Is Your Retirement Plan in Need of a New Strategy?
March 24th News Flash: The Congressional Budget Office issues some sobering news – payments from the Social Security system will exceed contributions into the system this year – six years earlier than their most recent forecasts had suggested. We are now facing a $29billion shortfall.
March 22nd News Flash: New Jersey Governor Chris Christie signs into law changes to the state’s public employee retirement system. No longer will part time employees be able to participate in the state program, nor will they be able to collect pensions for more than one state job. Christie calls it a great day for NJ tax payers.
March 18th News Flash: Florida legislators consider a series of changes to the state employee’s retirement program, including changes to the method of calculating benefit payments. Other states may follow suit.
For a week where everyone was said to be focusing on the newly passed health insurance reform bills, it turned out to be a fairly busy one – that’s right, these news items are from one week – and all on the retirement front.
Thirty Years in the Making: In the thirty years since the introduction to the 401(k) plan, the world of retirement planning has undergone a drastic shift, with defined benefit pension plans from private employers becoming nearly extinct in favor of the now popular defined contribution plan. One area that has seemingly been immune from this evolution has been the ranks of government workers, where the traditional pension plan has continued to stand as the core of most retirement plans. As we continue to emerge from a sustained economic slowdown with unemployment remaining near multi-decade highs, the news above points to just a few sobering ways in which workers may be forced to re-evaluate those retirement plans.
It would be naïve, however, to assume that changes like those being considered in the various states right now will mark the end of the changes to the retirement landscape – therefore it’s prudent that all investors take stock of the changes and consider how their own retirement plans might be impacted, regardless of where you are employed. To wit:
- Social Security: The system will need to be reformed in some way to better ensure the long term solvency of the system – which will likely result in some combination of changes to the existing retirement age, tax rates and payout levels.
- Tax Codes: The tax code currently gives favorable treatment to several types of retirement plans (401(k), IRA, Roth IRA, etc) and changes could be announced at any time to change the relative attractiveness of these plans.
- Health Care: For the first time, interest and dividend income of certain taxpayers will be subject to Medicare taxes as part of the health insurance reform package.
The best retirement plans have always been devised to protect investors from future uncertainty. Doing so has generally suggested a focus on potential portfolio returns, inflation rates and how long the investor might need to survive on their retirement income. The news of the last week should serve as a wakeup call to investors, however, that legislative changes and future tax rates also serve as risk factors that cannot be ignored. Now more than ever, it is clear that sound retirement planning calls for diversification both in terms of assets and in the types of accounts in which those assets are held. Given the changes already underway and the potential for more, how are you rethinking your retirement income? Are you making changes to your strategy?
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