Month: February 2019

The tax credit you might not know you have

Posted on by planeteria

As America Saves Week approaches at the end of February (February 25-March 2), there is an opportunity to promote a valuable way for low- and middle-income Americans to save for retirement.

The campaign is the brainchild of the Consumer Federation of America, a nonprofit collective of consumer education organizations that aims to help people learn more about money, debt and savings, and to organize their finances. The America Saves website offers numerous stories of people and communities that have benefited from this assistance.

Among the array of savings methods that might appeal to PERA members is the Saver’s Credit. Formerly known as the Retirement Savings Contributions Credit, the Saver’s Credit provides a nonrefundable tax credit worth up to $2,000 ($4,000 for joint filers) to eligible low- and middle-income taxpayers who make contributions to retirement savings accounts such as an IRA or 401(k).

The credit reduces an eligible worker’s tax bill dollar for dollar, helping to offset the cost of funding a retirement account. Saver’s Credit recipients don’t need to be nearing retirement but must be 18 or older and cannot be full-time students or claimed as a dependent on someone else’s tax return.

(If this is the first you’re hearing of this, don’t feel bad: According to TurboTax, only 12 percent of American households with annual incomes under $50,000 realize it’s available to them.)

For 2019, the maximum adjusted gross income to be eligible for the credit is $32,000 per year for single filers, $48,000 for heads of household, and $64,000 for joint filers. Retirement contributions earn a credit of between 10 and 50 percent of the savings amount, depending on level of income, up to the $1,000 maximum. And it’s not a one-time offering. As long as your income meets the requirements, you’re eligible, though the credit decreases as income rises.

The Saver’s Credit was recently cited by retirement experts as being a critical part of helping solve America’s growing retirement crisis, along with promoting automatic retirement savings plans. “By combining [such] automatic retirement savings with a transformation of the Saver’s Credit, Congress can boldly lead America and produce measurable progress for a majority of America’s workers,” said Diane Oakley, executive director of the National Institute on Retirement Security, during her testimony in a February House Ways and Means Committee hearing on the issue. “Acting sooner rather than later will greatly improve our future retirement security.”

Eligible Saver’s Credit participants can claim the credit by using Form 8880, “Credit for Qualified Retirement Savings Contributions.” Visit the IRS website to download the form and review the program’s specific requirements and procedures.

Protecting Shareholder Rights: PERA Advocates for Members and Investors

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Colorado PERA recently submitted two comment letters to the Securities and Exchange Commission (SEC). Together, the letters argue for increased transparency in financial markets that would benefit PERA members and other investors alike.

The first letter, sent in late January and signed by PERA Chief Investment Officer AmyMcGarrity, called for the SEC to allow U.S. investment managers to separate payments for trade executions from investment research costs. This echoed previous PERA views on the most recent Markets in Financial Instruments Directive, or MiFID II, which has required asset managers in Europe to separate out the cost of research from the commissions paid to brokers for executing trades.

As discussed in a previous PERA on the Issues post, McGarrity has called for the SEC to increase pricing transparency by providing clear guidance that would allow U.S. investors to pay directly for research, rather than receiving research as part of a bundle of services paid for by commissions.

McGarrity noted concerns about the “bundling” of investment research with trading costs, which she had also expressed back in 2017. In her January 2019 letter, she wrote that “U.S. investors should not be at an unnecessary disadvantage relative to our European peers.” McGarrity’s actions on behalf of the investor community and the PERA membership were highlighted in a recent article in The Financial Times.

Read McGarrity’s letter.

Continuing the theme of pressing for more disclosure and transparency that benefits both investors and PERA stakeholders, PERA Executive Director Ron Baker joined three dozen public retirement system directors and chief investment officers in signing a letter to the SEC penned by the International Limited Partners Association (ILPA). The ILPA is an organization created “to enhance and improve investor reporting and transparency” for private equity investors and stakeholders.

In the ILPA letter to the SEC, institutional investors called for the SEC to clearly define the fiduciary protections investors require in the private equity market and outlined the actions the Commission should take to ensure investor confidence in the marketplace.

“Strong fiduciary duties are the foundation of the vibrant private markets in the United States,” the letter stated. “These duties of care, loyalty, and good faith foster the trust that give investors confidence to invest with fund managers,” the letter continued.

Read the ILPA letter.

PERA will continue to advocate for investor transparency by joining forces with other institutional investors and investment industry organizations for the benefit of its members and retirees.

For more details on PERA’s investment program, see A closer look at PERA’s investment expenses.

Retirement Roundup: Everything you need to do before you retire

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A digest of timely information and insight about finance, investing, and retirement.

Everything you need to do before you retire | MarketWatch
Retirement is a monumental transition in a person’s life, and it shouldn’t be taken lightly. Every aspect of life is affected by the decision to retire, including relationships, health and wellness, and of course finances. Couples in particular are learning how to share their hopes and fears about retirement with one another, and looking for ways to stay active in place of their careers. “The key to a happy retirement is in the planning done during the years leading up to retirement,” said Howard Pressman, partner at EBW Financial Planning in Vienna, Va. “Not just financial planning but taking the time to envision their lives in retirement.”

3 strategies that are proven to increase retirement happiness | Forbes
How can you prepare for a successful retirement? It depends on who you ask, but traditional retirement planning has always focused on the numbers: How much have you saved? How much has your portfolio grown? What’s in your 401(k)? Are your investments tax efficient or should you consider a new investment strategy? – and that’s typically as far as most people go when it comes to evaluating whether or not they’ve prepared enough for a successful retirement. They’re not wrong, though. It would be extremely difficult to find satisfaction in retirement without any money, so it’s critical to evaluate your finances, projected growth and future expenses. But how can you take it to the next level and find true retirement satisfaction?

Health shocks drive many to retire earlier than planned | PlanSponsor
The Center for Retirement Research at Boston College (CRR) has published a new report looking into what issues commonly hold workers back from staying in the labor force beyond the age of 65. According to the report, several studies have found that a deterioration in health precipitates early retirement. Other influences on early retirement include changes in marital status and the presence of employer buyout offers, the authors write. “But no study to date has examined all of the factors together, making it difficult to say which one matters the most,” the brief says.

What do 2018 midterms mean for retirement policy and legislation? | Pew Trusts
The 2018 midterm elections changed the landscape for retirement policy, upending the status quo but still leaving the prospects uncertain for efforts to increase savings among private sector workers. At the federal level, a Democratic majority in the House brings divided government and new committee leadership. In the Senate, retirements and election losses have meant changes in the leadership and makeup of key committees. In the states, several legislatures and governorships have changed hands, resulting in new directions and policy agendas for addressing a nationwide problem. The Pew Charitable Trusts explored the prospects for federal legislation in an August brief, “Will Congress Act on Retirement Savings?” The start of the 116th Congress provides an opportunity to update that review with a look at what could be ahead over the next two years. [Read about Colorado’s 2019 legislative session here.]

How to save for retirement in every decade of your life | Men’s Health
Unlike cholesterol, blood pressure, and the time it takes to run a mile, savings may be one of those few things you actually want increasing with age. And no mater your age, there’s always a way to add a bit more to that savings pot. Arielle O’Shea, a finance journalist for NerdWallet, helps navigate the decades to reach retirement goals.

6 ways retirement has changed over the past 25 years | Kiplinger
Twenty-five years ago, Kiplinger’s Retirement Report launched to help readers enjoy a richer retirement. The first issue, published in February 1994, offered guidance on timely issues of the day, such as how to take advantage of the home-sale-profit exclusion (then $125,000) and how to comply with new rules that for the first time required a receipt for charitable donations of $250 or more. Some advice, such as how to figure tax on Social Security benefits, proved to be evergreen. In celebration of their 25th anniversary, Kiplinger’s asked some top financial and retirement experts to share their thoughts on how retirement has evolved in the past 25 years and how it might change in the years ahead.

New WEP/GPO repeal bill needs broader support to become law

Posted on by planeteria

When the 116th Congress convened in Washington, D.C., in January, a familiar proposal quickly rose again. The question is whether it has any chance of being signed into law.

The bipartisan Social Security Fairness Act of 2019 (H.R. 141) would amend part of the Social Security Act by repealing the Government Pension Offset (GPO) and the Windfall Elimination Provision (WEP). H.R. 141 is designed to address two provisions that reduce or eliminate Social Security benefits paid to public service employees (and their spouses) who spend the majority of their careers working for employers that do not participate in Social Security.

The WEP can reduce earned Social Security benefits for people who also receive a public pension through a job that’s not covered by Social Security, as is the case for most Colorado PERA-members. The GPO covers public employees who are eligible to receive spousal benefits and also worked in non-Social Security covered positions. Currently, the amount of each reduction is determined by formulas that include years of service in the private and public sectors and monthly retirement benefit amounts. The WEP and GPO do not affect the amount of a PERA benefit.

Federal legislation to reform the GPO and WEP has been introduced on a frequent basis: One previously introduced WEP/GPO bill called for using a Social Security benefit formula based on a person’s entire working career, but instead, H.R. 141 is similar to a proposal introduced in 2017 that called for a repeal of the WEP and GPO entirely.

Previous bills that have been proposed in the past have not progressed very far through the ratification process. Public employees say it’s unfair that they’re financially penalized for their career choices, but opponents argue that repealing these provisions would over-correct the system too far in the opposite direction, making it unfair to those who never worked in the public sector. Still otherspoint to the cost involved in repealing the WEP and GPO and the negative impact increased Social Security payments would have on the already stressed Social Security trust fund.

These still-unresolved arguments make the passage of this latest bill unlikely, despite its bipartisan support. The only Colorado member of Congress who has signed on to support this version so far is Rep. Scott Tipton (R-CO 3). PERA members and retirees who would like to see H.R. 141 passed—or at least debated or amended further—should contact their member of Congress and encourage them to support this legislation. The complete list of cosponsors is here. The U.S. House of Representatives’ website has a tool that matches ZIP codes and U.S. Congressional Representatives.

For moreinformation about how the GPO and WEP are calculated, the PERA website has this fact sheet, as well as a helpful video on YouTube.

Other useful resources:

WEP calculator

GPO calculator

Retirement Roundup: The big, surprising cost in retirement no one plans for, but should

Posted on by planeteria

A digest of timely information and insight about finance, investing, and retirement.

The big, surprising cost in retirement no one plans for, but should | Forbes
For most older Americans, driving is not a choice, it is a necessity. Transportation is often taken for granted but it is critical to living well at any age. Yet most people, including many financial advisors, are surprised to learn that transportation is the second largest cost in retirement. According to the Bureau of Labor Statistics, the top five expenses for people 65 years old and older are housing, transportation, health care, entertainment, and food. Transportation costs an average 65-year old head of household more than $7,100 a year compared to health care, which is often, and incorrectly, identified as the second greatest expense in retirement at $6,300 annually.

As retiree health care costs soar, public employers turn to private insurers | Governing
The cost of retiree health care is spiraling out of control. In just two years, according to a recent S&P Global Ratings report, unfunded retiree health care liabilities across the 50 states increased by $100 billion to now just under $700 billion. In response, some public entities are scrapping government-sponsored health plans and instead paying for retirees to purchase a plan on a private health insurance exchange. The change is expected to save some cities hundreds of millions of dollars and make their annual retiree health care costs more predictable.

Whyyou should take a vacation in retirement | US News
While many people imagine retirement as a permanent vacation, it isn’t. Retirement is more like a stay-at-home vacation. You’re not going to work, but you still have all your usual responsibilities, whether it’s taking care of the house and yard, doing your volunteer job or taking care of grandchildren. To really relax and take time off, you have to get away from home.

This retirement plan feature can help save on taxes—if you can find it at work | CNBC

If you’re looking for a strategy to slash your tax bill in retirement, your employer just might have the answer. You’re probably familiar with the traditional 401(k) — the workplace retirement savings plan where you can stash pretax dollars and have them accumulate on a tax-deferred basis. What you may not know is that many companies are now offering a Roth 401(k) option as well. You can stash after-tax dollars in these accounts, have them accumulate free of taxes and take tax-free withdrawals in retirement, provided you meet a set of conditions.

Howall 50 states tax retirees | Kiplinger
Retirees relocate for lots of different reasons, from the weather to proximity to grandchildren. Moving from a pricey part of the country to one with low housing prices could also lower your expenses and make your retirement savings last longer. But as you consider the cost of living in potential retirement destinations, don’t overlook the impact of state taxes on your bottom line.

The big problem with 56 percent of people retiring earlier than expected | Yahoo Finance
Early retirement is far more common than people realize, and it’s often unplanned. Retiring early may sound like cause for celebration, and it is for some, but for many people, early retirement can strain finances and cause stress. Few people who retire ahead of schedule do so because they can afford it. According to a recent Transamerica survey, 56 percent of retirees reported retiring earlier than they had planned. Of those, only 11 percent did so because they had saved enough money — the rest citing employment-related reasons like job loss or family and health-related reasons like an illness or sick family member.

Why a teacher’s defined benefit retirement plan outshines a 401(k)

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The vast majority of Colorado teachers will have a more stable, secure retirement because of Colorado PERA’s defined benefit style retirement plan, compared to a 401(k)-type option. That’s according to a new report jointly released by the National Institute on Retirement Security (NIRS) and the UC Berkeley Labor Center.

Critics of public pensions often argue that high attrition rates among new teachers mean that 401(k)-type retirement plans make more financial sense than established defined benefit (DB) plans for all educators. These contentions usually include claims that choosing, or being forced into, 401(k) plans wouldn’t harm teachers’ retirement security in the long run. But new research suggests that these conclusions are based on narrow interpretations of employment data and that they could hardly be further from the truth.

The study lays out compelling evidence that migrating teachers away from existing pension plans like Colorado PERA’s and into 401(k) savings options “would sharply reduce the retirement income security of teachers who account for a large majority of educational labor.” The report adds that such moves hamper teacher recruitment and retention, resulting in lower educator quality.

The study examined six states—Colorado, Connecticut, Georgia, Kentucky, Missouri, and Texas—chosen because they represent a geographic and demographic cross-section of the United States. Researchers found that 65 percent of all teachers will have worked for at least 20 years before they leave their careers, and that 77 percent of teachers’ retirement benefits will surpass what they could receive under an idealized 401(k) plan—meaning, a plan with low fees and professional management.

Skeptics tend to lean heavily on high turnover rates among young teachers when making their anti-pension arguments. While it’s true that a higher proportion of younger teachers leave for other professions during their first five years, once they’ve cleared that threshold, attrition drops sharply and remains low until retirement age. In fact, the “typical” teachers studied will serve 25 years in the same state and retire around age 58; in Colorado, the median age teachers retire is 57, after a median total of 17 years of service, and 48 percent of all Colorado teachers will stay in the profession until retirement age. See this graphic.

For those who have committed to teaching as a career, the debate between a DB plan and a 401(k) is no contest: According to the authors, 81 percent of Colorado’s teachers are economically better off choosing the PERA DB plan versus an idealized 401(k) plan with a 0.25 percent annual fee (compared to a 77 percent average for all six states in the study). Not only that, any teachers who start working at age 25 and serve for 30 years would have to contribute 100 percent more every pay period into their 401(k) to earn the same benefit as they would get from their DB plan contributions; in effect, they’d have to double what comes out of each check—while tracking and adjusting their own investments—just to barely equal their no-maintenance DB option.

Further, the PERA DB plan account is portable and can be left for a future benefit or rolled over to another retirement plan. Members always receive the value of their contributions (plus interest and if eligible a matching amount) when withdrawing an account – something that promoters of 401(k)-type plans often mischaracterize or fail to mention. Evidence of the value of PERA’s DB plan was presented in 2015 when an independent evaluation found PERA’s DB retirement plan to be more efficient and effective than other types of retirement plans, including 401(k)s.

See Pensions are Better infographic.