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Distributions - misc

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Expand Your Spending Categories in 2019 for Better Personal Retirement Budgeting and Planning
"[W]hen determining whether you are spending too much or too little, ... you should be looking at the proposed total spending budget for the current year divided by the present value of your total assets ... and not the proposed amount to be withdrawn from your accumulated savings divided by your accumulated savings." (Ken Steiner, FSA Retired)
[Opinion] SPARK Comment Letter to IRS on Proposed Hardship Distribution Regs (PDF)
11 pages. "By its terms, the Substantiation Memo only refers to the existing safe-harbor events. The IRS should expressly clarify that the substantiation guidelines described in the Substantiation Memo will cover the new safe-harbor event for expenses incurred as a result of federally-declared disasters and ensure that the Internal Revenue Manual is updated accordingly. This update should set forth what information and notifications the IRS would expect a plan administrator to collect and provide to substantiate the new seventh safe-harbor hardship event for expenses related to federally-declared disasters." (The SPARK Institute)
[Guidance Overview] IRS Issues Updated Eligible Rollover Distribution Notices
"The IRS recently updated its model notices in [Notice 2018-74] to include a number of significant changes in the law. There are two model notices, one for payments from a Roth account and one for payments not from a Roth account. Two changes addressed in the updated model notices apply to participants of most retirement plans, while others only apply to participants in certain governmental plans." (Frost Brown Todd LLC)
Assessing Economic Resources in Retirement: The Role of Irregular Withdrawals from Tax-Advantaged Retirement Accounts
"Compared to total household income, irregular IRA and pension withdrawals amount to about 5 percent of income for singles and 10 percent of income for married households. The irregular withdrawals are concentrated among those in the highest wealth quartile and those in the highest education group, reflecting the higher prevalence of pensions in high-paying jobs that are predominantly held by those with high education. Thus, they have little impact on poverty rates." (Michigan Retirement and Disability Research Center, Univ. of Michigan)
Finding Your Tax Equilibrium Rate When Liquidating Retirement Accounts
"[W]ith some relatively simple and straightforward assumptions about future Social Security and pension payments, RMD calculations, and anticipated interest, dividends, and capital gains, it really is feasible to make a reasonable approximation of an individual's future tax rates to determine where the ideal equilibrium will be. And then engage in strategies from accelerated retirement account liquidations, to partial Roth conversions, and capital gains harvesting, as necessary to ensure that any currently-lower tax brackets are filled up to reach the equilibrium point." (Nerd's Eye View)
Developing a 2019 Retiree Spending and Withdrawal Budget
"[If] you invested significantly in equities in 2018, it is likely that you experienced some investment losses last year. In order to avoid undesirable fluctuations in recurring spending, you may wish to consider some or all of the following actions: [1] Dipping into the Rainy-Day Fund that you previously established with investment gains enjoyed in previous years; [2] Reducing 2019 non-essential non-recurring expenses, or [3] Using the Smoothed Actuarial Budget Benchmark[.]" (Ken Steiner, FSA Retired)
[Official Guidance] Text of 2018 IRS Form 8915A: Qualified 2016 Disaster Retirement Plan Distributions and Repayments (PDF)
"Attach to 2017 Form 1040, 2017 Form 1040A, or 2017 Form 1040NR." [Fillable PDF; may not open correctly in some browsers.] (Internal Revenue Service [IRS])
[Guidance Overview] IRS Issues Proposed Regs Amending Rules for Hardship Distributions
"The proposed regulations include the following changes: [1] Elimination of the six-month suspension requirement; [2] Elimination of the plan loan requirement; [3] Modifications to the list of hardship distribution events; [4] Addition of participant representation requirement; [5] Expansion of sources available for hardship distributions.... [T]he Treasury Department and IRS expect that plans will need to amend their hardship distribution provisions to reflect some or all of the changes in the proposed regulations." (Drinker Biddle)
Retirement Plan Withdrawal Trends
"[T]he average participant withdrew more than 55% in any given year at or soon after retirement. Only 28% of participants remained in the plan three years after retirement." (J.P. Morgan Asset Management)
[Official Guidance] Text of IRS Publication 939: General Rule for Pensions and Annuities (PDF)
83 pages, Rev. Dec. 2018. "Use this publication if you receive pension or annuity payments from: [1] A nonqualified plan (for example, a private annuity, a purchased commercial annuity, or a nonqualified employee plan); or [2] A qualified plan if: [a] Your annuity starting date is before November 19, 1996 (and after July 1, 1986), and you don't qualify to use, or didn't choose to use, the Simplified Method; or [b] Your annuity starting date is after November 18, 1996, and as of that date you are age 75 or over and the annuity payments are guaranteed for at least 5 years." (Internal Revenue Service [IRS])
Reasons Why the Smoothed Actuarial Budget Benchmark is Superior to IRS RMD for Developing Spending Budgets
"[T]he RMD suffers from the following deficiencies: ... The assumptions underlying RMD withdrawal factors are questionable and are inconsistent with assumptions used to price inflation-indexed annuities.... [T]he RMD withdrawal factors are not based on one's life expectancy. Application of RMD is unclear for ages under 70. RMD doesn't coordinate with other sources of income. RMD doesn't consider non-recurring expenses.... RMD is inflexible and doesn't accommodate 'budget shaping.' " (Ken Steiner, FSA Retired)
Why Now Might Be the Time to Eliminate a Hardship Distribution Provision
"The new standard states that an employee must represent ... that he or she has insufficient cash or other liquid assets to satisfy his/her hardship need. The plan administrator may rely on the employee's representation unless the plan administrator has actual knowledge to the contrary.... [T]hat last part about the plan administrator having actual knowledge to the contrary could be an administrative minefield for plan sponsors, as plan sponsor personnel responsible for administration of the retirement plan might be more aware of personal information regarding some employees[.]" (Cammack Retirement Group)
Making Charitable Donations of Stock Instead of Cash After Tax Reform
"If you're charitably inclined and hold meaningful amounts of appreciated stock, such as shares acquired from a stock option exercise, restricted stock/RSU vesting, or ESPP purchase, donating stock instead of cash can be a smart tax-planning move.... [S]tock donations can reduce your taxes by giving you total deductions that exceed your new increased standard deduction amount." (Forbes)
[Guidance Overview] Proposed Amendments to the Hardship Distribution Regs (PDF)
"[This article includes] a table reflecting the various effective/applicability dates.... The Proposed Regulations make it automatic that a hardship distribution for those in FEMA-designated areas is permissible when there is a major federally declared disaster ... [T]he Proposed Regulations allow a plan to retroactively apply the new disaster event [rules] for 2018.... Employers will need to make operational decisions to implement changes under the Proposed Regulations prior to adopting a plan amendment.... A Hardship Distribution Operational Checklist will be helpful in this regard." (ASC)
Tips to Maximize the Tax Savings of Your QCDs and RMDs
"This year, [qualified charitable distributions (QCDs)] are more valuable than ever before. So valuable in fact, that everyone who qualifies should be making their donations through QCDs, which allow you to make charitable gifts of up to $100,000 per year directly from your IRA. An IRA check made payable to the charity will also qualify." (The Wall Street Journal; subscription may be required)
Better Budgeting with an Actuarial Approach
"Most [sustainable withdrawal plans (SWPs)] and Monte Carlo models focus exclusively on recurring expenses in retirement. A more robust [sustainable spending plan (SSP)] should separately plan for future expenses that are non-recurring in nature as well as those expected to be recurring from year-to-year.... Because it involves a mark-to-market calculation of client assets and spending liabilities, the [actuarial budget benchmark (ABB)] can produce volatile results from year-to-year due to investment fluctuations. Those undesirable fluctuations can be mitigated by smoothing the results." (Ken Steiner, in Advisor Perspectives)
New Hardship Rules, Other Statutory Changes Reflected in Newly Proposed 401(k) Regulations
"The stance taken by the IRS with regard to hardship distributions for casualty losses was unexpected.... [T]he proposed regulations allow (but do not require) plans to eliminate the requirement to suspend contributions for six months on the first day of the first plan year beginning on or after December 31, 2018, even if the hardship distribution was made prior to that date." (Newport Group)
[Guidance Overview] IRS Proposes Regs on Hardship Withdrawals
"Although 403(b) plans generally follow the hardship rules applicable to 401(k) plans, the proposed regulations do not modify the 403(b) rules to permit withdrawal of earnings on 403(b) elective deferrals or QNECs/QMACs that are in custodial accounts.... 403(b) plan sponsors will need to exercise care when amending their plans to comply with BBA 2018 and the proposed regulations." (Morgan Lewis)
[Guidance Overview] IRS Issues Much Anticipated Hardship Guidance
"The proposed regulations generally address: [1] the required elimination of the post-withdrawal suspension of elective deferrals, [2] the optional elimination of the requirement for participants to take plan loans first, [3] the ability to include additional plan account sources in hardship distributions, [4] changes in the ability to qualify for a hardship distribution in the case of casualty losses and losses associated with federal disaster areas, and [5] changes in the administrative process required to document that a participant has demonstrated the requisite financial need." (Groom Law Group)
How Much Cash Should Retirees Have on Hand?
"Retirees who now have access to their retirement accounts without penalty may consider having extra cash on hand ... to help sustain themselves should there be an extended down market. Retirees can draw from this 'cash cushion' account instead of having to sell investments at an inopportune time, locking in a loss." (T. Rowe Price)
DOL Guidance Addresses Fiduciary Status and Fees Under Program Facilitating Portability of Automatic Rollovers
"[F]iduciaries of distributing plans will remain fully responsible for their decision to participate in the program and thus will need to carefully consider its cost and features compared to other default IRA options. As the benefits of the program may depend significantly on the provider's success in enlisting plans and recordkeepers willing to share data about plan participation, this cost-benefit analysis may be especially difficult, particularly for early adopters." (Thomson Reuters / EBIA)
[Guidance Overview] DOL RCH Advisory Opinion Illustrates the Difficulties Inherent to Bulk IRA/Auto Portability Programs
"IRAs are individually owned investment contracts, which are under the control of the former participant -- even though they are set up by the former employer.... [T]he DOL made it clear that negative consent will not suffice to relieve the program's sponsor from the fiduciary obligations related to the decision to move the money from the IRA to the new plan.... Then there is that nasty problem of securities laws and other state laws ... The question ... is how a fiduciary which is not appointed by the individual IRA holder has any legal authority to do ANYTHING with a registered security (or even any other investment) after it is set up by the original employer, as the investments are legally owned by the former participant." (Business of Benefits)
DOL Proposes Prohibited Transaction Exemption Allowing Vendor's Automatic Account Transfers
"RCH is constructing a system to share data on 401(k) participants with recordkeepers to find a departing employee's new plan and facilitate the transfer.... RCH plans to charge a maximum one-time fee of $59 for each transfer. For accounts with $590 or less, the charge will be 10 percent of the balance, and the service is free for accounts with $50 or less. There also is a 20-percent reduction in the fee charged to a plan when the annual volume of roll-in transactions exceeds 1 million transactions per year, meaning the benefits of scale are passed on to participants in the form of reduced fees[.]" (HR Daily Advisor)
[Guidance Overview] IRS (Finally) Answers Questions About 2019 Hardship Distributions
"[The prior 'amount necessary' requirements] are replaced with a single new standard ... [1] The distribution may not exceed the amount of the participant's financial need ... [2] The participant must have obtained all other available distributions under the employer's retirement plans; and [3] The participant must represent, in writing, that he/she has insufficient cash or liquid assets to satisfy the financial need." (Spencer Fane)
Creating Retirement Paychecks from a Volatile Portfolio
"[T]he mechanical challenge of how to actually generate those retirement 'paychecks' that transitioning retirees are accustomed to, is an entirely separate matter from just investing the retirement portfolio itself, and entails a number of distinct policy-based decisions about how to standardize a process for a wide range of retirees.... [A]dvisors might even consider creating Withdrawal Policy Statements to then codify the processes they will use to generate retirement income withdrawals[.]" (Nerd's Eye View)
A Better Nest-Egg-to-Lifetime-Income Translator
"[The Actuarial Lifetime Retirement Income Estimator (ALRIE) Excel workbook] provides answers to ... [1] How much real dollar monthly lifetime income commencing X years from now will my current nest egg of $Y support? [2] How much real dollar lifetime income commencing X years from now will my projected future nest egg of $Z support? [3] What percentage of my future wages will I need to save over the next X years to increase my nest egg from $Y to $Z?" (Ken Steiner, FSA Retired)
How to Effectively Take Early IRA Distributions Without Penalty
"If IRA owners design their 'series' of payments in accordance with strict IRS rules, and keep taking their series payments regularly without any 'modification' until they are over age 59‑1/2 (and for at least five years), the SOSEPP payments are penalty-free.... Your clients need to get the largest possible payments allowed by IRS rules. This means they should use a single life expectancy ... the highest permitted interest rate ... [and] the amortization method[.]" (Natalie Choate, in Morningstar Advisor)
Tax-Efficient Charitable Giving of Savings or Retirement Benefits
"This article discusses how savings or retirement lifetime and survivor benefits may be used to fund charitable contributions in a tax-efficient manner. These tax advantages may be offset by other considerations, tax and otherwise.... The most favorable tax consequences arise from special or demonstrative (pecuniary) bequests, which are treated like plan designations. General (pecuniary) bequests, unlike residuary bequests, may cause a mismatch between income and charitable deductions." (Albert Feuer, via SSRN)
Approaching the Decumulation Phase of Retirement (PDF)
21 pages. "Despite the evidence that, in general, those who have retired -- especially those who have been retired for a significant amount of time -- are spending less/at a slower rate than might have been assumed, there would seem to be little reason to believe that this behavior will hold true for future generations.... [W]hile experts continue to exhort all currently employed Americans to adopt a prudent approach to accumulating savings for retirement, what do they recommend to those already retired when it comes to decumulation?" (Pentegra)
[Guidance Overview] IRS Updates Guidance on Safe Harbor Notices for Eligible Rollover Distributions
"The model notices also include clarifications, such as: [1] Confirming that the 10% premature distribution penalty tax ... applies only to amounts includable in income, but the section 72(t) exception for qualified public safety employees does not apply to payments from IRAs; [2] Explaining how the rollover rules apply to governmental section 457(b) plans that include designated Roth accounts; and [3] Recognizing the possibility that the 60-day deadline for making rollovers may ... be extended for those taxpayers affected by certain events such as federally declared disasters." (Eversheds Sutherland)
[Guidance Overview] IRS Updates Required Tax Notice to Address Plan Loan Offsets and Other Law Changes
"Notice 2018‑74 reminds us that distribution of a 'plan loan offset amount' is an eligible rollover distribution ... [T]his can occur when, for example, the terms of the plan loan require that, in the event of an employee's termination of employment or request for a distribution, the loan is to be repaid immediately or treated as in default. The Notice also indicates that a plan loan offset may occur when, under the terms of the plan loan, the loan is canceled, accelerated, or treated as if it were in default.... The Notice also reminds us, however, that a plan loan offset cannot occur prior to a distributable event." (Spencer Fane)
How to Figure Out What You Can Safely Withdraw in Retirement
"[S]oon-to-be-retirees [need] 3 years worth of expenses in cash or very short-term fixed income to start retirement. Most market downturns won't last more than 3 years and using that liquid surplus to live on during down markets can allow you to ride out the storm from a position of relative safety." (Financial Finesse)
[Official Guidance] 2018 IRS Form 4972: Tax on Lump-Sum Distributions from Qualified Plans of Participants Born Before January 2, 1936 (PDF)
"Use Form 4972 to figure the tax on a qualified lump-sum distribution (defined below) you received in 2018 using the 20% capital gain election, the 10-year tax option, or both. These are special formulas used to figure a separate tax on the distribution that may result in a smaller tax than if you reported the taxable amount of the distribution as ordinary income." (Internal Revenue Service [IRS])
[Official Guidance] Draft 2019 Form 1099-R: Distributions from Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, Etc. (PDF)
11 pages. "Generally, distributions from retirement plans (IRAs, qualified plans, section 403(b) plans, and governmental section 457(b) plans), insurance contracts, etc., are reported to recipients on Form 1099-R." (Internal Revenue Service [IRS])
Retirees: Use Online IRS Withholding Calculator to Avoid Unexpected Taxes on Pensions
"With tax reform bringing major changes for the year ahead, the [IRS] today urged retirees to make sure they are paying in enough tax during the year by using the Withholding Calculator, available on The Tax Cuts and Jobs Act, enacted in December 2017, changed the way tax is calculated for most taxpayers including retirees.... For retirees who receive a monthly pension or annuity check, this may mean changing the amount of federal income tax they have withheld. The easiest way to do that is to use the Withholding Calculator. Though primarily designed for employees who receive wages, this useful online tool can also be helpful to those who receive pension or annuity payments on a regular schedule, usually monthly or quarterly." (Internal Revenue Service [IRS])
Am I Too Old to Convert My IRA to a Roth IRA?
"Given your life expectancy as you get older, say, after 70-1/2, the benefit you'll reap in your life expectancy won't be worth the upfront cost, probably.... But the real benefit if you are doing it as an older person is for the next generation, for you children or grandchildren, because the power of the Roth IRA can grow over their life expectancy." (Morningstar Advisor)
[Guidance Overview] Puerto Rico Treasury Department Extends Period to Make Hurricane-Related Retirement Plan Distributions
"Pursuant to AD 17-29, distributions from a qualified plan or an IRA on account of Hurricane Mar�a could be made from September 20, 2017 until June 30, 2018 (the 'eligible period'). On July 31, 2018, the PR Treasury issued Administrative Determination Number 18-13 extending the eligible period until November 30, 2018 to make eligible distributions pursuant to AD 17-29 and 18-02. All other provisions under AD 17-29 and AD 18-02 remain in effect." (Littler)
Handling Taxed Uncashed Retirement Checks: The Common Practice and the Better Practice (PDF)
"When financial institutions and plan sponsors transfer uncashed check assets into an Auto Rollover IRA account, it offers several benefits ... The bad news is that this approach does not solve several problems associated with uncashed checks that have been taxed. In spite of this fact, it seems to be a widely used practice ... Even without clear guidance from the IRS, we can still do the right thing. We can still adjust our Forms 945, petition the IRS to restore the taxes, make the account whole, and roll it into an IRA account. Or, if the account balance exceeds $5,000, restore the funds back to the plan." (PenChecks, via Journal of Pension Benefits)
How to Increase Your Current Retirement Spending Budget Under the Actuarial Approach
"[1] Work part-time.... [2] Consider all your assets.... [3] Defer commencement of Social Security or purchase a fixed life annuity.... [4] Marry someone with lots of assets who is willing to share them with you.... [6] Decrease your desired estate.... [7] Assume decreasing expenses after first death (for couples).... [8] Assume declining future real dollar recurring expenses as you age.... [9] Decrease the default lifetime planning period (LPP) assumption(s).... [10] Increase the default investment return assumption." (Ken Steiner, FSA Retired)
There Are No Guarantees If You Self-Insure Your Retirement
"In this post, we will compare the risks and potential rewards of self-insuring your retirement vs. purchasing life annuities. Note that while [this discussion] compares these two alternatives, there is nothing to stop you from combining these approaches in your personal financial planning. In fact, many retirement experts recommend utilizing both approaches rather than one or the other." (Ken Steiner, FSA Retired)
The Pro Rata Formula and Inherited IRAs
"The pro-rata rule is a rule that almost always determines the taxation of an IRA distribution when the IRA owner has any IRA containing after-tax amounts.... If you have any Roth IRAs, they will not be included for purposes of the pro-rata formula.... [Y]our 401(k) with your employer is not part of the pro-rata formula used to determine the taxation of an IRA distribution.... Any inherited IRAs you may have are NOT included when you are determining the taxation of one of the IRAs in your name." (Slott Report)
[Official Guidance] Text of IRS Instructions for 2018 Forms 1099-R and 5498: Distributions from Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc. (PDF)
25 pages. "What's New: ... [1] A conversion of a traditional IRA to a Roth IRA, and a rollover from any other eligible retirement plan to a Roth IRA, made after December 31, 2017, cannot be recharacterized as having been made to a traditional IRA.... [2] Special rules apply to retirement plan distributions made to employees affected by certain natural disasters that occurred in 2016 and 2017." (Internal Revenue Service [IRS])
Hardship Withdrawals After the Bipartisan Budget Act of 2018
"While there is no change to current rules for 2018, the rules with respect to hardship distributions are going to change significantly beginning in 2019. Beginning in 2019, participants may legally take hardship distributions from QNECs and QMACs and earnings on 401(k) contributions, QNECs and QMACs, if the plan permits them to. Sponsors will want to review their hardship distribution policy and consider whether they wish to extend it to these amounts. There will also be new rules (of some sort) for determining whether a participant has a hardship." (October Three Consulting)
How to Deal with Improper Roth Contributions
"Option 1: Make a corrective distribution.... Option 2: Recharacterize.... Although the Tax Cuts and Jobs Act of 2017 eliminated the ability to recharacterize Roth conversions, the recharacterization option still exists for regular contributions to traditional or Roth IRAs ... Option 3: Accept the excess contributions penalty for one year and move on." (Natalie Choate, in Morningstar Advisor)
IRS Confirms that Safe Harbor Hardship Distributions Cannot Be Taken for Repayment of Student Loans
"The IRS confirmed in [Information Letter 2018-1] that because a safe harbor hardship distribution may be made only for the prospective payment of education expenses, it cannot be made for the repayment of student loans. The IRS suggested that as an alternative to taking a hardship distribution, the participant may be able to get a loan from the plan." (Drinker Biddle)
[Guidance Overview] 401(k) Plan Sponsors: Time to Revisit Your Hardship Withdrawal Provisions
"Will a plan be treated as satisfying the regulatory safe harbor if it retains the 6-month suspension period for purposes of making elective deferrals and employee contributions? What happens to participants whose 6-month suspension period has not yet expired when the change to eliminate the suspension period becomes effective? Will a plan be treated as satisfying the regulatory safe harbor if it retains the requirement that a participant must first obtain any available plan loan before taking a hardship withdrawal?" (Verrill Dana LLP)
Most Retirees Only Withdrawing Required Minimum Distribution
"Sixty-eight percent of retirees are only taking the required minimum distributions (RMDs) from their retirement accounts, [according to] a survey of more than 1,000 retirees with at least $100,000 in investable assets. Only 21% feel confident about taking money out of these accounts.... The survey also found that the median savings these retirees have is $839,000.... 25% said they were not sure if their retirement savings will last throughout their lifetime.... 25% fell short of their retirement savings goal by $250,000 or more." (planadviser)
Three Misleading IRS Forms
"Form 5498 for inherited IRA ... [N]obody has the responsibility to tell the beneficiary about this [RMD] obligation.... Form 5329: Missed RMD 'shortfall' ... if you want a waiver of the penalty, you must ignore the instructions on Form 5329 itself ... file the form along with your explanation of reasonable cause and how you remedied the shortfall and you have a chance at getting an IRS waiver.... Form 1099-R: Where's my QCD? ... [T]he Form 1099-R ... will show a total ... IRA distribution ... with no mention whatsoever that any of it went to a charity, or that there even was a QCD at all." (Natalie Choate, in Morningstar Advisor)
Expressing Projected Accumulated Savings as Lifetime Retirement Income
"[The Actuarial Lifetime Retirement Income Estimator (ALRIE)] is a more robust tool for retirement plan providers (including [DC] plan sponsors, DC plan administrators and brokerages) who want to give plan participants a better idea of how much lifetime retirement income their account balances may provide." (Ken Steiner, FSA Retired)
Lump Sums Are Most Common Payment Option for Participants in Defined Contribution Retirement Plans
"As workers approach retirement, they might wonder how their retirement savings will be paid out. Among private industry workers in defined contribution plans in 2017, most participated in savings and thrift plans (73 percent). Other common plan types include deferred profit sharing (25 percent) and money purchase pensions (18 percent). A lump sum was the most common payment option available to workers in these plans. A lump sum provides retiring workers the full amount of their retirement savings and earnings with no further benefits received from the plan." (U.S. Bureau of Labor Statistics [BLS])
Some Risks Can't Be Modeled
"The shortcoming of [Monte Carlo] simulation is not that it will create unrealistic scenarios -- quite the opposite -- it won't generate many highly unlikely outcomes. So, even after we test retirement plan risk with simulation we still don't know much about the effects of low-probability catastrophic events.... [At] some point we must face the fact that our retirement plan can't manage every risk by relying on good fortune in the stock market.... The best spending rules won't eliminate these risks." (The Retirement Cafe)
How Living Longer Will Impact Your Retirement
"Rather than quit the workforce at age 65, many Americans continue to work either to supplement their retirement income or because they miss the routine of the workplace.... Health care costs may eat up funds.... In the past, pulling out 4 percent of a fund's principal each year was considered safe. However, that rule of thumb may not work anymore.... [M]oving investment money upon retirement into conservative funds, such as those based on bonds or cash, may no longer make sense." (U.S. News & World Report)
[Opinion] The Actuarial Approach to Retirement Spending
"[The authors] believe that the [actuarial budget benchmark (ABB)] is a powerful spending algorithm that is much more robust than any strategic withdrawal plan (SWP) or spending algorithm built into typical Monte Carlo models, and the Actuarial Approach is a time-tested process to keep spending on track over time. Despite these positive features, however, the actuarial profession appears to be reluctant to even discuss the Actuarial Approach, much less endorse it." (Ken Steiner, FSA Retired)
The 4% Withdrawal Rate: Is It Still the Rule of Thumb?
"[If] $40,000 of retirement income is needed outside of pension and/or social security, an individual would need to save $1 million to be safe under the 4% rule. However, if that individual were to save $1.5 million, he/she will likely be safe, even if the 4% rule were to fail. So, don't just aim to meet savings goals -- smash them! ... If an individual is not tracking expenses and budgeting now, it is going to be far more difficult to do so in retirement. And tracking/budgeting now can also have the effect of lowering current expenses, which can result in more retirement savings -- and thus, more income in retirement!" (Cammack Retirement Group)
The Search for Certainty in the Uncertain World of Personal Retirement Financing
"Since it is based on real market information for relatively low-risk investments, the [actuarial budget balance (ABB)] can be used to properly calibrate the assumptions used in the Monte Carlo model for more risky investments.... If you invest in risky assets and the Monte Carlo model indicates that your sustainable spending level is significantly higher than your ABB ... this can also be an indication that the Monte Carlo modeling assumptions may not reflect investment risk properly. If the current spending level produced by the [Monte Carlo] model differs significantly from your ABB, it is a worthwhile educational exercise to discover why this is the case." (Ken Steiner, FSA Retired)
Retirees Get a 401(k) Withdrawal Headache
"More than half of boomers approaching retirement have no money in a 401(k).... For those who do have savings, paralysis is the more common reaction.... Miscalculations can wreak havoc on retirement finances ... [N]ot many people can do the complex calculations required to find an optimal rate of withdrawal.... To preserve their finite resources, retirement experts recommend that boomers ... [1] Track spending and review sources of retirement income.... [2] Delay Social Security.... [3] Carefully plan a withdrawal strategy." (Squared Away Blog, by the Center for Retirement Research at Boston College)
How Six Types of Retirement Income Are Taxed
"[1] Tax-deferred accounts. Prepare to feel pain.... [2] Profits from the sale of investments, such as stocks, bonds, mutual funds and real estate, are taxed at capital gains rates, which vary depending on how long you've owned the investments.... [3] Roth IRAs. Give yourself a high five if your retirement portfolio includes one of these accounts.... [4] Many retirees are surprised -- and dismayed -- to discover that a portion of their Social Security benefits could be taxable.... [5] Payments from private and government pensions are usually taxable at your ordinary income rate ... [6] If you purchased an annuity that provides income in retirement, the portion of the payment that represents your principal is tax-free; the rest is taxable." (Kiplinger)
Asset Decumulation or Asset Preservation: What Guides Retirement Spending? (PDF)
"[W]ithin the first 18 years of retirement, individuals with less than $200,000 in non-housing assets immediately before retirement had spent down (at the median) about one-quarter of their assets ... Retirees with at least $500,000 immediately before retirement had spent down only 11.8 percent within the first 20 years of retirement at the median. While some retirees do spend down most of their assets in the first eighteen years following retirement, about one-third of all sampled retirees had increased their assets over that period." (Employee Benefit Research Institute [EBRI])
Do Stochastic Models Necessarily Do a Better Job of Helping You Determine How Much You Can Safely Spend This Year?
"While ... it is important to employ a 'good model' of the future when developing a retirement plan, [the authors] are not convinced that it is absolutely necessary to use a model that employs simulations.... [A] 'good model' for determining how much you can safely spend in the current year ... is one that: [1] Does a reasonably good job of forecasting future experience, [2] Adequately addresses your retirement risks, and [3] Helps you to make informed financial decisions with some degree of confidence." (Ken Steiner, FSA Retired)
Tax Cut and Jobs Act Loosens Certain Restrictions on Hardship Distributions from 401(k) and 403(b) Plans (PDF)
"The Act directs the Department of the Treasury to modify the existing regulations to remove the 6-month prohibition on employee contributions within one year of the enactment of the Act. The revised regulations will apply to plan years beginning after December 31, 2018 and will apply to both 401(k) and 403(b) plans." (Boutwell Fay LLP)
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