Category: Retirement Issues

Working in Retirement Often is More a Dream Than Reality

Many workers are staying on the job longer or plan to before going into their golden years.

More retirees said they retired at ages 66-69, rising from 11% in 2021 to 14% in 2022, according to the latest annual survey by the Employee Benefit Research Institute (EBRI) and Greenwald Research.

And 7 in 10 workers expect to work for pay as a source of their retirement income, and 1 in 5 are counting on it as a major source, according to the EBRI poll. A growing percentage of workers say they will never retire – 15% in 2022, up from 10% in 2021, according to the EBRI survey.

Unfortunately, expectations of working in retirement can backfire. For workers who plan to work in some fashion for pay after they retire, that desire still appears to be more of a nice notion than a reality. Only 27% of retirees have employment income, according to the EBRI poll.

‘Sad commentary that health insurance has to be such a big factor’

That desire to remain employed is backed up by other recent surveys. More than half of workers (57%) plan to work in retirement citing a variety of reasons ranging from the income to keeping their brains alert, or the social connection, according to the most recent study by the nonprofit Transamerica Center for Retirement Studies.

The specter of soaring medical costs alone is stomach-churning. The average couple age 65 retiring this year and enrolled in Medicare may need approximately $315,000 saved (after tax) to cover healthcare expenses in retirement, according to the Fidelity Retiree Health Care Cost Estimate.

That’s what motivated Russ Eanes, an author, to get back in the workforce after retiring five years ago from his job as chief executive at MennoMedia, a book publisher. A year ago, he went back to work at GetSetUp, an interactive website that delivers virtual education to older adults.

The impetus: A steady paycheck and access to a health insurance plan.

“It’s a sad commentary that health insurance has to be such a big factor in these decisions,” Eanes told Yahoo Money.. “I’m on Medicare as of February, but my wife is a year behind, so we have to scramble to figure out how to have her covered for another year. While I was making out okay as a freelancer, it can be feast or famine.”

Older workers are not always ‘proactive’

But getting back to work or staying employed is not always easy, and in some cases, it can be the workers themselves who short-change their ability to stay on the job longer.

“Many 50+ workers are not proactive about taking steps to help ensure they can work as long as they want and need,” Catherine Collinson, CEO and president of nonprofit Transamerica Institute and Transamerica Center for Retirement Studies, told Yahoo Money. “Among those employed by for-profit companies, our research showed that only 62 % are focused on staying healthy so they can continue working and just 44% are keeping their job skills up to date.”

Only a small percentage are networking and meeting new people (16%), taking classes to learn new skills (12%), scoping out the employment market and opportunities available (10 %), attending virtual conferences and webinars (9%), or obtaining a new degree, certification, or professional designation (5 %), Collinson said.

Meantime, more than 2 in 5 workers expect a gradual transition to retirement, according to the EBRI survey.

In reality, “only a fraction of companies offer employees the option of a phased retirement,” Collinson said. “Our most recent employer survey finds 27% of employers offer a formal phased retirement program.”

Forced retirements

Even more troubling– nearly half of retirees retired earlier than they planned.

“Back-to-work plans can be upended by unexpected health challenges and caregiving demands,” Nancy Collamer, a retirement coach and author of “Second-Act Careers: 50+ Ways to Profit from Your Passions During Semi-Retirement,” told Yahoo Money.

The median expected retirement age for workers — age 65 — and the reported retirement age of retirees —age 62, according to the EBRI survey. Two-thirds said their early retirement was for a reason out of their control, such as a health problem or disability, company downsizing or reorganizations, or caregiving for a loved one.

Some of those reasons were amplified by the pandemic.

Since March 2020, 1.1 million more Americans between the ages of 55 and 74 retired earlier than what would have been expected during normal times, according to a recent report from The New School’s Schwartz Center for Economic Policy Analysis. The number of those who retired involuntarily a year after losing a job was 10 times higher than pre-pandemic times, the report found.

‘Beginning to feel the impact of inflation’

This trend may be shifting. As of March 2022, 3.2% of workers who were retired just one year ago are now employed again, according to research by Nick Bunker, the director of economic research at Indeed Hiring Lab.

One caveat: while the EBRI Retirement Confidence Survey was conducted as the inflation rate had already begun its rapid rise, and at that time, the majority of workers and retirees reported being confident that they had enough money to keep up with inflation in retirement, the economic picture is grimmer now.

With the inflation rate at 8.3% in April of 2022, down slightly from 8.5% in March, which was the highest since December of 1981, and the S&P 500 index off its January peak by 16.6%, that exuberance may be fading.

“Some workers are beginning to feel the impact of inflation, and the number is likely to grow,” Copeland said. “How the economy evolves over the next few months is likely to result in workers reconsidering where they stand regarding retirement. If inflation continues at historic rates and the stock market continues falling, more workers will be reevaluating their retirement plans.”

By: Kerry Hannon

Kerry is a Senior Columnist and Senior Reporter at Yahoo Money. Follow her on Twitter @kerryhannon

Source: Working in retirement often is more a dream than reality

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What You Should Know Before Investing In Fidelity’s Bitcoin Retirement Accounts

This morning crypto advocates and the crypto curious alike woke up to the news that asset management giant Fidelity will start allowing investors to put bitcoin into their 401(k) retirement savings accounts. On its surface this looks like an easy way for individuals to get access to this emerging asset class in an advantageous way from a tax perspective. However, there are still some important considerations to take into account.

Here is what you need to know.

The service will be available later this year to participants in employee-sponsored retirement plans offered by Fidelity—but only if an employer opts to offer it. Annual gains in a 401(k) are tax deferred, which eliminates the hassles associated with crypto investing and annual tax reporting. Withdrawals from a 401(k) in retirement are either taxed as ordinary income (if you contributed to a traditional pre-tax account) or tax-free (if you put after tax dollars into a Roth account).

According to The Wall Street Journal fees on these investments will range between 0.75%-0.90%, plus trading fees which falls within the mid-range of spot market trading fees offered by most major exchanges in the U.S. such as Coinbase, Gemini, Kraken, FTX.US, and Binance.US. Additionally, for now, employees will only be able to allocate a maximum of 20% of their currently account balances and new contributions to bitcoin.

The service is going to be slowly rolled out over the course of 2022. Currently the only firm to have publicly signed on is business analytics firm MicroStrategy. Led by billionaire bitcoin bull Michael Saylor, MicroStrategy is the world’s largest corporate holder of bitcoin with a treasury topping $5 billion worth of the asset. And again, your employer will have to agree to offer the service. Some may balk at the asset’s volatility.

Back in 2013 you could purchase a single bitcoin for under $300. As of this writing, a whole bitcoin will run you approximately $40,000. This is gargantuan growth, but it has not been smooth.

There have been multiple occasions where bitcoin and other leading crypto assets have lost well north of 50% of their value (many of which happened before the industry broke into the mainstream consciousness). However, many investors likely remember bitcoin approaching $20,000 in late 2017 before losing 75% of its value in the subsequent months.

We saw another such drop during the late fall when bitcoin fell from $69,000 to the low $30,000s. Bitcoiners will tell you that the asset more than recovers each time that it gets knocked down. In fact, many consider riding these boom and bust cycles as a rite of passage. But it might not be for everyone.

While there may have been cheering throughout #cryptotwitter that Fidelity is letting clients dip their toes in bitcoin, the government may not be as happy. For starters, federal regulators have been very reticent at letting investors get easy exposure to the crypto spot markets, even bitcoin.

Famously, the Securities and Exchange Commission is yet to approve a bitcoin spot ETF (it has approved a handful of products that offer exposure to bitcoin futures contracts), often citing the market’s vulnerability to fraud and manipulation.

When it comes to retirement planning, volatility again comes into play. Bitcoin is down nearly 40% from its all-time high of just under $70,000 last November, and retirees and those soon to retire may not have the funds or time to ride out these boom and bust cycles. In fact, last month the Department of Labor issued a notice expressing several concerns with investing retirement funds in crypto.

Chief among them were the market’s extreme volatility, its emerging (cloudy) regulatory status, the inability of investors to make informed decisions, as well as more basic concerns about the security of holding crypto assets, which have become juicy targets for hackers. Labor’s concerns matter because it has a say in the regulation of employer sponsored plans.

In addition, when news came out last July that Coinbase, the largest crypto exchange in the U.S., had partnered with a retirement firm to offer such services, David John, a senior policy advisor at AARP Policy Institute and the deputy director of the retirement security project at the Brookings Institution, told Forbes: “Crypto itself is fascinating, and intriguing as it starts to develop, but it’s still in its early phases.

And it is definitely not appropriate for retirement investing.” Added John: “The fact is that for retirement investing, you want growth, and you want a limited amount of volatility. The older you get, the less you want your portfolio to gyrate up and down, because it makes it very hard to plan your retirement income.”

While Fidelity is a world unto itself when it comes to asset management and retirement savings, there are other ways to get your retirement savings access to crypto. Firms such as Kingdom Trust, iTrust Capital and BitcoinIRA let investors purchase digital assets via exchanges and hold them in individual retirement accounts.

Additionally, Coinbase partnered with ForUsAll in June to let participants in employer sponsored plans purchase dozens of different crypto assets and hold them in tax deferred programs.

Finally, if you want exposure to the industry but don’t want to directly hold digital assets, there are plenty of stocks and ETFs that track companies operating in the crypto industry that are highly correlated to the underlying assets.

Saving for retirement is a personal decision, and your strategy – from what to hold to allocation percentages must —depend on your specific circumstances. Please seek out a Registered Investment Advisor or other professional advice before making any big decisions.

Steven Ehrlich

Steven Ehrlich

I am director of research for digital assets at Forbes. I was recently the Social Media/Copy Lead at Kraken, a cryptocurrency exchange based in the United States.

Source: What You Should Know Before Investing In Fidelity’s Bitcoin Retirement Accounts

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How To Turn Your Retirement Account Into a Personal Pension Plus

Just as you insure your home against the risk of fire and flood, so too can you insure another of your most valuable investments from risk: your retirement savings.

Retirement is a source of significant anxiety for Americans. It’s reported 40% of us fear retirement more than death. Outside of government jobs, pensions have nearly all disappeared. Important changes aimed at addressing some systemic issues are coming, but experts like Wade Pfau believe new Social Security legislation may not be enough. Combined with the potential of a recession (as the bull market keeps running), economic pressures posed by COVID-19, and 10,000 Baby Boomers retiring every day, this is hardly surprising.

With the near extinction of employer-provided pensions, Americans increasingly have to figure out their own retirement income plan, though many of us lack the tools or training to do so.

The ‘Fragile Decade’

Financial literacy is an often-neglected area of education among Americans; this causes financial planning to feel opaque and overwhelming. For many, retirement boils down to, “How much money do I need to save by the time I retire?” But it’s not that simple, and not planning for sequence-of-returns risk is a major pitfall.

Because retirement accounts are typically tied to the stock market, and the stock market is inherently volatile, it’s possible for an unexpected downturn to significantly impact a retiree’s income stream if it happens during the so-called “fragile decade” – the five years leading up to retirement and the five years that follow.

Simply put, if you experience significant losses due to some combination of withdrawals and poor performance during the fragile decade, it is difficult to recover. You’re in a position where your earning years are either behind you or almost behind you, and most of your retirement (if not all of it) is still ahead. Given that retirement can last 30 years or more, that could spell disaster during your most vulnerable years. That’s sequence-of-returns risk, or sequence risk.

Insuring Your Retirement Like You Insure Your Home

So, is your retirement at the mercy of the risks inherent in the stock market? Maybe. But it doesn’t have to be. An annuity can be an effective way to ensure your retirement’s durability by reducing your income stream’s exposure to market risks. Just as you insure your home against the risk of fire and flood, so too can you insure another of your most valuable investments from risk: your retirement savings.

Some financial advisers have been hesitant to offer their clients annuities, for a variety of reasons. Among these reasons are high costs and limited liquidity, as well as the lack of a death benefit. Many believe they’re just too complicated. While these complaints were true of some types of annuities, they aren’t true in general. Not anymore.

These objections are being overcome as modern annuities tend to be simpler and less costly. These innovations have inspired many financial advisers to change their position on annuities; in fact, a 2021 survey conducted by RetireOne and Protective Life found fewer than a quarter of financial advisers would not recommend an annuity to a client, even if it was the best fit for the client’s needs.

But some of those objections still are worth examining. Most annuities do have liquidity restrictions and many are not historically good at protecting against inflation.

Contingent Deferred Annuities

A contingent deferred annuity (CDA) has the same overall advantage of other income annuities – guaranteed income regardless of stock market downturns, badly-timed withdrawals, and so forth – but this type of annuity sidesteps some of the remaining hurdles.

A CDA acts as a sort of “risk wrapper” for your IRAs, Roth IRAs and taxable brokerage accounts, but the insurance portion is unbundled from the underlying accounts so that investments in ETFs and mutual funds may be covered. The amount of income you receive from the CDA (your coverage base) is calculated from the total of your initial investment, and will not drop below that amount, no matter what the markets do. In fact, your coverage base may go up, and those annual income payments can range from 3% to 6%. Keep in mind that excess withdrawals CAN impact your coverage base, however.

The CDA’s income payments trigger when you need them and are paid by the insurance company for the rest of your life, even after your assets are depleted. Until then, your financial adviser continues to manage your retirement assets for you.

This means that, if the stock market trends very well, the accounts the CDA is safeguarding will grow and so will the amount that your income payments are based on, giving you a bigger cushion later in life. But if the market does poorly and your accounts shrink, your CDA continues to pay out at the same rate, regardless of how poorly your investments perform. And, subject to the claims paying ability of the insurance company, they continue even if the underlying accounts are depleted. It’s guaranteed income for life.

How Do CDAs Work?

That sounds great, right? But you’re probably asking how it all works and, perhaps most importantly, what it’ll cost. Again, this is insurance. It isn’t free. But, it’s all more straightforward than you might think.

The first question to ask is: What do I want to cover? A CDA is typically designed to cover mutual funds and ETFs. The best CDAs offer many approved mutual funds and ETFs to choose from. The chances are your retirement accounts are already set up to work with them. You decide the total value you want to insure, and that sets your initial coverage base.

It’s important to reiterate that these funds stay where they are. Your financial planner continues to manage them, and you retain the same level of control you always had. In some cases, you can continue to add funds to that coverage base, too. Depending on the specific CDA you’re paying for, you may even increase the income you get from the CDA by doing so. You can also withdraw funds from your retirement account normally, though withdrawing funds too frequently can have an adverse impact on your annuity income.

Once you trigger your payments, those payments continue for life. They’re withdrawn from the covered accounts, but the rate of payment stays constant even if the value of the covered accounts drops – even if it drops to zero.

Another salient point: You don’t need to trigger payments if you don’t need that income, and you can cancel that coverage once you feel confident that your other retirement income streams are sufficient to maintain your quality of life. If you don’t want to pay fees for coverage you don’t need, then you don’t have to.

And speaking of those fees, you’re usually looking at something about 1% to 2.2% of the account value withdrawn each year from the accounts being covered. Those fees can be variable, based on the account value, or they can be fixed based on your total initial investment. A fixed fee means your fee is established when you establish your initial coverage base, and it remains constant as account values fluctuate. The fee does not increase if your retirement accounts give you particularly good returns, but the reverse is also true: If your accounts do poorly, you don’t see a reduction in your fees.

Here’s one of the best parts: Triggering your payments doesn’t necessarily trigger a taxable event. If you’ve been deferring your taxes with a Roth IRA, covering that Roth with a CDA allows you to draw income from that account upon retirement, without the usual tax implications of withdrawing money from a traditional IRA or a taxable account.

All these benefits make CDAs an efficient method for de-risking your portfolio as you near retirement. It’s a great way to make the fragile decade less fragile.

A ‘Personal Pension Plus’

Pensions are rare these days. Entire generations have entered the workforce without the promise of a pension. Your parents may have pensions. But do you have one? Probably not.

A CDA can turn your existing retirement accounts into something very pension-like, one that can protect your income during that crucial “fragile decade.” And, with the dual advantages of being able to cover retail mutual funds and ETFs, and the inheritability of the asset, a CDA really is a “Personal Pension Plus.”

When dealing with investment accounts, it is easy to get tunnel vision about Return on Investment, and how much money you have saved. But what you’re trying to achieve is the best quality of life possible, once your earning years are over. You want to have the greatest possible spending power during your retirement. A CDA can help you do that by turning your retirement account into a guaranteed income stream…for life.

Edward J. Mercier

By: Edward J. Mercier
Edward J. Mercier is president of RetireOne®. He has more than 25 years of experience spanning investment and insurance products, including sales, distribution, clearing and general management. He has held multiple senior leadership positions at Charles Schwab & Co., most recently as general manager of investment management distribution and clearing services.

Source: How to Turn Your Retirement Account Into a ‘Personal Pension Plus’

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Facing Shortfalls, Pension Managers Turn to Risky Bets

The graying of the American employee is a math drawback for Farouki Majeed. It’s his job to take a position his means out. Mr. Majeed is the funding chief for an $18 billion Ohio college pension that gives retirement advantages to greater than 80,000 retired librarians, bus drivers, cafeteria staff and different former staff. The issue is that this fund pays out extra in pension checks yearly than its present staff and employers contribute. That hole helps clarify why it’s billions in need of what it must cowl its future retirement guarantees.

“The bucket is leaking,” he mentioned. The answer for Mr. Majeed—in addition to different pension managers throughout the nation—is to tackle extra funding threat. His fund and plenty of different retirement programs are loading up on illiquid belongings resembling personal fairness, personal loans to corporations and actual property.

So-called “various” investments now comprise 24% of public pension fund portfolios, in response to the latest knowledge from the Boston School Middle for Retirement Analysis. That’s up from 8% in 2001. Throughout that point, the quantity invested in additional conventional shares and bonds dropped to 71% from 89%. At Mr. Majeed’s fund, alternate options had been 32% of his portfolio on the finish of July, in contrast with 13% in fiscal 2001.

This technique is paying off in Ohio and throughout the U.S. The median funding return for all public pension programs tracked by the Wilshire Belief Universe Comparability Service surged to almost 27% for the one-year interval ending in June. That was one of the best consequence since 1986. Mr. Majeed’s retirement system posted the identical 27% return, which was its strongest-ever efficiency primarily based on information courting again to 1994. His private-equity belongings jumped almost 46%.

A majority of these blockbuster positive aspects aren’t anticipated to final for lengthy, nevertheless. Analysts anticipate public pension-fund returns to dip over the subsequent decade, which is able to make it tougher to cope with the core drawback dealing with all funds: They don’t have sufficient money to cowl the guarantees they made to retirees. That hole narrowed in recent times however remains to be $740 billion for state retirement programs, in response to a fiscal 2021 estimate from Pew Charitable Trusts.

This public-pension predicament is the results of many years of underfunding, profit overpromises, unrealistic calls for from public-employee unions, authorities austerity measures and three recessions that left many retirement programs with deep funding holes. Not even the 11-year bull market that ended with the pandemic or a fast U.S. restoration in 2021 was sufficient to assist pensions dig out of their funding deficits utterly.

Demographics didn’t assist, both. Prolonged lifespans brought about prices to soar. Wealthy early-retirement preparations and a wave of retirees world-wide additionally left fewer lively staff to contribute, widening the distinction between the quantity owed to retirees and belongings available.

Low rates of interest made the pension-funding drawback much more tough to unravel as a result of they modified long-held assumptions about the place a public system might place its cash. Pension funds pay advantages to retirees via a mixture of funding positive aspects and contributions from employers and staff. To make sure sufficient is saved, plans undertake long-term annual return assumptions to mission how a lot of their prices can be paid from earnings. These assumptions are at present round 7% for many funds.

There was a time when it was potential to hit that concentrate on—or larger—simply by shopping for and holding investment-grade bonds. Not anymore. The extremely low rates of interest imposed by central banks to stimulate development following the 2008-09 monetary disaster made that just about inconceivable, and shedding even just a few share factors of bond yield hindered the purpose of posting regular returns.

Pension officers and authorities leaders had been left with a vexing resolution. They may shut their funding gaps by decreasing advantages for current staff, chopping again public companies and elevating taxes to pay for the bulging obligations. Or, since these are all tough political decisions and courts have a tendency to dam any efforts to chop advantages, they may take extra funding threat. Many are selecting that possibility, including dollops of actual property and private-equity investments to the once-standard guess of bonds and shares.

This shift might repay, because it did in 2021. Beneficial properties from private-equity investments had been an enormous driver of historic returns for a lot of public programs within the 2021 fiscal yr. The efficiency helped enhance the combination funded ratio for state pension plans, or the extent of belongings relative to the quantity wanted to satisfy projected liabilities, to 85.5% for the yr via June, Wilshire mentioned. That was a rise of 15.4 share factors.

These bets, nevertheless, carry potential pitfalls if the market ought to fall. Illiquid belongings resembling personal fairness usually lock up cash for years or many years and are far more tough to promote throughout downturns, heightening the danger of a money emergency. Various belongings have tripped up cities, counties and states prior to now; Orange County famously filed for chapter in 1994 after losses of greater than $1.7 billion on dangerous derivatives that went bitter.

The heightened concentrate on various bets might additionally end in heftier administration charges. Funds pay about two-and-one-half share factors in charges on various belongings, almost 5 occasions what they pay to spend money on public markets, in response to analysis from retired funding marketing consultant Richard Ennis. Some funds, consequently, are avoiding various belongings altogether. One of many nation’s best-performing funds, the Tampa Firefighters and Police Officers Pension Fund, limits its investments to publicly traded shares and bonds. It earned 32% within the yr ending June 30.

It took some convincing for Mr. Majeed, who’s 68 years outdated, to change the funding mixture of the Faculty Workers Retirement System of Ohio after he turned its chief funding officer. When he arrived in 2012, there was a plan below technique to make investments 15% of the fund’s cash in one other kind of other asset: hedge funds. He mentioned he thought such funds produced lackluster returns and had been too costly. Altering that technique would require a feat of public pension diplomacy: Convincing board members to roll again their hedge-fund plan after which promote them on new investments in infrastructure initiatives resembling airports, pipelines and roads—all below the unforgiving highlight of public conferences. “It’s a tricky room to stroll into as a CIO,” mentioned fund trustee James Rossler Jr., an Ohio college system treasurer. It wasn’t Mr. Majeed’s first expertise with politicians and fractious boards.

He grew up in Sri Lanka because the son of a distinguished Sri Lanka Parliament member, and his preliminary funding job there was for the Nationwide Growth Financial institution of Sri Lanka. He needed to consider the feasibility of factories and tourism initiatives. He got here to the U.S. in 1987 along with his spouse, received an M.B.A. from Rutgers College and shortly migrated to the world of public pensions with jobs in Minneapolis, Ohio, California and Abu Dhabi. In Orange County, Calif., Mr. Majeed helped persuade the board of the Orange County Workers Retirement System to cut back its reliance on bonds and put more cash into equities—a problem heightened by the county’s 1994 chapter, which occurred earlier than he arrived.

His 2012 transfer to Ohio wasn’t Mr. Majeed’s first publicity to that state’s pension politics, both; he beforehand was the deputy director of investments for one more of the state’s retirement programs within the early 2000s. This time round, nevertheless, he was in cost. He mentioned he spent a number of months presenting the board with knowledge on how current hedge-fund investments had lagged behind expectations after which tallied up how a lot the fund paid in charges for these bets. “It was not a reasonably image at that time,” he mentioned, “and these paperwork are public.” Trustees listened. They lowered the hedge-fund goal to 10% and moved 5% into the real-estate portfolio the place it might be invested in infrastructure, as Mr. Majeed needed.

What cemented the board’s belief is that portfolio then earned annualized returns of 12.4% over the subsequent 5 years—greater than double the return of hedge funds over that interval. The board in February 2020 signed off on one other request from Mr. Majeed to place 5% of belongings in a brand new kind of other funding: personal loans made to corporations. “Again once I first received on the board, in case you would have instructed me we had been going to have a look at credit score, I might have instructed you there was no means that was going to occur,” Mr. Rossler mentioned. The private-loan guess paid off spectacularly the next month when determined corporations turned to non-public lenders amid market chaos sparked by the Covid-19 pandemic. Mr. Majeed mentioned he added loans to an airline firm, an plane engine producer and an early-childhood schooling firm impacted by the widespread shutdowns. For the yr ended June 30, the newly minted mortgage portfolio returned almost 18%, with greater than 7% of that coming in money the fund might use to pay advantages.

The system’s whole annualized return over 10 years rose to 9.15%, effectively above its 7% goal. These positive aspects closed the yawning hole between belongings available and guarantees made to retirees, however not utterly. Mr. Majeed estimates the fund has 74% of what it wants to satisfy future pension obligations, up from 63% when he arrived. Mr. Majeed is now eligible to attract a pension himself, however he mentioned he finds his job too absorbing to think about retirement simply but. What he is aware of is that the pressures forcing a cutthroat seek for larger returns will make his job—and that of whoever comes subsequent—exponentially tougher. “I believe it’s going to be very robust.”

By: Heather Gillers

Heather Gillers is a reporter on The Wall Street Journal’s investing team. She writes about pensions, municipal bonds and other public finance issues. She previously worked at the Chicago Tribune, the Indianapolis Star, and the (Aurora, Ill.) Beacon-News. She can be reached at (929) 384 3212 or heather.gillers@wsj.com.

Source: https://www.wsj.com/

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IRAs For All? Mandatory Retirement Accounts Part Of $3.5 Trillion Budget Plan

Do Americans need a nudge from their employers—and a handout from Washington—to get them to save for retirement? That’s the premise behind draft retirement language in the the House Ways and Means Committee mark up of the $3.5 trillion budget reconciliation package.

Under the proposal, starting in 2023, employers with five or more employees would have to offer a retirement plan and automatically enroll employees, diverting 6% of their pay to a retirement account. An automatic escalation clause would increase the automatic contribution to 10% of pay by year five. The default plan would be a Roth IRA invested in a target-date fund, a mix of investments based on your expected retirement year.

For employers, it’s a mandate. They would have to offer the plans. Employees would be able to opt out.

“We’re not trying to put an undue burden on the small employer. We’re trying to help the employee who works for a small employer be a lifetime saver,” Ways and Means chairman Richard Neal (D-Mass.) said at the hearings.

The retirement section of the Build Back Better Act is expected to dramatically expand retirement savings. It would create 62 million new retirement savers and would add an additional $7 trillion in retirement savings over a 10-year period, according to the Employee Benefit Research Institute. Nearly all—98%—of these new savers would be folks who earn less than $100,000 per year.

“We know that people are far more likely to save for retirement if they have access to a retirement plan at work (12 times more likely), but there’s a real access problem – small businesses just never quite seem to get around to setting these up,” says Nevin Adams, chief content officer for the American Retirement Association.

To offset administrative costs for employers, the proposal includes a tax credit to employers for setting up the plans. And a tax penalty of up to $900 per employee per year if they don’t comply.

“Main Street now faces an onerous new mandate from Washington and a tax penalty if you don’t comply. Small business owners know this is yet another, or feels like another, war on work,” Rep. Kevin Brady (R-Texas), the top Republican on the Ways and Means Committee said at the hearings.

The small business lobby is crying foul. The National Federation of Independent Business (NFIB) says the tax credits provided to employers for setting up plans are temporary and limited, and that the cost of compliance amounts to a “hidden tax.”

There is evidence that auto-IRAs work for both employers and employees. Rep. Earl Blumenauer of Oregon noted how a similar state-mandated auto-IRA program mandated for all employers in his state has generated $120 million of savings “in our little state” so far. And a Pew survey found that 73% of employers were either satisfied or neutral about the Oregon program.

Hand-in-hand with the auto-IRA provision is a change to the Saver’s Credit. Lower-income Americans, even those who don’t owe taxes, would get a newfangled Saver’s Credit—a government match on their savings—$100 to $500 per person per year from the U.S. Treasury paid into their individual retirement account. The $47 billion cost of the retirement proposal is evenly split between the Saver’s Credit provision and the auto-IRA provision.

This auto-IRA proposal is different from the one that is in pending bipartisan retirement legislation known as SECURE 2.0, which would not mandate that employers offer these accounts but rather make them voluntary. SECURE 2.0 contains other important provisions, such as allowing employers to provide matching money to retirement accounts when workers pay off student loan debt.

Representative Neal said that SECURE 2.0 is “getting over the goal line this year” too. Some of the revenue raisers for the Build Back Better Act under discussion relate to retirement, and Representative Neal said that they could be released this weekend.

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Ashlea Ebeling

Ashlea Ebeling

I cover personal finance, with a focus on retirement planning, trusts and estates strategies, and taxwise charitable giving. I’ve written for Forbes since 1997. Follow me on Twitter: @ashleaebeling and contact me by email: ashleaebeling — at — gmail — dot — com

Source: IRAs For All? Mandatory Retirement Accounts Part Of $3.5 Trillion Budget Plan

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