how rapidly the rules have shifted under our feet. Here are nine changes made since 2006 that would upend even the most carefully crafted retirement plan:
As a result of these changes, my wife and I hope to convert 20% of our tax-deferred assets to Roth accounts by age 73, when our RMDs must start. These conversions will be taxed at a federal rate of 24%, rather than the 28% or 33% hit that would have been triggered before.
Yet, I don’t celebrate too much, as these tax savings are significantly offset by higher Medicare surcharges. Our sizable Roth conversions push us into higher IRMAA premiums and trigger the 3.8% Medicare surcharge on investment income. While I wish we could have converted more money before age 65 when the IRMAA surcharges kicked in, Roth conversions are still a game-changer for us because they’ll reduce our future RMDs and grow tax-free.
In addition, our children’s inheritance will currently incur no federal or state estate taxes, and our growing Roth accounts will be inherited income-tax-free. On the other hand, our children will be required to not only empty, but also pay taxes on our other retirement accounts in just 10 years, rather than over their entire life expectancy, which was the case before.
What have I learned from reviewing the 2006 retirement presentation? It’s never safe to get too comfortable with any retirement plan. And further changes are coming. For example, today’s lower income-tax rates are slated to sunset after 2025, as are those high federal estate-tax exclusions created by 2017’s legislation.
Retirement and estate plans have incurred seismic tax changes—both positive and negative—since 2006. No doubt, Washington will continue to tinker with the rules, especially when the current income-tax rates sunset. That uncertainty rests atop the already unpredictable returns from the investment markets. The upshot: It’s futile to draw up precise cash-flow projections for retirement—because those projections simply won’t hold up over the years.
John Yeigh is an author, speaker, coach, youth sports advocate and businessman with more than 30 years of publishing experience in the sports, finance and scientific fields. His book “Win the Youth Sports Game” was published in 2021. John retired in 2017 from the oil industry, where he negotiated financial details for multi-billion-dollar international projects. Check out his earlier articles.
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John…you described file and suspend option as a “loophole “. I don’t know how this word became popularized but this option was clearly spelled out in the 2000 Senior Citizens Right to Work Act of 2000 signed by then President William J. Clinton.
Because so many people were disappointed when it was shut down someone decided to say it was a loophole—not what was intended —and it caught on. But the official reason was to “avert the threat of a government shutdown and to save money for Social Security” as outlined in the Budget Act of 2015.
One more SECURE 2.0 change…. there are much more generous (i.e. larger) amounts that can be redirected from a conventional IRA to a QLAC (Qualified Life Annuity Contract). This has led me to consider an annuity for the first time.
Great look back John, thank you. Don’t be too hard on those planners for not discussing the potential benefits of delaying Social Security past FRA, as this has also varied over the years, with maximum benefits being derived anywhere from actual FRA to age 72. I believe the last change to this was somewhere around 2006 to 2008, so it the age-70 delayed benefit perk would have been brand new at the time.
As for the other stuff, it definitely makes future planning a lot more difficult when the rules of the game are changing so much all the time. A few basic contours, without sweating the small stuff too much, seems prudent, and then maybe bearing down on some of that small stuff when retirement is much closer.
Excellent analysis John, all thriving things change. The only constant in life is* change. Your input at HD has always been more than anticipated by myself and many others. It has always been outstanding.
Precise cash-flow projections in all markets seem both unpredictable and futile with worldly ever changing tax policies. All recognized in recent bond market movements.
Those contributing to legislation of tax code do so considering next the few decades. Who’s wanting to retire into a spartan idleness, not contributing to the current eras mindset.
As well as its contemporaneous learnings & leanings.
Paul – Thank you for the kind feedback.
I’d gathered from reading that Congress generally doesn’t consider more than the next decade when developing tax legislation. That’s one reason we have so much churn in our tax laws. (Another is the lobbyists.) New tax laws should be permanent (none of this “sunset” nonsense).
Thanks for the great summary of tax changes in recent times. It reinforces my thought that the two largest costs in retirement are taxes and healthcare. With 2025 coming at us quickly, having a diversity of tax exposures may help you weather the changes. You can’t have all your eggs in the IRA, Roth or taxable buckets as you don’t know how things will play out. Also, the estate tax limits and rates could change in 2025 and change all your planning.
Very good summary. I could go back to 1974 and ERISA and do a similar illustration of changes that have affected retirement security good and bad. Nothing seems to change.
I used to give those types of presentations and I always emphasized that nothing was guaranteed. That’s one of the reasons I keep harping on my views on retirement income.
Thanks Dick , but I must admit I was somewhat surprised by so many changes – 9 in 17 years. This means that congress meddles with retirement planning every two years.
Congress has a knack for hiding benefit/retirement related type changes in all types of legislation mostly tax laws.
We differ on one thing though. I do not see IRMAA as a penalty. Rather, it is an income based premium which, while I don’t like paying, it is very logical, even fair IMO.
Thanks John. It is amazing that all these changes have occurred, many since 2010 when I retired.
I retired with 89% of my investments in IRAs. I finally got wise and started doing backdoor Roth conversions the past 4 years. Yes, I paid an IRMAA penalty but now down to 33% IRAs and plan to continue until the big tax reset in 2026. I do not have a crystal ball and think the odds of more favorable treatment in 2026 and beyond is unlikely.
Jerry, I, like you, am aggressively pursuing the Roth option despite a signficant IRMAA penalty. I’m hopeful to get to 20+% of investable assets and perhaps more if the 2017 tax rates are extended past 2025.
Good one, John. Seeing all these changes together makes me wonder if future tax policies around Roth IRAs will make us regret big conversions now. Still, future tax rates seem likely to be higher than current ones. Rather than converting big chunks into our Roth, I’m planning for a middle ground of modest annual draws from our traditional IRA to trim the balance while also delaying Social Security past FRA. It would still somewhat leverage lower nominal tax rates in our 60s without pushing us into the highest Medicare IRMAA brackets. I’m curious how others think about this.
That sounds like excellent advice David. Though our circumstances sound more modest than yours, I’ve also adopted a “middle ground” approach, in which we still convert some chunks of our retirement accounts to Roth, but not over-doing it to the point that we destroy much of said conversion’s future value. I came to this path after carefully studying our state’s tax structure, and realized that going too far with those conversions would wipe out a lot of potential benefits that our state affords to both public pensions and public retirement account withdrawals, from which we are doing the conversions. Keeping withdrawals more modest means we preserve that favorable tax treatment in the here and now, while also doing conversions at a very modest rate for the future. As John points out, you can never really be sure what kind of changes Congress is going to enact over time, and getting favorable tax rates now while also keeping an eye on the future seems a prudent choice.
Dave – I’ve come to the conclusion that many (upper) middle-income 50-60 year olds who have deferred tax accounts well into seven figures might want to think about slowing down their contributions, and retirees in their 60’s may want to initiate withdrawals to “trim the balance” unless either can take advantage of the alternative for Roth conversions. These folks have enough time for their accounts to double or triple again before RMDs begin. RMDs alone could bump their US tax rates in the mid-30’s percent especially if the 2017 legislation is allowed to sunset. This could push retirement tax rates higher than working year tax rates and negate the benefits of tax deferral.
I’m Roth converting to the max, especially as I likewise believe in higher future tax rates – just look at the recent budget proposals. However, if investments appreciate even partially as much as the last decade, many of today’s retirees will end up with highish tax rates anyway. Roth is the only potential escape, but it is taxing to get Rothed, especially with IRMAA.
We’re in this exact situation but go back and forth on cutting back our deferred-comp contributions. We’re still working but in a high tax bracket now. Does it make sense to pay taxes on current income?
Thanks to Secure 2.0, we won’t have to take RMDs until age 75 (we’re 62 now). We’ll have windows from 65-70 (between retirement and Social Security
…and 70-75 (before RMDs) where we’ll be in lower tax brackets than we are now. We can’t see where it makes sense to pay the taxes now.
Thanks for this eye-opening timeline of changes. Your observation of the futility of exact cash flow planning is very affirming too. I’ve met with advisors at various times over the years and the projections offered usually do not turn out to be helpful.
John, I love long-range planning, working out the details well ahead of time. Your article is a good reminder that life is not static, and we must remain nimble, even as we age.
I and several friends are also planners/analysts, with two friends projecting years forward down to pennies. This comprehensive lookback of changes says set the basics and move on as fine-tuning is likely wasted effort.