Taxes are a ticking time bomb, or rather torpedo.
Despite Trump’s high-profile tax win, the total impact of taxes on a retiree can be absolutely devastating, according to new research published in the Journal of Financial Planning.
It shows that up to 20 million American retirees will be in marginal tax rates as high as 40.7 percent. The reason is that most people only focus on federal tax brackets, whereas the study shows the result of also including Social Security taxes.
The article, “Understanding the Tax Torpedo and Its Implications for Various Retirees,” written by William Reichenstein, Ph.D., CFA, Professor Emeritus, Baylor University and William Meyer, CEO of Retiree, Inc., notes that the recent tax law calls for temporarily lower tax brackets through 2025.
Reichenstein and Meyer said there are steps they can take during the next few years “that could significantly extend the longevity of retirees’ financial portfolios,” something about which they want to educate both financial planners and retirees.
“This study shows the impact of strategically combining a Social Security claiming strategy together with a tax-efficient withdrawal strategy,” Reichenstein said in a statement. “Most Americans don’t understand that Social Security is taxed and that they may be able to reduce their marginal tax rate.”
“Our previous research showed how the Social Security claiming decision can make a person’s money last two to 10 years longer,” Meyer added. “Next, we showed how a tax-efficient withdrawal strategy added another seven years of longevity. In this study, we put the concepts together, including Social Security and Medicare. The study clearly shows a retiree can be taxed at a much higher rate if they only focus on tax brackets.”
Meyer’s suggested plan advisors focus on three clear areas to differentiate themselves and add value to the sponsors they support:
- Social Security is the largest asset many participants have, so help them with it. It should be a part of every retirement discussion. “I recently spoke in front of the U.S. Senate and it’s clear the Social Security Administration is unprepared to help impending retirees. I was engaged by Wells Fargo’s 401k group on this topic last month and 15,000 participants signed up to learn about this topic. Transitioning into retirement starts with Social Security and how 401k balances are withdrawn relative to how participants claim benefits.”
- Retirement income is NOT a product. Annuities and target date funds are good, but people will need to figure out how long their money will last. “Can they retire?” Meyer rhetorically asked. Recent research from Prudential showed that employees who stay at the company are expensive, and add to costs. Plan advisors have to do better to help participants feel confident and ready to retire. This means providing different tools and education on how to transition to retirement.”
- Coordination is imperative. “Right now plan advisors and most plans focus solely on the assets in the plan,” he concluded. “This is not realistic. Families have outside savings, Social Security and other benefits. We need to help pull the pieces together to really see how much money a person needs in retirement.”
With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.
