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2nd Quarter 2019

July 15, 2019

Inside Financial Connections Newsletter

  • IMPROVING THE RETIREMENT SYSTEM
  • A WORLD WITH RENEWABLE ENERGY
  • SOCIAL SECURITY CONSIDERATIONS FOR DIVORCED SPOUSES
  • FIRST HALF OF 2019
  • LEGISLATION TO TWEAK RETIREMENT PLANS

IMPROVING THE RETIREMENT SYSTEM

Our current retirement system was established decades ago when pensions were prevalent, life expectancy was lower and fewer people utilized Medicare and Social Security.

The results of a study conducted by the global research firm, Morning Consult in collaboration with the Certified Financial Planner (CFP) Board of Standards, showed only 25% of Americans feel prepared for retirement. One in four people believe saving for retirement is too complicated and 30% of employees don’t know whether or not their employer offers a retirement plan.

In an effort to improve the retirement system, the CFP Board along with Fred Reish, an internationally known expert in retirement issues and a partner with Drinker Biddle, heads a committee tasked with drafting recommendations for policy makers on how to improve the system.

According to a press release issued May 8th, a “blue-ribbon panel of CFP® professionals” will be put together “offering real life experiences” to help shape the recommendations. We are pleased to announce that Jill Hollander has been asked to participate on this panel.

So far, there have been conference calls and a one-day meeting in Chicago. Jill knows the “new way” is to use conference calls but she said there is no substitute for in-person interaction.

A WORLD WITH RENEWABLE ENERGY

Could our planet’s energy needs become 100% renewable? According to a just completed study by LUT University (in Finland) and Energy Watch Group (a German Non-Profit), the answer is YES.

The study simulated a transition from fossil fuel to renewable energy by 2050. The energy requirements for power, heat, transportation and water sanitation/desalinization were able to convert to a sustainable energy system with more efficiency in a cost-effective manner.

The study divided the world into nine major regions and 145 sub-regions. With decentralized energy production, energy efficiency increased. Energy would primarily be a mixture of solar and wind, but biofuels would be a contributor to electricity.

This report is the first of its kind that dissects the use of sustainable energy systems on an hourly basis. There’s also another bonus – it is estimated the renewable global energy system would create 35 million jobs!

If you’d like to read the full study, please go to:
http://energywatchgroup.org/wp-content/uploads/EWG_LUT_100RE_All_Sectors_Global_Report_2019.pdf

SOCIAL SECURITY CONSIDERATIONS FOR DIVORCED SPOUSES

You may be recently divorced or it might have been decades ago. As you approach retirement, it is important to consider Social Security options based on your earnings record and your ex-spouse’s earnings record.

You are entitled to whichever is more – your benefit or 50% of your ex’s benefit. Below are some of the eligibility requirements:

  • Married at least 10 consecutive years
  • Currently unmarried
  • Former spouse qualifies for Social Security benefits
  • You both must be at least 62 (benefits would be discounted)
  • Divorced at least two years or your former spouse is already collecting benefits
  • If you were born before January 2, 1954, and have reached Full Retirement Age, you may be eligible to receive spousal benefits while deferring your own until age 70.

If your former spouse predeceases you and you are still single, you may be eligible for your ex’s full benefits (assumes more than your benefit). See www.SocialSecurity.gov for more complete information.

Financial Connections’ clients may give us a call if you have questions. We are available if you would like to discuss how this might fold into your retirement plan.

See complete blog article here.

FIRST HALF OF 2019

By most measurements, bonds and U.S. stocks are expensive. Part of the rise in stock prices is due to companies’ buying back their own stock. Repurchasing company stock reduces the number of shares outstanding thus increasing the price per share.

According to the Wall Street Journal, company buybacks are a major source of equity demand. When the demand is high, markets rise. Companies spent over $800 billion last year in buybacks. Many analysts believe this creates artificial gains and when the buybacks stop, demand declines and so will the stock market. Last quarter stock repurchases declined for the first time in a decade.

Many analysts believe stock buybacks hurt long-term gains because the money used to buy a company’s own stocks diverts funds from long-term investments in capital spending or research and development. Some politicians are even discussing putting a limit on a company’s ability to repurchase shares.

At this time, only international stocks have low valuations based on price to earnings. Our portfolios have exposure to both domestic and international stocks.

Further concerns are forecasted with the trade war on/off status and a general slowing of the economy. While consumers continue to buy moving the economy forward, companies are contracting their spending not knowing what to expect on the tariff horizon.

If you would like to discuss your portfolio strategy, please don’t hesitate to contact us.

LEGISLATION TO TWEAK RETIREMENT PLANS

The House of Representatives passed 417-3 the Setting Every Community Up for Retirement Enhancement Act (SECURE).

The Senate version is called the Retirement Enhancement Securities Act (RESA). Do they have someone whose only job is to come up with these acronyms?

There are 29 potential new provisions. Highlights of the legislation are below.

Small employers – It has been a long-term goal to get small employers to offer a retirement plan for their employees. The SEP-IRA and SIMPLE plans were created long ago to entice small employers to offer a plan. They have met with limited success. The new legislation would allow small employers to join together to offer a 401(k) plan for potentially less cost and less fiduciary liability.

Annuities – We are not a big fan of annuities because of their typical costs. We also find it an oxymoron to have an annuity inside a retirement plan. One of the selling features of annuities is their tax deferral. Why do you need one when a retirement plan is already tax deferred? Be that as it may, the legislation encourages annuities to be in 401(k) plans. (A win for the very strong insurance lobby.)

Required Minimum Distributions (RMD) – Many of our clients are already in their RMD phase. Currently, once a person reaches 70.5, they are required to start their withdrawals. SECURE moves the age to 72 while RESA has it at 75.

Age limit on IRA Contributions – Under current law, workers cannot contribute to a traditional IRA after age 70.5. SECURE would repeal this age limit for workers.

Employer Tax Credit for Auto Enrollment – A new tax credit would be offered to small employers offering a retirement plan that automatically enrolls employees.

Lifetime Income Disclosure – Currently defined contribution plans (401(k), 403(b), etc.) accrue money until you leave your employer. This provision would require plans to provide an estimate of how much lifetime income your defined contribution plan balance would provide. While the theory is good, the devil will be in the details. How will this lifetime income number be calculated? So far, we don’t know.

Inherited Retirement Plans – This new feature will cause problems for many. Currently, beneficiaries can stretch out the distribution over a lifetime (hence called “stretch-out” provisions). The new legislation is a tax-generating change. The Supreme Court ruled that inherited accounts are not retirement accounts. This changed legislative thinking about why should the beneficiary receive an extended tax benefit.

SECURE has the provision that the funds would need to be distributed within 10 years. RESA is different; it would require the end to stretch out provisions for inherited IRAs over $450,000.

Part-Time Workers – The legislation makes it easier for part-time workers to qualify for some 401(k) plans.

Adoptions or Birth – Parents would be able to withdraw up to $5,000 to cover qualified expenses from their retirement plan without penalty.

Tax Penalties – Penalties for the failure to file tax returns for retirement plans increases.

529 Plans – Unrelated to retirement, a withdrawal of up to $10,000 from a Section 529 plan could be used to pay back student loans.

At this time, these changes primarily apply to 401(k)s, 403(b)s and IRAs. New estate planning techniques will need to be considered.

We still don’t know what the final legislation will look like since the Senate and House need to negotiate a final bill acceptable to both houses.

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