Q&A With Jamie Hopkins on Retirement Income Planning in 2020

From the health crisis and the shortest-lived recession in history to near-zero interest rates and unprecedented stock market volatility, 2020 has looked unlike any other year.

These changes can be calamitous for retirees and soon-to-be retirees. While younger investors can ride out sudden volatility and aren’t relying on interest rates to provide current income, those nearing or in retirement don’t have this luxury. To learn more about how the retirement planning landscape is changing in 2020, we spoke with Jamie Hopkins, the managing director of Carson Coaching and director of retirement research at Carson Group. He unpacks the biggest changes shaping retirement planning. Read on for edited excerpts from that interview.

How can advisors help with retirement income plans?

Outside of just the direct health impacts of COVID-19, I’m very worried about these early claiming and retiring trends in 2020. Coupled with increased market volatility early in the year and low interest rates, we could be looking at many Americans being overweighted in certain investment strategies, which don’t align with their long-term goals.

Another concern is the fact that too many people just don’t have access to quality financial advice and income planning. As an industry and society, we need to strive for better access for all Americans to personal finance advice and retirement income planning.

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For advisors, they need to continue to get educated. I’ve often said that I would only hire or refer about 5 to 10% of financial advisors today, and this mostly has to do with a lack of commitment to continued education. If you want to specialize in retirement income planning, show your commitment by studying in a program like retirement income certified professionals (RICPs).

Advisors need to help clients get retirement income plans in place, educate people on risks and basic financial topics, commit to education for themselves and try to open up access to financial planning. These are not easy, but 2020 has highlighted the need for advisors to guide their clients.

How has the SECURE Act changed retirement income planning?

Getting a bit more specific on income planning. When 2019 came to a close with the Setting Every Community Up for Retirement Enhancement Act of 2019, it was the largest retirement act passed by Congress in roughly 15 years. This bill fundamentally changed the required minimum distribution rules, pushing back the required beginning date from age 70.5 to 72 and changed the inherited rules for retirement accounts. Simply put, the SECURE Act removed an ability for many beneficiaries of inherited retirement accounts to stretch payments over their own life, instead requiring that the entire retirement account be distributed within 10 years after the owner passes away. There are still some exceptions to this rule, most notably an ability to stretch distributions if the account is left to a surviving spouse.

One of the biggest issues with the bill passing at the end of 2019 is that it has been lost in the chaos of 2020, leaving many outdated. Americans need to sit down and review their retirement income beneficiaries, trusts and estate plans in light of the SECURE Act.

In some cases, like with certain types of pass-through trusts listed as beneficiaries, you could have a disaster if it’s not updated from a tax perspective following the SECURE Act. We have seen trusts that could require all of the retirement assets held for the full 10-year period, then distributed in one tax year, causing a huge tax bill for the beneficiaries. In short, the SECURE Act brought a lot of additional complexity to retirement income planning and not enough people are focusing on these changes.

What does the CARES Act legislation mean for retirees?

If it wasn’t enough that the largest piece of retirement planning legislation passed at the end of 2019, the government (later) passed one of the largest relief and spending bills in history, called the Coronavirus Aid, Relief, and Economic Security Act. Part of the CARES Act included some retirement planning changes for the year, most importantly, a suspension of 2020 required minimum distributions.

The suspension of 2020 RMDs provides some relief to retirees in that they don’t need to take forced and likely taxable distributions from retirement accounts in 2020, a year that is seeing a lot of uncertainty and volatility in the market. Instead, these individuals can leave their retirement accounts alone and let them sit until at least 2021. That being said, most retirees will need to take distributions from their accounts to provide retirement income this year. Not everyone will have the luxury of pushing off RMDs.

However, for those who can push off RMDs, there is a lot to consider for 2020. Do you want to do Roth conversions instead? Or give money to charities in a more tax-efficient manner? Should you roll back some of your RMDs into your individual retirement account if you took them before the passage of the CARES Act? Does reducing RMDs this year help your long-term income planning? All of these need to be considered. There is not an easy answer or one that applies to everyone, going back to the notion that income planning is specific to an individual’s goals and situation.

[See: The Best Podcasts for Financial Advisors]

Are there alternative strategies to help their retired clients benefit in 2020?

Roth tax planning is probably one of the best strategies available for clients and financial advisors today. With tax rates looking favorable under the Tax Cut and Jobs Act of 2017 for this year, a lot of people will want to take advantage of current rates and do Roth conversions of traditional IRA money.

Looking at the right time to retire, the right investment strategy, how income will be generated, where someone will live and health care are among crucial decisions to review in 2020. Honestly, I think there will be a lot of plans that change specifically because of the impact on nursing homes in 2020. This is a real conversation that advisors need to have with their clients around long-term care.

What other important trends are influencing retirement planning today?

There are three major trends impacting retirement income planning today. First, low interest rates. This can’t be overstated when it comes to retirement income planning. What is probably most well-known about retirement income research is the 4% rule. The idea that you can take 4% of your account, adjusted for inflation each year, over the course of 30 years and not run out of money based on a historical investment of 50% in U.S. large-caps and 50% in U.S. bonds.

However, with current interest rates where they are, this research might not hold up. The issue is safer investments like U.S. bonds, certificates of deposit, the Treasury’s inflation-protected securities, annuities and life insurance products, which are all seeing lower payouts. Even other insurance products for retirement like long-term care insurance are seeing pressure due to low interest rates. All of this creates a real challenge for retirees looking to insurance products or safer investments for retirement security.

[Read: Tax Deductions for Financial Advisor Fees Without IRC 212.]

Another big issue or trend facing retirement income planning is the concerns in 2020 about early retirement and Social Security claiming. This isn’t something that can be easily fixed either, as many will have to claim out of necessity due to current economic conditions, a decision that will impact the next 30 years of their retirement.

Lastly, with the government budgets and spending where they are in 2020, there is a lot of concern about rising tax rates in the future. This makes things like Roth strategies more appealing today and tax-deferred saving less appealing. More and more people are worried about rising tax rates, which could significantly change planning strategies and perceived benefits for saving for the future.

When you pull everything together, we are in a very challenging environment for those nearing retirement. Interest rates are low, and there is a lot of market volatility and concern about rising interest rates. The long-term care and health care system is struggling, and people aren’t getting the help they need.

Instead of trying to solve every issue, start with an easier step.

Calculate your retirement income needs. Add up your expenses and try to project out what you might want in retirement for income. A decent rule of thumb is that you might need around 70% to 80% of your expenses today as income in retirement. Then multiply that number by 25. That is a good number you should have saved for retirement. If you need $40,000 a year in retirement from your investments, that would be $1 million.

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Q&A With Jamie Hopkins on Retirement Income Planning in 2020 originally appeared on usnews.com

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