The way we go about the process of retirement income planning has changed in the last decade.
The following five developments have forever affected the way we plan both before and during retirement.
1. The Roth IRA
The Roth IRA came into existence with the Tax Payer Relief Act of 1997. Although 1997 may seem like a long time ago, it takes many years for a new saving’s tool to become mainstream. The Roth is well on its way and newer tax laws have made this tool even more accessible.
For example, starting in 2006 employers were allowed to amend their 401(k) and 403(b) plans to allow for designated Roth contributions. In 2010 the income limitation on Roth conversions was removed, and starting in 2013 in-plan Roth conversions were allowed.
Why is the Roth IRA such a big deal? The contributions go in after-tax, the money grows tax free and is withdrawn tax free in retirement (assuming you follow the rules), distributions don’t count in the formula that determines how much of your Social Security will be taxed, and you aren’t required to take a prescribed amount out when you reach age 70 ½.
In addition you can take your original contributions (but not necessarily conversions or investment earnings) back out at any time with no taxes or penalties (Note: slightly different rules apply to designated Roth contributions within an employer plan.)
The flexibility this savings vehicle offers is unparalleled. It continues to change the way people plan, save, and spend in retirement.
2. Sophisticated Social Security calculators
Starting about 2010 online Social Security calculators began to sprout up. They’ve continued to evolve into sophisticated planning tools that show you the effects of just about anything you want to see in relation to your benefits and claiming options.
Married couples can see how survivor and spousal benefits work. You can play around with the results over longer or shorter lifespans, see how working longer affects your benefits, estimate your future benefits at various ages, and instantly see claiming strategies that may be more or less appropriate for you. These online tools are a welcome retirement game-changer. They can help millions of Americans make better choices about their benefits.
3. Academic research
As waves of baby boomers reach retirement age, the demand for rigorous analysis has increased. Financial institutions and academics have started delivering detailed research that challenges many of the traditional approaches to generating income in retirement.
A few examples:
- Traditional asset allocation advice is turned on its head in the paper The Rising Equity Glide Path by fellow RetireMentors, Wade Pfau and Michael Kitces.
- The idea that retirees need inflation adjusted income for life is challenged in The True Cost of Retirement by another RetireMentor, David Blanchett.
- In Adding the Income Dimension Peng Chen and James X Xiong show that the traditional efficient frontier model used to build portfolios may not be the best approach to use as a saver’s goal shifts from accumulating assets to generating life-long income.
This type of academic work is revolutionizing the way people plan for income in retirement.
4. Specialized retirement income planning designations
The Certified Financial PlannerTM designation has been around for over 25 years and has emerged as a needed minimum standard in the financial planning profession, much like an MD in the medical profession. However, just as with medicine, in financial planning, there are times where specialists are needed.
Two new specialty designations have emerged in the past few years, the Retirement Management Analyst designation (RMA), sponsored by the Retirement Income Industry Association and the Retirement Income Certified Professional designation (RICP) sponsored by the American College.
The curriculum in these designations focuses on the decumulation phase (vs. accumulation) covering distribution strategies, products, risks, and tax considerations that affect those who are withdrawing from savings and investments on a regular basis.
Retirement is a series of irrevocable decisions that need careful consideration. I anticipate more retirees will turn to specialists to help them navigate their way through the retirement income planning process.
5. The Great Recession
In the 90s many retirement planning projections were run using rates of return of 10% a year or more. Financial projections at such returns often showed that only minimal savings would be needed to achieve a reasonable retirement lifestyle. The Great Recession changed those assumptions.
After experiencing a prolonged period with below average returns more people are realizing you cannot count on above average returns to achieve your financial goals. You must create a plan that secures a basic retirement lifestyle regardless of the economic and market conditions you may encounter.
By approaching planning this way if you get above average returns you’ll find that you can retire a bit earlier, or have a more comfortable lifestyle. This is much better than using overly optimistic assumptions and finding yourself barely scraping by because things outside of your control (market returns) didn’t deliver what you had expected.
All in all, these retirement game-changers are helping us plan for a more secure future. I look forward to seeing the industry continue to evolve.
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