Tax efficiency, Social Security and drawdowns
Some retirement researchers challenge traditional thinking on preservation of tax-sheltered investments.
It’s a long-standing principle of retirement drawdown strategies: preserve the tax-saving benefits of tax-sheltered investments as long as possible.
But there’s no-one-size-fits-all rule here, and these days a growing number of retirement researchers are pointing to a different approach: tap tax-deferred accounts first in the early years of retirement in order to reduce the total lifetime tax burden. The idea is to use dollars in 401(k) or IRA accounts to meet living expenses - or convert a portion of these assets to Roth IRA accounts - before claiming Social Security in years when your marginal tax rate is lower than it will be after you start to receive benefits.
This approach takes advantage of Social Security’s valuable delayed claiming credits while minimizing taxes on ordinary income. It also can help avoid or minimize taxes on Social Security benefits and Medicare income-related monthly adjustment amounts (IRMAA) levied on high-income retirees, and the net investment income surtax.
Learn more in my new Morningstar column.
What happened with reverse mortages?
Whatever happened to the mainstreaming of reverse mortgages in retirement plans?
Retirement researchers have been pushing the idea for years, arguing that despite the high costs, it makes sense to consider the benefits of reverse loans as a way to tap home equity in retirement.
But loan activity remains flat. Volume for home equity conversion mortgages (HECM) finished 2021 at 53,020 loans—an 18.7% bump from 2020 but still in the range where originations have bounced around since 2012, according to Reverse Market Insight. And, loan volume is far below the peak year of 2008, when 115,000 loans originated. From a market penetration standpoint, HECMs are barely a blip - just 2% of eligible households.
In my latest WealthManagement.com column, I examined attitudes and acceptance for HECMs among financial planners on behalf of clients.
Legislation would expand one-stop shop for health services in community
Last year, I wrote for The New York Times about the growing challenges of providing home-based care as more older people look for ways to stay out of institutional settings. The challenges facing seniors - and communities - have become acute in the wake of the pandemic and the horrific death toll it took in nursing homes.
One of the possible solutions I covered for that story is PACE - shorthand for Programs of All-Inclusive Care for the Elderly. Funded by Medicare and Medicaid, PACE programs provide a complete suite of medical and social services to seniors who meet the qualifications to be in a skilled nursing facility, but want to live independently. Most (but not all) PACE enrollees are low income and eligible for both Medicare and Medicaid.
PACE gets high marks from experts on long-term care, but it has not been scaled up to have the kind of impact nationally that it might.
Now, legislation has been introduced in the U.S. Senate to expand PACE. The bipartisan bill is sponsored by Sen. Bob Casey (D-PA) and Tim Scott (R-South Carolina). Casey and Scott co-chair the Senate’s Special Committee on Aging, and held a hearing on PACE this week. Watch the hearing below.
What I’m reading
The pandemic has made seniors less active . . . COVID-19 widows struggle to get benefits as Social Security offices remain closed . . . What investors should know about Treasury Inflation-Protected Securities . . . A Supreme Court decision could help you save for retirement . . . Extreme weather and rising insurance rates squeeze retirees . . . As life spans extend, people in their 60s, 70s and beyond want to keep working . . . The Fed is about to raise interest rates - banks probably won’t do the same for your savings account . . . People Over 80 are still taking care of their parents and partners.