Archives for August 10, 2018

All of sudden, there’s a flurry of activity in the Capitol to help Americans save for retirement and for emergencies. Seven bills in the Senate and the House — some of them bipartisan — have recently been introduced. And the House Republican leadership is crafting what it calls “Tax Reform 2.0,” which would include retirement savings reforms as well as making last year’s tax cuts permanent; they’re not working with Democrats on this, however. So far, the Trump administration has been less enthusiastic about boosting Americans’ savings; it ended Obama’s MyRA retirement-savings program, for example.

If the bills wending through Congress pass later this year or in 2019 — a very big “if” — they could amount to the biggest changes in workplace retirement savings plans since 2006, as well as the first time Washington has addressed the public’s lack of emergency savings. And if the Democrats take the House in the November election, retirement reform will likely be the priority for the ranking Democrat on the House Ways and Means Committee, Richard Neal, of Massachusetts, his aides have said.

The Washington Post recently noted that one of the major retirement bills being floated— the Retirement Enhancement and Savings Act or RESA — “could add millions of people to the rolls of tax-deferred retirement accounts.”

Help to stem Americans’ savings crisis

Helping workers save for retirement could go a long way to lessen the retirement crisis in America. One reason so few people have so little saved: only about half of private-sector employees have access to employer-sponsored retirement plans like 401(k)s. Retirement plans at small businesses are even less common; the number of uncovered workers at businesses with fewer than 50 employees is nine times that of uncovered workers at large companies, The Washington Post recently noted.

Legislation under discussion aims to change all of this, and a bipartisan pair of Senators (Cory Booker of New Jersey and Todd Young of Indiana, a Democrat and Republican respectively) have called for a blue-ribbon panel to boost retirement security in America.

Referring to the retirement-savings legislation backed by a bipartisan group of Senators — Democrats Booker and Heidi Heitkamp (N. D.) and Republicans Tom Cotton (Ark.) and Young — the co-chair of the Bipartisan Policy Center’s Commission on Retirement Security and Personal Savings, James B. Lockhart III, said: “These common-sense proposals will greatly help people save for their future and retire with dignity.”

Here’s a rundown of five things the bills — many of them supported by financial services firms, AARP, economists and public policy think tanks — would do (apologies in advance for all the Washington acronyms below):

1. Allow for “rainy day” workplace savings programs, akin to 401(k)s for emergencies. This idea is being pushed by House Republicans like Kenny Marchant of Texas and the bipartisan group of Senators noted above, with their Strengthening Financial Security Through Short-Term Savings Act.

The short-term savings plans, sometimes called “sidecar” accounts, would let employers automatically enroll workers to build up tax-free earnings and get cash if, for instance, their car broke down, the roof began leaking or they were socked by a surprise medical bill. And these accounts would prevent workers from tapping retirement plans to pay for emergencies.

“By giving the green light for employers to automatically enroll their workers into short-term savings accounts, this bill [the bipartisan Senate one] has the potential to spur much needed innovation, experimentation and uptake,” said Ida Rademacher, executive director of The Aspen Institute Financial Security Program. “Today’s working families need new tools to meet the unprecedented short- and long-term financial challenges they face. Sidecar rainy day savings may well do both — by building up an emergency fund while simultaneously reducing the need for premature withdrawals from retirement accounts.”

David Newville, director of federal policy at the progressive think tank Prosperity Now, and The Aspen Institute’s David S. Mitchell, recently wrote on Medium that adopting rainy-day savings accounts “will not just help employees cope with emergencies and build economic security, but could also boost businesses’ bottom lines.”

In its recent paper Roadmap for Improving U.S. Retirement Savings: Make It Easier, the retirement experts at BlackRock (the world’s largest asset manager) said they support “the inclusion of emergency savings solutions in the retirement savings dialogue.”

2. Make it easier for small businesses to offer retirement plans to workers. “Many small employers are reluctant to offer [retirement] plans to their employees because of concerns regarding potential fiduciary liability as well as administrative complexity, burdens and costs,” the BlackRock report said. Broadening 401(k)s to small business employees is a key component of RESA, sponsored by Orrin Hatch (R-Utah), head of the Senate Finance Committee, and Ron Wyden of Oregon, the ranking Democrat on that committee. And the bipartisan group of Senators noted above have a similar bill.

The legislation would make it easier for small businesses to band together and jointly offer retirement plans to their employees through what are known as Multiple Employer Plans or MEPS. Currently, small businesses must be in the same industry or sector to share a MEP. But the new bills would eliminate that requirement.

Broadening MEPS, an idea which has been kicking around Congress for a while, has widespread bipartisan support as well as the backing of many retirement authorities such as Alicia Munnell, director of the Center for Retirement Research at Boston College.

The small-business retirement plan bills would also simplify the process for automatically enrolling 401(k) participants, as happens at many big firms. And the RESA bill would encourage small businesses to set up retirement plans by increasing the size of the annual federal tax credit for doing so, from $500 to as much as $5,000 for three years. Raising the credit, says Jamie Hopkins, retirement income program director at The American College of Financial Services, “is a great idea to incentivize and encourage plans.”

3. Let people contribute to traditional individual retirement accounts (IRAs) after they turn 70½ if they’re still working. Today, they can’t. And they also need to start taking distributions from their IRAs once they hit 70½. (With Roth IRAs, there is no age 70½ contribution limit or required minimum distributions.) Congress is considering letting people over 70½ with earned income contribute up to $6,500 a year in either a traditional IRA or a Roth IRA.

Hopkins says lifting the age ceiling on traditional IRAs makes sense; after all, many people are living and working longer than in the past. But he thinks a better idea would be to remove the current income phaseout range for Roth IRA contributions; that way, any worker over 70½ could still contribute to a Roth IRA.

4. Let more workers invest some of their 401(k) money in annuities to deliver guaranteed, steady retirement income for life. Today, very few employers offer this option, largely because they don’t want the liability if the insurer behind the annuity goes belly up or can’t make its promised payments. The legislation would take employers off the hook.

Hopkins supports having more annuities for 401(k) savers, but doesn’t think this legislative change would broaden their availability very much. “There is still a huge negative perception around annuities that likely won’t be overcome by a simple liability protection,” he says.

5. Translate retirement savings into retirement income. The RESA bill would require employee benefit statements to include monthly estimates of the income employees’ 401(k)s might deliver with an annuity, not just their total account balances. That information could be a huge help for retirement planning. The BlackRock 2018 DC Investor Pulse Survey found that 93% of plan participants are “looking for guidance on annual and monthly retirement income.”

Hopkins says “there is a huge benefit to showing people the income their savings can generate.”

When you get a new credit card, you probably know something about the rewards and the sign-up bonus. If you tend to carry a balance, hopefully you know the APR as well. But there’s a good chance you’re unaware of perks that can save you hundreds of dollars.

Less than half of the respondents in a recent WalletHub survey knew about popular secondary credit card benefits, including rental car insurance and airport lounge access. Some benefits are lesser-known still: Only 17 percent of those polled knew that some cards offer cell phone damage protection, like the U.S. Bank Visa Platinum card, CNBC Make It’s top-ranked balance-transfer credit card. It covers up to $600 in damages to your phone — twice per year.

To benefit from a lot of these perks, you need to be aware of them. For instance, U.S. Bank requires you to pay for your cell phone bill with the Platinum card in order to receive the protection benefit.

Some cards offer price protection, meaning if you buy an item on your credit card and then its price drops within a set time frame, usually a month or two, you can get refunded the difference. But that requires you to submit a claim form. In the Wallethub survey, one out of four respondents said they want a card that offered price protection, making it the most popular of any secondary benefit.

Other perks are easier to access but still require awareness. If you have an elite travel card like the Chase Sapphire Reserve or American Express Platinum, for example, you don’t need to buy marked-up cocktails in the airport terminal as you wait for your flight; you can go get free drinks at the lounge.

Likewise, a rental car salesman working for commission intent on warning you about the recent hail storms in the area may not mention the fact that your credit card actually already offers a damage waiver. But if you have a Visa or American Express card, you could be covered on $50,000 in rental car damage.

The Capital One Venture card, meanwhile, our No. 1 pick for the best travel credit card, offers an auto rental collision damage waiver and travel accident insurance.

So no matter what card you have or are considering getting, read the fine print to ensure you’re taking advantage of the deals available to you. Annual fees can cost hundreds of dollars, and these perks are partly what justifies them.

Jerome and Candace in Mason: We’re both in our early fifties and hoping to retire in about ten years. Is there a recommended amount of stocks versus bonds we should own right now?

Answer: Some online retirement calculators and investing “rules” would say this is an easy question to answer. For example, the “Rule of 100” (sometimes also referred to as the “Rule of 110”) says subtracting your age from 100 (or 110) gives you the percentage of stocks you should have in your investment mix.

But here’s the problem: a rule like this treats everyone with the same age as, well, completely the same! It doesn’t take into account considerations such as your sources of income, your tolerance for stock market risk, or your retirement goals. Your financial situation and retirement dreams are unique to you, so why use a rule that gives “blanket” advice?

Moreover, this generalized type of advice usually suggests a heavy emphasis on bonds for someone nearing retirement. But just getting to retirement isn’t enough. You also want to get through retirement, right? For you, it might make sense to have a little more stock exposure to help beat taxes and inflation. But again, everyone is different.

Plus, specifically regarding the Rule of 100, a lot has changed since it was created. These days, U.S. Treasury bonds are paying a fraction of what they were paying 20 or 30 years ago, meaning the bond portion of your investments are no longer much of “income generator.” Additionally, life expectancies keep creeping upwards, requiring your money to last longer.

Here’s The Simply Money Point: To know how much stock exposure you should have, a personalized financial plan can help. It will analyze your entire financial picture and determine an investment mix of stocks and bonds that’s customized for your needs. This way, you’ll be taking just the right amount of investment risk – no more, no less.

Grace from Batavia: My nephew is physically disabled. Is there something (or some way) we can help him save for some of the healthcare expenses he’ll face for the rest of his life?

Answer: We have some good news for you. In 2014, Congress signed the ABLE (“Achieving a Better Life Experience”) Act. This legislation allows individuals with disabilities to set-up a special account to save money for college and other qualified expenses on a tax-deferred basis. This account is viewed as a supplement to public benefits and private insurance. Each state has its own set of rules and regulations.

In Ohio’s case, the account is called a STABLE (“State Treasury Achieving a Better Life Experience”) account. To qualify, an individual must have developed his/her disability before the age of 26, must have lived with their disability for more than a year, or expect it to last for at least a year. There are also additional criteria involving Social Security benefits.

There are five investment options from which an individual can choose. There’s currently a maximum yearly contribution limit of $15,000 from any person or source, plus, if an individual is employed, he/she can contribute up to additional $12,060 of their own income. The max lifetime limit is $462,000. Earnings grow tax-free, and qualified expenses come out tax-free. An Ohio resident can also get a state income tax deduction for contributions.

An eligible individual, his/her parent or legal guardian, or the holder of a power of attorney can set-up a STABLE account. This can be done for free at www.stableaccount.com. A minimum deposit of $50 is required, but there is no minimum on subsequent deposits. There is a $30 annual account maintenance fee as well as investment fees.

Also of note: an individual does not have to be a resident of Ohio to open a STABLE account (however, the annual maintenance fee will increase to $42). Kentucky also has its own version (only available to Kentucky residents), which you can find at www.stablekentucky.com.

The Simply Money Point is that a STABLE account is a fantastic way for individuals with disabilities to save for the future without hurting their government-assisted benefits. For more information about Ohio’s plan, including eligibility requirements and what counts as a “qualified expense,” visit www.stableaccount.com/faq.

Responses are for informational purposes only and individuals should consider whether any general recommendation in these responses are suitable for their particular circumstances based on investment objectives, financial situation and needs. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing, including a tax advisor and/or attorney.

When it comes to saving money, seeing the world is the No. 1 priority for Americans, according to a new survey.

SunTrust Banks recently revealed that 45 percent of Americans save their money for travel, surpassing saving money for emergency savings, retirement, buying a house and buying a car/truck/motorcycle.

The quarterly National Financial Confidence Index surveyed 2,500 adult Americans representing different ages, incomes and geographic regions. Even when the survey results are broken down by generation, traveling is still the No. 1 reason to set money aside, especially for millennials (at 47 percent.

After travel, 37 percent of Americans put money toward emergency savings; 30 percent for retirement; 21 percent save money to buy a house; and 20 percent save money to buy a car, truck and/or motorcycle.

About one-third of those surveyed reported regularly feeling stressed about money or finances.

“Those who report feeling less stress about money or finances have a higher financial confidence,” says Keith Lerner, SunTrust managing director and chief market strategist. According to the survey, one in five Americans who score highest on financial confidence are more likely to be happier, give to charity and are more satisfied with their freedom to make life choices, like travel.

Indeed, research shows travel can bring happiness. Thomas Gilovich, Irene Blecker Rosenfeld Professor of Psychology at Cornell University, has done countless research on how people get more enjoyment and satisfaction from experiential purchases, like travel, over material purchases. This is especially true for millennials, who would rather travel for experiences than buy a home.

In another report by Expedia, 57 percent of Americans are currently saving money for travel and, even higher, 65 percent of millennials are saving money for travel. A whopping 74 percent of Americans prioritize experiences over products or things.