Is retirement savings the one thing candidates can agree on?

In the American political arena, retirement may be one of the last great unifiers. Presidents, senators and representatives from both parties know the issue is of paramount concern to many of their constituents.
But just because everyone in Washington agrees on the importance of something, that doesn’t mean they 100% agree on the best way to implement it. Election Day may influence both how people save for retirement, and how and when they withdraw those savings later on. Given these uncertainties, investors may want to double-check that their current financial plan is both long-term and flexible in nature, say retirement experts at TIAA.
Daniel Keady, TIAA’s Chief Financial Planning Strategist, observes that policies can gyrate unpredictably, as politicians focus on short-term considerations and midterm elections. In terms of saving for retirement, however, it’s important for investors to look past the politics and “think long-term, because that’s really what retirement savings is all about,” he says.
With the long-term always in mind, a strong financial plan will allow for the periodic adaptation that’s sometimes necessary after a major election, adds Jim Daniello, a Wealth Management Director at TIAA Individual Advisory Services. “Administrations change, taxes change, tax policy changes. Your financial plan—the location of your assets in regard to taxes—should be flexible,” he says. Talking to your advisor and reviewing an asset location worksheet can help you understand how potential tax increases could affect you.
Once the dust clears from the 2020 election, here are a few possible changes investors could see down the road.

With the passage of the SECURE Act last year, Congress is already working on the next round of legislation to modernize the retirement system.

Taking SECURE to the next level

Chris Spence, Managing Director, Federal Government Relations at TIAA, expects the discussion to continue around improving and modernizing the retirement system. Last year, the Setting Every Community Up for Retirement (SECURE) Act was enacted. This was the first piece of comprehensive retirement reform legislation to be enacted in over a decade. But the next round of retirement legislation, often referred to as “Retirement 2.0,” is already in the works in the House and Senate. Although passage of the SECURE Act took more than three years, Shelly-Ann Eweka, a Director of Advice Strategy at TIAA, hopes Round Two moves faster, with the country now so “financially fragile.”
Regardless of how the votes come in, she says, “We have a retirement challenge in this country in terms of how many people are unprepared, who do not have enough lifetime income coming in during retirement.”
Eweka notes that over the past few decades, the financial services industry has been very innovative in developing savings instruments and accounts, yet a lot of people have still struggled to make up for the switch from pension-based retirements to ones much more dependent on their own contributions. The coronavirus crisis is making matters that much worse, she observes.

Tax treatment tweaks to retirement accounts

Should Democratic presidential candidate and former Vice President Joe Biden win the White House, it is likely that his Administration will consider changes to incentivization for savings.
Currently, money withheld from paychecks to contribute to a 403(b), 401(k) or similar retirement savings plan will reduce your taxable income. Instead of paying taxes on those funds when you contribute them, you pay tax on the contribution and any gains only upon withdrawal from the retirement account, sometimes many decades later. Not only do you postpone the taxes, but in retirement, you might be in a lower tax bracket than when the retirement contribution was made in the first place.
The Biden campaign has proposed replacing this tax deferral with a tax credit. Spence says that without knowing the exact specifics of how such a tax credit would work (Biden’s plan is not detailed), it’s impossible to say what the impact of such a change would be. He adds that the present tax-deferred system works well, and there is always room for increasing retirement savings through other policy proposals. In Washington, many of those policy solutions have bipartisan support, Spence notes. Several were included in the SECURE Act, and it’s likely we’ll see additional proposals in the next round of retirement reform.

Automated solutions to help people save more

One way to increase retirement savings nationwide would be to reduce the so-called coverage gap, a goal of both parties.
Richard E. Neal of Massachusetts, the Democratic chairman of the House Ways and Means Committee, who led the SECURE Act and will be leading the 2.0 efforts, is likely to pursue an “auto-IRA” plan proposal next year, Spence says. That would ensure that everyone has access to a retirement plan through their employer; currently, about one-third of private-industry workers do not have access to a workplace retirement plan. Through tax credits and making it easier for small employers to band together under a single retirement plan, Congress late last year made it easier for small businesses to adopt retirement plans, but the auto-IRA would push the concept further.

Auto-enrollment boosts participation in retirement plans

A study of new employees in South Dakota state government showed a big increase in participation when auto-enrollment was introduced.

Source: TIAA Institute, June 2020
Enhanced automatic enrollment and automatic contribution increases in retirement plans were included in the SECURE Act, and further enhancements are likely in the future. Automatic features in retirement plans, where individuals are defaulted into plans as opposed to having to proactively enroll or their contribution rate is automatically increased annually, have proven very effective.
“These have been very effective at getting people into plans, getting them to save,” Spence says. “When those people are enrolled,” he adds, “the vast majority of them are not un-enrolling; they are staying inside the plan. Along with that are the automatic increases; even if it’s only one percentage point a year, you’re automatically increasing someone’s contribution. They don’t have to proactively do it.”
To allow people to continue saving without having to draw down from their retirement accounts, the SECURE Act changed the starting age of Required Minimum Distributions (RMDs) from 70.5 to 72. The next iteration could increase it even further, to age 75.

Ensuring proper asset location for future costs

As Daniello noted earlier, TIAA’s asset location strategy may be able to help investors be sure that their investments are in the right types of accounts (taxable and tax-advantaged) that reflect the potential time frame in which they might need to draw from them—or the tax ramifications if and when the assets have to be sold to make ends meet.
Checking accounts and brokerage accounts, for example, should hold money that might be needed any day, while money that will be needed later can be in classic retirement accounts, personal annuities and/or long-term care insurance policies. Money that may never have to be tapped for personal needs might end up in a life insurance policy or a Roth IRA. A cogent, comprehensive asset-location strategy can reduce tax bills when assets are sold, Daniello says.
And increasingly, those assets are being sold to help retirees pay for healthcare costs that are likely to keep rising regardless of the outcome of the election.
“One of the things that we try to incorporate into the planning for our clients is that they may not fully appreciate, or anticipate, the increasing need for healthcare in their financial plan, whether it be home healthcare or long-term care,” says Daniel Soo, a Wealth Management Advisor at TIAA. Retiree healthcare benefits have been watered down over time, he adds, as costs have risen, and some people are postponing their retirement dates in response. Soo urges TIAA clients with a retiree healthcare savings program to participate in it as early as they can so they’ll have more dollars for medical costs later on, when they’ll need them most.

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The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

Advisory services are provided by Advice & Planning Services, a division of TIAA-CREF Individual & Institutional Services, LLC, a registered investment index adviser.

This material is for informational or educational purposes only and does not constitute fiduciary investment advice under ERISA, a securities recommendation under all securities laws, or an insurance product recommendation under state insurance laws or regulations. This material does not take into account any specific objectives or circumstances of any particular investor, or suggest any specific course of action. Investment decisions should be made based on the investor’s own objectives and circumstances.