Considering all of the political and economic uncertainty America faces today, aspiring retirees might feel like they need a crystal ball and a graduate degree in economics to call it quits with confidence. But financial experts say creating a personalized plan that diversifies income sources, tackles tax planning questions, accounts for rising health care costs and scrutinizes Social Security options can go a long way toward helping savvy spenders relish retirement.
Here are ways financial planners said retirement might change in the new year. Learn what you can do to protect your portfolio and pocketbook after you clock out for the final time.
1. Interest Rates Might Rise
The Federal Reserve has raised the federal funds rate by a quarter point three times in the last 12 months, but some experts are at odds about how those increases will impact rates for certificates of deposit and mortgages.
“The Federal Reserve is expected to raise rates again in December and at least two more times over the following 18 months,” said Joel Salomon, founder of SaLaurMor Management, a prosperity coaching firm. “This will increase short-term CD rates, especially 1- and 2-year rates.”
Rising interest rates will also affect mortgage rates. “The current spread between short-term Treasury bills and 10-year Treasury notes is signaling lower mortgage rates ahead,” Salomon said. “So, if someone who is retiring is thinking about refinancing their mortgage, they could wait if they expect to refi into a longer-term mortgage like a 30-year, but they should jump now if they want a 1-year adjustable rate mortgage or other shorter-term mortgages.”
Others, including economists at the Mortgage Bankers Association, expect 30-year rates to rise to 4.6 percent next year and top 5 percent in 2019 as the fed rate rises. That compares with the October 2017 average of 3.9 percent for a fixed-rate 30-year home loan, so it makes sense to consult with financial experts about your specific situation if you’re considering making a mortgage move.
2. CD Rates Might Rise, But Will Continue to Offer Low Returns
It’s true that CD rates have risen over the past year, said Christopher Berry, managing partner and founder of The Elder Care Firm, which specializes in estate planning, but retirees should spread some of their savings out to options that offer returns that outpace the inflation rate.
“CD rates may continue to go up in 2018, however, if you’re looking for a long-term investment, CDs are probably not the way to go. When interest rates go up they can impact everything from bond prices to mortgages and credit cards,” he said. “While it’s okay to play it safe with some amount of your money, putting all your eggs in the CD basket is not a long-term strategy that will keep up with inflation.” In fact, the 10-year CD might be the worst bank product ever.
3. Lower Returns for REITs
One investment type that could take a hit from higher interest rates is the real estate investment trust. While the relationship between interest rates and REITs can vary by trust type, higher interest rates generally translate to lower REIT returns, which has driven down yields recently. Instead of buying REITs, invest in real estate other ways.
“For 2018, it looks like a year of consolidation for REITs,” Berry said. “There has been a period of conservatism when it comes to REITs and their value. Some of my clients, prior to working with me, had REITs that they were locked into and not very happy in this market. I expect the same for 2018.”
4. Traditional IRAs Will Experience an Exodus if Tax Laws Change
The key difference between traditional individual retirement accounts and Roth IRAs is when people pay income taxes on contributions, according to Salomon, whose experience includes time as a hedge fund manager and portfolio manager. With traditional IRAs, the break comes up front for contributions that meet certain guidelines, and account holders are responsible for paying taxes on withdrawals made in retirement. With Roth IRAs, account holders pay taxes on contributions up front, but can take money out tax free in retirement. Roth IRAs are also more flexible if you need to withdraw money earlier.
For those who anticipate their tax rate to fall under the tax proposals being considered by Congress right now, converting from a traditional to a Roth IRA will allow you to lock down lower rates since you will be required to pay income taxes on funds you contributed tax free in the past. But, because Roth withdrawals aren’t taxed, you won’t be hit with higher rates if they rise in the future.
“If the tax law changes go in as expected, it will make sense for eligible retirees to convert traditional IRAs to Roths,” Salomon said. “There will be strong incentives to invest in Roths and not traditional IRAs going forward.”
Understand the Differences: Roth vs. Traditional IRA
5. Investment Brokers Won’t Face Big Changes After All
Sweeping new rules regulating the investment-advice industry were to take effect in 2018, although the Trump Administration has cast doubt on the final fate of the U.S. Department of Labor’s so-called “fiduciary rule.” The rule requires investment advisors, brokers, insurance agents and others who offer retirement advice to put the best interest of their customers first when offering investment guidance.
Put simply, the rule’s goal is to eliminate conflicts of interest for brokers and advisors who might receive higher commissions and other incentives for certain products they sell. And, though some parts of the rule went into effect in June, Trump mandated a review of its enforcement mechanisms. That could lead to significant changes, or essentially scrapping most of the provisions, down the road. The Department of Labor delayed the start of the fiduciary rule to July 1, 2019.
6. Tax Cuts Are Probably Coming
The Tax Cuts and Jobs Act still faces hurdles in the Senate. But Berry, the lawyer and estate planner, expects some changes to come out of the massive tax code overhaul being championed by Trump and many other Republicans.
“The Trump tax cuts are going through Congress as we speak,” Berry said. “It will be interesting to see what actually end[s] up going all the way through Congress and the Senate.”
Currently, key provisions include cutting the number of tax brackets and dramatically increasing the standard deduction for individuals and married couples. At the same time, the act proposes cutting several popular deductions — including the mortgage interest deduction for new home loans of up to $500,000.
7. The Standard Deduction Will Change
Regardless of the results of tax overhaul efforts, standard deductions will rise slightly in 2018 because of inflation adjustments by the IRS.
“For single taxpayers and married individuals filing separately, the standard deduction rises to $6,500 in 2018, up from $6,350 in 2017, and for heads of households, the standard deduction will be $9,550 for tax year 2018, up from $9,350 for tax year 2017,” Berry said.
It’s also worth noting that tax filers who are 65 and older are entitled to a higher standard deduction.
8. On-Demand Mobile Advice Will Increase
According to the Pew Research Center, four in 10 seniors now own smartphones, more than double the share of smartphone owners in the age group in 2013, and 67 percent of adults ages 65 and older go online. Older adults are increasingly using tech tools to seek specific guidance on savings goals and other financial topics, said Tom Conlon, head of client relations for the robo-advisory firm Betterment for Business, which handles client companies’ retirement plan administration.
“Retirees will able to access advice on their own terms, thanks to technology,” he said. “Accessibility to advice will continue to expand through digital platforms and mobile messaging.”
9. Retirees Can Anticipate More Personalization
Technology will also help advisers and retirees dig deeper into financial data and details, Conlon said.
“It’s not enough to just look at your 401k balance or Social Security payouts anymore; you need a holistic view of your finances, and the advice you get needs to be customized to where you are in your financial life.” he said. “We’ll begin to see more advice personalized to a person’s unique situation and short- and long-term goals”
10. Healthcare Costs Will Rise
PricewaterhouseCoopers’s Health Research Institute expects a 6.5 percent spending increase in the employer-based insurance market in 2018, which excludes plans sold through Affordable Care Act exchanges and government insurance plans including Medicare. And experts expect this long-term trend to continue throughout the industry, simply because of the law of supply and demand. Baby boomers are continuing to retire, shrinking the ranks of care providers at the same time they may start to need more care themselves.
Brian Saranovitz, co-founder of the retirement planning firm Your Retirement Advisor, recommends aspiring retirees set aside a significant chunk of cash for possible healthcare costs.
“When running a retirement projection, it’s important to enter out-of-pocket healthcare costs at approximately $12,000 per year using an inflation factor of 3 to 5 percent,” he said. “If this expense is not factored into a retirement forecast, it could have an effect on long-term portfolio longevity.”
11. Medicare Costs Will Rise for Higher-Income Retirees
Most Medicare beneficiaries pay a standard monthly premium set to cover 25 percent of program costs for Medicare Part B and Part D, which cover medical and drug expenses. But some with higher incomes are required to cover between 35 and 80 percent of program costs, said Marcy Keckler, vice president of financial advice strategy at the financial planning firm Ameriprise Financial.
“The higher your income, the more you’ll pay for Medicare parts B and D,” she said. “Beginning in 2018, beneficiaries with incomes above $133,500 will pay an even higher premium surcharge than the current amount.”
For instance, Medicare recipients with incomes between $133,501 and $160,000 will pay 65 percent of Part B and Part D program costs starting in 2018, up from 50 percent prior to 2018, according to the Kaiser Family Foundation. Their monthly Part B premiums are expected to increase to $348 in 2018, up from $268 in 2017, based on projections of Part B program costs from Medicare.
“Over a 20-25 year retirement, this adds up,” Keckler said. “A financial advisor can help you plan strategies before you reach retirement age to generate tax-efficient income that reduces both the taxes you pay and the premiums you pay for Medicare.”
12. Social Security Benefits Will Rise Modestly
Next year’s annual Social Security increase of 2 percent certainly outpaces the 2017 cost of living increase figure of 0.3 percent, but low inflation rates continue to drive down these annual adjustments. For all retired workers, this cost of living adjustment will move the average monthly benefit from $1,377 to $1,404. For a retired couple that both receive benefits, the average 2017 amount of $2,294 will increase to $2,340 in 2018. Learn all the expected Social Security cost of living adjustments for the coming year.
13. More Income Will Be Subject to Social Security Taxes
The cap on earnings subject to Social Security taxes will increase from $127,200 in 2017 to $128,400 in 2018. In addition, the retirement earnings test for those who haven’t reached their full retirement age will increase from $16,920 in 2017 to $17,040 in 2018. The earning test for those in the year of their full retirement age will increase from $44,880 in 2017 to $45,360 in 2018. While this change won’t have much impact on people who plan to retire early in 2018, it will affect some who retire later in the year — increasing both their contributions and, possibly, their retirement payments.
14. Social Security’s Future Will Remain Murky
The Social Security trust fund reserves balance will reach zero around 2034, according to the Social Security and Medicare trustees’ most recent annual report. That means by 2034, the system will only bring in enough revenue to cover around 77 percent of scheduled benefits.
More Changes Coming: 12 Ways Social Security Has Drastically Changed Since Its Inception
However, people who are planning to retire in the near future should focus more on understanding their options under the Social Security system, said David Freitag, a financial planning consultant with the MassMutual Financial Group.
“A startling finding from a recent MassMutual survey revealed that 62 percent of people nearing retirement age failed a basic true/false quiz about Social Security filing options,” he said. “Depending on their age, a couple planning to retire at age 62 in 2018 has at least 81 different filing strategy options available to them. Some older couples will have well over 100 ways to take their benefits. This makes getting it right challenging.”
Those who aren’t sure about their options should work with a financial planner before filing for Social Security benefits.
15. Uncertainty Will Increase
And Social Security isn’t the only conundrum for those approaching retirement. People are living longer than they have in the past and there’s no way to predict how long retirement might last for you or what unexpected expenses and economic environments you might face 20 years down the road. But personalizing your plan is a good first step for those who want to revel in retirement, no matter how long it lasts.
“The way to control uncertainty is to take ownership of the things that you can manage personally,” Freitag said. “Do not let a plan described by your Uncle Harry at the family picnic apply to your own plan for retirement. What works for Uncle Harry will probably not be right for you.”
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