Pension Changes Could Limit Retiree Income

Two weeks ago the Treasury released proposed and temporary regulations in support of the Kline-Miller Reform Act. This could amount to be a huge blow to retirees who are counting on pension benefits to fund their retirement. These regulations allow for:

– Reduction of benefits for current retirees
– Increased Sponsor and participant contributions
– Reducing early retirement subsidies

The most glaring impact may be the ability of plans facing insolvency the right to immediately reduce benefits to no less than 110% of the PBGC guarantee, the maximum is currently $13,000 per year. This means that pension benefits of current retirees could be reduced to no less than $14,300 in 2015.

Participants who are 80 or older or those who are on disability are exempt from these benefit adjustments. For participants who are 75 or older at the time of implementation there will be a phase out applied.

Plan participants of these plans are most likely to be impacted by these regulations. If you are currently receiving benefits from one of these plans or anticipate receiving benefits from them in the future, you should consult your financial advisor.

When meeting with your advisor, it is best to discuss how potential reductions in benefits will be offset by either:

– Retiring later
– Living with less income
– Contributing more to your retirement savings accounts

While none of these options are preferred, the reality is that most people will have to make adjustments to their retirement plans to make ends meet. Social Security benefits are another income source that could be maximized to help offset the effects of reduced pension income. Most people do not even collect their full retirement benefits due to them because they take benefits before their retirement age.

By waiting until your full retirement age you can collect 100% of your own benefit. You can gain a delayed income credit each year until age 70 by delaying beyond your full retirement age. This could potentially increase your benefits by 32% if you wait until age 70 before filing for benefits. While you may wait until age 70 to collect your own benefit, you may be eligible to apply for your spouse’s benefit while waiting. This strategy is known as a file and suspend option, which should be discussed with your advisor.

Due to the bleak financial standing of the PBGC and it’s own acknowledgement of fiscal duress (see 2014 annual report) we should expect further pension changes in the future. If you have questions about how these regulations impact your retirement or how your financial plan should be adjusted as a result please feel free to contact me.

The Unexpected Reason You Need Asset Protection

I had the good fortune to be a kid in the ’60s and ’70s, when science fiction retained just enough of the optimism of the ’50s to be fun, but also began to hint at darker futures. You could watch Star Trek after school for a pick-me-up, and2001: A Space Odyssey after dinner to bring you back down again.

One of the recurrent themes of the sci-fi of the time was robots. They were usually good (“Danger, Will Robinson!”), but could sometimes be bad (the homicidal HAL 9000). They could be humanoid (Blade Runner) or resemble a home appliance (R2D2).

I can’t recall sci-fi robots ever depriving anyone of a livelihood, however. That possibility only occurred to me once I started studying economics at college.

You wouldn’t think you’d need asset protection from robots, but it’s true: Robots are stealing jobs now and with potentially serious consequences for you… even if you’re at or near retirement.

Robots: Not Just Another Tool

The mainstream economic view of robotics is the same as any process of technology-driven industrial productivity improvement. According to this view, the spread of robotics will be just like the transition from hand-looms to steam-driven textile mills in the 19th century. There will be initial displacement of workers, but the resultant growth of the economy will produce more than enough new jobs, and lower prices to boot.

I don’t buy this sanguine story, for three reasons.

First, industrial steam-looms (like Henry Ford’s assembly lines) produced consumer goods that were bought by the people who operated them, and by consumers in captive colonial markets like India. There was a good match between the industries adopting new technology and the markets they served – as productivity increased, so did the absolute size of those markets, especially as colonialism brought new ones into being. Today’s robots, on the other hand, are displacing workers who have been producing goods for quantitatively mature markets, like smartphones or hamburgers. I don’t see the total sales of either increasing dramatically over the long term.

Second, I think Karl Marx was right for once when he argued that the universal adoption of labor-saving technology will result in a fall in the rate of return of capital. When one hamburger joint automates, it can undercut its conventional competitors’ prices for a while. But when all hamburger joints are automated, the only way to maintain market share will be to drop the price of a burger, eventually reducing the return of investment in those robots. There may be scope for further productivity enhancement – and robots may become cheaper when made by other robots – but once you’ve gotten rid of human labor, there’s a limit to how much margin you can keep over the long-term.

But above all, automation will displace workers who won’t be able to purchase the resulting goods. Unless capitalists decide to start cutting working hours, hiring more than one employee to share a week’s work, and raising hourly wages – the techno-utopian dream – many people will simply be shut out of the modern economy. The “economic cycle” that links production to consumption will be broken.

That will intensify the first two problems… and cause another: socio-political instability.

Asset Protection: Preparing For a Robotic Future

For many of us, this isn’t an immediate problem. We’re part of the pre-robotic economy, and by the time machines really start having an impact, we’ll be retired.

But that’s precisely the problem.

The U.S. Social Security system, like those in most advanced economies, relies on current worker tax contributions to fund pension obligations toward previous generations. A robotic economy will produce a steep fall in tax collections. In 10 to 15 years, social pension systems will be unworkable, no matter how much you’ve put into them over the years. If you’re counting on Social Security for your retirement, you’re in deep trouble.

If I’m right about the impact of robotics, the future will be far more unequal than the present. Some industries catering to the lucky few will prosper, but the vast majority of today’s firms will simply run out of customers.

That means you won’t be able to rely on conventional retirement investment and asset protection strategies to beat inflation. As in any period of rapid economic change, there will be winners and losers, and anticipating who they will be is crucial.

That’s why I predict that the only people who will prosper in our robotic future are those who eschew conventional public and private pensions – including 401(k)s – and take a more active approach to retirement investing and asset protection. Self-directed IRAs and certain annuities, for example, give you the scope to ride the waves of the future rather than be engulfed by them.

If you haven’t got a retirement and asset protection strategy like that, you’d better start working on it now, before our robot overlords gain the upper hand.

What Everyone Needs to Consider Before Retiring

When plan to leave the working world and enter retirement, it’s more than just choosing to bring your career to an end. It is very important that you make sure that you plan your finances before retiring. This is particularly important if you are planning an early retirement. In some cases, working for an additional couple of years could make all the difference. The last thing you want is to retire and find that you do not have sufficient funds to support your usual lifestyle.

Prior to retiring, you should set up a meeting with an independent financial advisor to discuss your options. They should draft up a balance sheet that details everything from your assets to your liabilities in order to calculate your total net worth.

Next, you will need to pay off as much of your debt as quickly as you possibly can. The less debt you have weighing you down, the better for your finances and stress levels. Interest on credit cards and loans have a way of building up, and it’s easy to get in over your head. When you get all of your debt paid off, you will need to calculate your basic current cost of living. Remember that, as you age, you will normally require more money to maintain your lifestyle each month. Expenses like food, water, and electricity go up regularly, and you might find that you need additional medical care. In fact, at some stage, you might need to move to a long-term care facility and, again, this costs money.

There are no quick ways of planning for the future. You need to keep all of your options open including equity release. An equity release is an excellent option to keep in mind, and it’s always a good idea to have your home reevaluated periodically. By knowing how much your home is valued at, you will have a better idea of how much you will be able to release. Taking this step might mean that you will end up sacrificing some of your estate, but it is a far safer option than taking a risk with a loan or any other form of credit. It is also of the highest importance that you choose an independent financial advisor and stick with them. Maintaining the services of the same advisor will help you build a relationship with them which will certainly bode in your favour over the years.