4 Public Policy Risks to Retirement-Katey Troutman

Source: Thinkstock

Retirement can be a scary thing for many Americans, particularly in recent years; the whole institution seems to have a gloomy cloud of uncertainty hanging over it these days, and experts continue to roll out articles which contribute to that rather disheartening outlook.
And while it’s true that Americans ought to be on their toes when it comes to retirement, with the right amount of flexibility, most risks can be managed. Some risks, however, are easier to prepare for than others, and while changes to public policy might give soon-to-be retirees a bit more of a heads-up than other, more unexpected risks like “black swan” market events and other timing risks, they can still create headaches.
“Increases in taxes, new types of taxes, evolving healthcare reform or changes in programs like Social Security, Medicare and Medicaid can have a significant impact on your income in retirement,” notes the Principal Financial Group. “Though shifts in public policy are out of your control, you can help yourself by creating a strategy for your personal situation.”
The traditional “three-legged stool” approach to retirement is definitely changing, or shifting, at the very least. Traditionally, Americans have been advised to plan and save for retirement using a combination of Social Security, employer pension plans, and personal savings and investments. That model may be a bit outdated now, especially considering that for a good deal of the working population, employer-provided pension plans are a thing of the past, or simply never were to begin with.
There have been a number of recent public policy changes which could affect older workers, particularly in the aftermath of Obama’s 2015 budget; here are what we believe to be the four biggest risks to retirement.

4. A new “cap” on wealth inside traditional IRAs

Obama’s 2015 budget includes a proposal to place a limit or “cap” on the amount of wealth inside a traditional IRA; this means that no further contributions or accruals would be allowed into a retiree’s IRA after the individual has enough assets to fund a “secure retirement,” according to a recent report from Forbes.
So just what, exactly, does the government consider a “secure retirement”? Well, the good news is that for most Americans, the wealth cap is unlikely to have much of an affect; the government considers “secure retirement” to be up to $3.2 million. It is, however, important to note that for wealthy Americans, this could have a big impact, and wealthy Americans approaching retirement age may need to make some adjustments to their retirement plans if they wish to maintain their current standard of living post-retirement.
One issue with the new cap that may have a more widespread affect is that the government will take into consideration all of your other assets when determining whether you have reached the “wealth cap” of $3.2 million; that is, your 401(k), 403(b), and traditional IRA would all count towards the cap.
Dr. VanDerhei at the Employee Benefit Research Institute notes that it’s possible that the cap would affect one in every ten people saving with a 401(k), and could cause a serious reduction in some retirees lifestyles, though it would primarily affect wealthier individuals who are accustomed to a certain higher standard of living during their working years.

3. Minimum distribution requirements for Roth IRAs

Americans planning for retirement are often advised to utilize Roth IRAs, and for good reason. As RothIRA.com says, “Roth IRAs are tax-free when you follow the rules.” Additionally, one of the major benefits to a Roth IRA is the fact that there a no mandatory withdrawals, unlike a traditional IRA, which requires you to withdraw a minimum amount by the age of 70 1/2. “This is particularly useful for estate planning purposes,” notes RothIRA.com, because “it allows the account balance to continue to grow.”
Many Americans successfully utilize Roth IRAs later in their retirement, and put off withdrawals form the account to allow the balance to grow still further, even after they’ve retired.
Again, the 2015 budget proposal throws a wrench in that plan. According to the Treasury Department, “the proposal would harmonzie the application of the MRD requirements for holders of designated Roth accounts and of Roth IRAs by generally treating Roth IRAs in the same manner as all other tax-favored retirement accounts, i.e., requiring distributions to begin shortly after age 70 1/2.”
This measure would essentially nullify many of the strategic reasons why Americans choose to put their money in Roth IRAs in the first place, as it could potentially require retirees to take out more money than they need, potentially pushing them into a higher tax bracket unnecessarily.
Regardless of the changes proposed in the 2015 budget, it’s always a good idea to diversify, especially when the future of retirement as we know it seems uncertain. Clearly we are in the midst of a shift, and spreading out your assets in include a combination of taxable, tax-deferred and tax-exempt accounts allows for greater flexibility. “It’s important to have enough flexibility and liquidity in the plan to react to changes,” says a report from the American College financial advisors program.

2. Potential changes to Medicare and Medicaid

Health care costs are without-a-doubt the largest expense retirees need to be mindful of; according to Principal Financial Group. For example, a couple who retired at 65 in 2012 can expect to pay $227,000 in healthcare costs during retirement, and Prudential notes that nursing home costs are some of the largest possible retirement expenses, with the average annual cost of a private room coming in a $75,000 and a shared room coming in at $67,000.
Women, in particular, should save more for potential healthcare costs as statistically women both live longer and require more healthcare services in retirement, AARP notes. In 2007, the report found that women spent a median of $3,319 out-of-pocket on medical expenses, compared to just $2,948 for men, even though women are more likely to have supplemental insurance, such as Medicare or Medigap than men. For this reason, women could be profoundly affected by changes to government healthcare programs.
The Society of Actuaries cites, “increases in retiree contributions for Medicare,” “tighter income standards for Medicaid and other means-tested programs,” among the possible future changes likely to affect retirees, and notes that “higher payments by high-income retirees are already scheduled” to go into effect. The Society of Actuaries report also notes that “reductions in Medicaid programs and in support for long-term care can reduce the supply of quality providers and facilities in total, affecting both individuals and the broader population.”

1. A decrease in Social Security benefits and other changes

Social Security has long been the boogeyman when it comes to retirement worries, and changes to Social Security are still possible. In fact, most financial planners agree that if you’re far from retirement (say in your early to mid 30s) you should expect that benefits will be significantly less by the time you expect to retire, and that you should plan accordingly.
“It has generally been acknowledged that while funds presently exist to pay current levels of Social Security benefits, there is a long-term solvency problem,” a Prudential report notes.”An eventual solution is likely to involve tax increases, eligibility changes, benefit cuts, or some combination of these measures.”
Social security currently accounts for about 38 percent of an elderly person’s retirement income. The government is currently seeking to “eliminate aggressive Social Security claiming strategies, which allow upper-income beneficiaries to manipulate the timing of collection of Social Security benefits in order to maximize delayed retirement credits.”
The good news is that, as a Society of Actuaries report says, “historically Congress has been very reluctant to reduce benefits promised to current retirees. Older workers may also escape benefit reductions,” but the report notes that “younger workers future government benefits are less safe from reduction.”

culled from wallstreetcheatsheet