Thursday, May 11, 2023

Barbservations from Three Retirement-Focused Webinars

I recently attended three webinars related to retirement planning. One discussed required minimum distribution (RMD) rules, the second, retirement planning in general, and the third, the FIRE (Financial Independence, Retire Early) movement.

Below are eight key take-aways from these programs:

Simple RMD Description- The IRS wants their cut of your retirement savings that they have been waiting to take for decades. The amount that older taxpayers must withdraw is called a required minimum distribution (RMD) and it is 100% taxable as ordinary income. If taxpayers are near the top of a marginal tax bracket, RMDs can move them up to a higher tax bracket.

Use of RMD Withdrawals- A chunk will pay income taxes. Many people use their effective tax rate as a guide to determine how much to set aside and ask their retirement account custodian to withhold taxes or send the IRS estimated payments. After that, the government does not care what taxpayers do with RMDs. They can spend, gift, or resave this money.

Secure 2.0 Legislation- As a result of this December 2022 law, designed to boost retirement savings by American workers, benefits experts are predicting more qualified employer plans and more plan participants…eventually. Time will tell if workers save more money and have more income in retirement. Unfortunately, many Americans simply don’t have money to save.

Multiple RMD Ages- People with tax-deferred retirement savings accounts born in 1950 or earlier have a RMD of 72 (or 70½ for those who turned 70½ prior to 2020). Those born in 1951-1959 and 1960 and later must begin RMDs at age 73 and 75, respectively. This is a moot point for many older adults as over 80% of account holders withdraw money before RMD age.

IRMAA Surprises- Many older baby boomers who are exiting the workforce in peak earning years are meeting IRMAA (income related monthly adjustment amount) for the first time and are shocked because it is based on income earned two years ago and it feels punitive. IRMAA is a Medicare Part B and Part D premium surcharge for higher earners and there are 5 tiers. Managing income tax and IRMAA income brackets is a key challenge for these taxpayers.

The Future of Social Security- Depletion of the Social Security reserve (a.k.a., trust fund) is projected to take place sometime in the 2030s decade, but this has been anticipated for years based on demographic trends. Depletion of the reserve is not the same as Social Security “going bankrupt,” as many people falsely believe. Benefits may be cut, but they will not go away.

Permission to Spend- Financial planners often encounter long-time “super-saver” clients who have accumulated $1 million+ and have difficulty spending down their accumulated savings. A key question to ask is “What is the purpose of your wealth?” Discussing this question can help give people “permission” to spend their savings.

FIRE Number Formula- FIRE proponents aggressively save young adulthood to afford to leave 9 to 5 jobs in their 40s or earlier. They set a “walking away number” (savings goal) and save as much as possible by maximizing income and reducing expenses. Various FIRE calculators are available to “do the math.” Another FIRE goal-setting technique is saving 25x desired annual income (e.g., $55,000 x 25 = $1,375,000). Obviously, not everyone can do this.

I watch about a dozen personal finance webinars each month. More “Barbservations” to follow.

This post provides general personal finance or consumer decision-making information and does not address all the variables that apply to an individual’s unique situation. It does not endorse specific products or services and should not be construed as legal or financial advice. If professional assistance is required, the services of a competent professional should be sought.



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