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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To be fair to the authors, many topics became outdated because of a surprising number of subsequent tax-law changes.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.
Marjorie – thanks for your more knowledgeable insights. I may have gotten the nuance slightly wrong, but indeed, loophole has become the common reference. It’s probably less of an impact than the 2017, Secure Act or IRMAA changes for most HD readers.
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.
Best2u&yours.. wink.
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 healthcar