Jason and Emilia discuss retirement in Trump’s America.
Below is the full transcript:
Announcer: Welcome back, America, to Sound Retirement Radio where we bring you concepts, ideas and strategies designed to help you achieve clarity, confidence and freedom as you prepare for and transition through retirement. Now, here is your host, Jason Parker.
Jason: America, welcome back to another round of Sound Retirement Radio. So glad to have you tuned in, in this morning. As you know, we like to start the morning right two way, first, by renewing our mind and then, second with a fun joke to share with the grandkids. It is my good fortune to have Emilia Bernal in the studio with me this morning. Emilia, welcome back.
Emilia: Thank you. Good morning.
Jason: Good morning. The title of this show could be a little bit controversial. It is number 140, Retirement in Trump’s America, and so we’ll get into that in just a minute but before we do, let me share a verse so the … to renew our mind. We have verse Proverbs 13, verse 7. “One person pretends to be rich, yet has nothing. Another pretends to be poor, yet has great wealth.” Let me say that again because I kind of stumbled over it. “One person pretends to be rich, yet has nothing. Another pretends to be poor, yet has great wealth.” We see that all the time. Sometimes, the people showing up driving the Mercedes aren’t necessarily the people with the most money in the banks.
Emilia: True that. My husband always says that people that have the nicer cars are usually the ones that don’t know how to save. All right. I’m going to give you the joke of the day. What do you call a boomerang that doesn’t come back?
Jason: I don’t know. What do you call a boomerang that doesn’t come back?
Emilia: A stick.
Jason: I like it. That’s awesome. Okay, so retirement in Trump’s America. Let’s get started with episode number 140.
Emilia: Sounds great. Why are we doing a show called Retirement in Trump’s America?
Jason: Well, a couple things to say. First of all, people generally are going to fall into one of three camps here. They either are people that really like President Trump and the current administration, people that really don’t like President Trump and the current administration and then, the third group would be the folks that say, “Hey, whoever’s president, we’re going to respect him, we’re going to pray for him and just hope for the best for America.”
I think it’s important to understand that as a financial advisor, our job isn’t to take sides and create a political debate or political discussion. Our job is to help understand the policy that’s being talked about and being implemented and being proposed by our elective representatives so that the people that we serve can use that information to make the best decisions about their retirement going forward. It really brings to light public policy risk. Public policy risk is something that everybody’s exposed to because we all live in this country. We all vote for our elected representatives hopefully, and so we all have to both benefit from those decisions and pay the price for the decisions that our country’s moving in. That being said, the purpose of this is just to help us understand some of the policy changes that are being proposed and talked about and then from a planning perspective, what people should be thinking about.
Emilia: Great. As we begin the show, let’s start with healthcare and Medicare.
Jason: Yeah. This is really where I hear a lot of the concerns. First of all, with Medicare, there wasn’t a lot of change to Medicare. There were a couple of things in terms of how people are going to be reimbursed. There’s some talk about the Medicare trust funds. If we were to repeal the Affordable Care Act completely because there were some provisions in there about trying to reduce Medicare costs and … it could result in people’s Part B premiums being higher. It could put some strain on the Medicare trust funds that are available for hospital insurance and some of those types of things.
For the most part, the average person out there really didn’t feel any impact as a result of the Affordable Care Act if they were already on Medicare. There wasn’t a big impact to most people. I would expect that if the Affordable Care Act were completely repealed, which part of why there’s so much uncertainty about this is that Congress, even though the Republicans hold a majority in the house of the Senate and they have the presidency, they haven’t been able to agree on the best path forward for dealing with healthcare.
Repealing the Affordable Care Act obviously wasn’t popular. Coming up with a plan to replace it, they haven’t been able to get the votes to make it happen so that’s where there’s the most uncertainty especially, I would say, Emilia, for folks that are getting ready to retire early. Maybe they’re going to retire at 56 or 59. For a lot of those folks, their biggest single expense in retirement is their health insurance premiums. Right now today in Washington State, for a married couple, for a high-deductible health insurance plan, if they’re retiring early, they’re probably going to be looking at $1,200 easily, $1,200 a month in health insurance premiums. I was out with a friend of mine the other day. He’s 62 and he said he has no debt, no mortgage, no car payments, everything’s paid off. His biggest expense in retirement are his insurance costs so, that’s … Yeah.
Emilia: Wow. It’s actually more necessary as you get older.
Jason: That is the thing. Most of us don’t tend to get healthier with age. Unfortunately, we don’t have a lot of clarity on healthcare or Medicare and so we just need to kind of hold the line and not do anything radical but we’ll see how that plays out.
Emilia: Sounds great. Sorry. Have any changes been proposed to Social Security then?
Jason: Well, most people, when they think of Social Security, they think of it as a retirement benefit. For the retirement benefit, no, there’s no real significant changes. Social Security is such a wonderful program because you’ve paid into it for a long time. It’s tax-efficient income under … People can look up the provisional income rules to understand how that works but right now, in a worst case scenario, only 85 cents of every dollar that you receive from Social Security is taxable too. It’s tax-advantaged income. It’s inflation-adjusted income. There is a benefit for a spouse and there’s also a survivor benefit and there’s widow’s benefit.
There’s some really great benefits to Social Security that a lot of people don’t think about, so from a retirement standpoint, no big concerns there. There has been some talk … A Republican … I can’t remember his name now off the top of my head but he did testify before Congress that he thought the for retirement age should be increased which wouldn’t surprise me. That’s kind of been happening already. Most people know if they’re born before 1943 and 1954, their retirement age is 66. For me, my for retirement age is 67 and so it wouldn’t surprise me one bit if … As people are living longer, maybe the for retirement age would be extended but nothing official there on Social Security.
Now, the piece in the current budget proposal, there has been a recommendation to significantly reduce Social Security disability insurance spending, SSDI. Most people, when they think about Social Security, they’re not thinking of the disability portion but there is talk about significantly changing how that works. While there’s been no talk about change to Social Security retirement, there is the Social Security disability component that people should be thinking about.
Emilia: That’s good. Good information there. Let’s go onto the next portion here is, what is President Trump’s tax plan?
Jason: Yeah. This is where things kind of get fun actually. The President has said that he wants to see the tax code simplified and he wants both corporations and individuals to pay less money in taxes. Here’s what we know in terms of the proposal that’s out there right now. The first thing, and one of the things I think was most significant, was the doubling of the standard deduction. Right now, that’s about a little over $12,000 for a married couple and the proposal, if we were to double that, we’d be looking at $24,000 standard deduction. Yeah, that’s a big deal.
One of the things that that potentially could do is simplify the tax code because right now, a lot of people, their biggest itemized deductions are charitable contributions and mortgage interest but the only time you itemize is if your itemized deductions, or the only time it really matters is if your itemized deductions are greater than your standard deduction. For many people, they may no longer have to itemize if the standard deduction is double. That’s a big deal. That’s putting more money in people’s pockets, day one.
The second thing is there’s talk or it’s been proposed to reduce the tax brackets. We have seven currently down to just three. Right now, the top tax bracket in our country is 39 and ½% approximately. Under the new proposal, the top … There would only be three tax brackets. They would be 35%, 25% and 10%. Now, what we don’t know is when, based on your income, those tax brackets come into play. Right now, from my experience, a lot of the people that we serve are in the 15% marginal income tax bracket and you’ll notice, under these three proposed, there is no 15%. There’s a 10, a 25 and a 35. I don’t know if that means that the people that are currently in the 15 are going to be moved up to the 25 or if the people in the 15 are going to be bumped down to the 10 because there’s not a lot of clarity about when those tax brackets come into play.
The next is the repeal of the alternative minimum tax and so, some people are impacted by this, not that many. I’m not going to spend a lot of time on that one. Eliminate the estate taxes. Again, this is an area that’s probably not going to affect most retirees. The federal estate tax right now is up over $11 million, so unless our listeners out there have more than $11 million, there’s probably not a lot of concern for most retirees about eliminating the federal estate tax.
There’s talk about reducing corporate tax rates from 35% to 15%. Now, this could impact everybody in a positive way. I mean generally speaking, if companies have more money to spend and more of it’s going into research and development, it’s going into hiring people, because corporations are really just the … are just people, people that work, have jobs at companies that figure out ways to add products and services to people’s lives and so, if companies are incentivized by being able to have more money to spend to build their companies, to figure out better ways to provide products and services to people, that could end up being a good thing for Americans. It could help improve the workforce and just keep more money right here in our country. That’s what it’s intended to do. I don’t know if that’s exactly how it will work but that’s the hope.
One of the things that surprised me was an increase in the capital gains rate. Right now, capital gains rate for some people can be as low as 0% depending on the tax bracket they’re in but for many people, it’s 15% is the long term capital gains rate. There is talk about increasing the long term capital gains rate back to more the average. Over time, the long term capital gains rate has been closer to 20% and so there’s talk about or it’s been proposed to increase the long term capital gains rate from 15% to 20% but the other advantage there is they’re also going to repeal the 3.8% Obamacare net investment income tax. While capital gains rates will be going up, people won’t be hit with this additional 3.8% Obamacare net investment income tax.
The bottom line is this when it comes to taxes. Most people’s money is tied up in retirement accounts, 401Ks, 403Bs, TSPs, IRAs, accounts that have never been taxed and that money has been allowed to … They got a tax reduction at the time that they contributed to those. They didn’t have to pay taxes on the money at the time they contributed. That money has grown tax deferred all these years but when people turn 70 and a half, because of the required minimum distribution rules, they have to start taking money out of those accounts even if they don’t want to. Many times, those accounts, especially with the stock market that we’ve been having, they’ve grown to sizable amounts. It’s not uncommon for us today to see people with $500,000 easily in their retirement accounts. Many people have over a million dollars in those retirement accounts and none of money has ever been taxed.
One of the things we have to be thinking about is we have, right now, some very low tax rates in our country and maybe they could be going lower under this new administration’s proposal but the question becomes with our national debt continuing to grow, we’re almost at $20 trillion, does it make sense to start paying taxes on some of that money now by doing conversions from those traditional accounts to something more like a Roth IRA? It’s hard to know whether or not that’s the right course of action to take until you sit down and you crunch the numbers. You need to do a retirement cash flow plan first and then you need to look and see strategically how would you go about doing those types of conversions.
I always recommend everybody … Our firm, we’re not a CPA firm. We’re not a tax advisory firm. We’re an investment advisory firm and a financial … We do financial planning for people, retirement planning for people to help them make this transition. You always want to get good advice from a tax professional before you do anything that could potentially have a significant impact on your taxes but tax decisions are added bonuses to a good retirement plan. They shouldn’t be the driving force. Retirement’s all about cash flow. It’s not about taxes but if you have a million dollars and you’re in the 25% tax bracket, well, $250,000 in that retirement account may not be yours. That might be Uncle Sam’s money. You just need to be thinking about the best way to get the money out of those accounts and maybe it’s to wait till 70 and a half, maybe it’s to take the money out earlier. Maybe you should be doing conversions but those are things people should be thinking about from a tax standpoint.
Emilia: Great. I hope our listeners are taking a lot of this in. It’s really important, up-to-date information. We’ll go on then. How will federal employees be affected by the proposed budget?
Jason: Yeah. This is one that we … and I think partly because we live in a community where there are a lot of federal employees. We have a lot of people that currently work under the Federal Employees Retirement System program and still a few that come in under the old Civil Service Retirement System, so FERS and CSRS are how they’re often referred to. Under the proposed budget, we did see some things that were pretty significant. I’ll just hit on the highlights here. Number one is increasing federal employees’ contributions for workers. Well, first of all, let me back up and explain why this is being proposed. The congressional budget office, CBO says that the cost of benefits for the Federal Employees Retirement System was 47% higher for federal employees than for private sector employees.
Jason: 47% higher for federal employees than for private sector employees. It’s the private sector, the taxes that are being generated from the private sector that fuel our federal government and a lot of people in the private sector don’t feel like federal employees should be getting a better retirement package and that people that are paying the taxes to support that. That’s understandable. Now, at the same time, federal employees, they feel entitled and they work for the federal government for a long time. They want to protect what they feel is something they’ve worked for and earned. You see both sides of the equation but obviously, people that are going to be impacted negatively by this are going to be opposed to it and taxpayers, the people that are small business owners that are paying for the federal employees’ wages, they’re probably going to be in favor of reducing some of these expenses.
Here’s what it looks like. First of all, making federal employees contribute more towards their benefits. They’re talking about changing the way that pensions are determined for federal employees. Right now, it’s based on a high three and so they’re saying it would be based on a high five which means the more you average something, the less it’s probably going to be. It could be that future pension would be less money. Now, a lot of people in corporate America today don’t have a pension. There is no guaranteed income. While the federal employees may not like the fact that their pension will be less, they still have one. A lot of people don’t have that.
Emilia: Exactly, yes.
Jason: They also have proposed eliminating the cost of living allowance for current and future FERS recipients, Federal Employees Retirement System. The argument there is that FERS recipients, while they get a pension from the federal government, they’re also eligible for Social Security and Social Security does have a cost of living allowance built into it and so the argument is that because they would still be getting their Social Security and their cost of living allowance, that they don’t also need a cost of living allowance for their federal pension. The proposed cutting the COLA for the CSRS by half a percent, .5%, so CSRS recipients, they take a kind of a big hit when it comes to Social Security. They don’t get their full Social Security benefit based on the Windfall Elimination Provision and government pension offset rules so they do have a COLA they’re probably more dependent on but there’s talk about changing that for them as well.
Here’s one that is probably going to be a shocker and a surprise for people that are in the private sector that don’t know that this exists but one of the things that federal employees have right now is something called the supplemental payments for FERS retirees. What this does is for people that have worked for the federal government for 30 years, they can retire as early as 56 and the federal government, as kind of this added pension almost, pay … they pay a supplement that’s about 75% of what their Social Security benefit would be from 56 until they’re eligible for Social Security at 62. It’s almost like they get a pension but then they also get this additional supplement so if they retire at 59, because you’re not eligible for Social Security at all until 62 and so this just gives them this little additional income to help buy them time until they’re eligible for Social Security. Again, people in the private sector have nothing like this.
Emilia: No, yeah.
Jason: You can understand why people don’t like the idea of paying these lofty, better than average benefits for folks when the majority of Americans aren’t receiving those. It does make me think. If you’re one of our elected leaders, one of our congressmen or representatives, it really doesn’t feel right that they should be getting the cream of the crop in terms of healthcare benefits, retirement benefits. I mean, if the average American that’s paying the taxes to support these things, I mean we all should be on the same playing field. There’s no reason. I don’t think our elected officials deserve anything better than the average American. I think the first thing that our elected leaders really should do if they’re going to be righteous, fair people is to say, “Hey, regardless of what happens with the rest of the federal employment staff, let’s, as the leaders of this country, do what’s right by the way of the American people and not take the best of the best in terms of retirement benefits.” That’s what I think would be the right thing to do but … Those are the big changes that people should be thinking about in terms of if they’re current or under the FERS program or the CSRS program.
Emilia: All right. Jason, how likely will any of this actually happen?
Jason: There you go. Exactly. Again, the Republicans hold the majority in the House, the Senate and the presidency and they weren’t able, even though for years they’ve been saying eliminate, get rid of the Affordable Care Act, it’s killing America, the reality is when push comes to shove, when it really comes to the rubber hitting the road, these guys have been unable to agree on the best path forward. Whether it’s tax reform, a budget, healthcare, at this point, I don’t know that we’re going to see any of this stuff get through because there’s just not a unified … There doesn’t seem to be a unified mission amongst Republicans and Democrats to move our country forward. I think that’s what most people want. I think most people are tired of this bickering between Republicans and Democrats and independents and green party and all this. We’re Americans and we just … we want to move this country forward.
Now, of course, we have different ideas about what that looks like but it just underlines and underscores public policy risks. A lot of people are dependent on Social Security, Medicare, Federal Employees Retirement System and one administration can come in and make one thing happen and another administration can come in and take it away and change it.
Emilia: I know you’ve mentioned a lot of times too how the stock market’s been doing. How has the stock market responded since Trump was elected?
Jason: It’s responded very well. Yeah. If you look at the S&P 500 from November 7th, 2016 until today, it’s up almost 18%, over 17%. Yeah, we’ve seen this incredible rally. What’s a little bit concerning about that is the market’s been expensive for some time and most people would recognize that. I mean if you look at the price to earnings of the market on a cyclically adjusted basis, a couple of years ago, even Janet Yellen came out and talked about how she was concerned about prices but companies … The profits continue to roll in. We see unemployment at all-time lows. There’s a lot of reasons to believe people are very bullish on the fact that if we get these tax cuts, it’s just going to bring that much more money into our country and that America’s healthy and that we’re strong and that we’re producing goods and services that justify these higher prices. The problem is over a long period of time, price to earnings on a cyclically adjusted basis hasn’t been sustainable at this level.
Emilia: I think you answered my next question then. Is it going to be able to rally and last? Will this last?
Jason: Well, that’s hard to say. Nobody has a crystal ball when it comes to the stock market. What we know for certain is that the stock market’s generally a volatile place. What we’ve experienced in the last couple of months is just this market that keeps going up and up and up and it’s kind of like that old story where you put a frog and water and you start turning up the heat and the frog doesn’t jump out because it’s not boiling water. I think a lot of people are starting to experience that maybe, this slow cooking of a frog that’s taking place.
The market never goes straight up. I mean given a long enough period of time, the market’s going to go up. A hundred years from now, I’m confident the market’s going to be higher than it is today. The concern for most retirees though is do they have enough time in the short term, because the worst case scenario would be they retire, the market tanks and they’re pulling money out of their portfolio. That would be a hard place to be. That being said, you shouldn’t rush out and make radical changes to your planning based on the current administration or any administration for that matter.
Emilia: The water’s not boiling yet.
Jason: Well, it’s getting pretty hot but with that, we’re out of time. Until next week, Emilia. Thanks for being here.
Emilia: Thank you.
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