It’s not easy to plan for changes in public policy. In fact, it’s downright difficult if not impossible; it’s not a risk that is personally manageable nor predictable, according to a report recently published by the Society of Actuaries (SOA).
But changes in changes in taxes, interest rates, public benefits, and rules governing private benefits can improve or worsen the situation of retirees, according to the report, Managing Post-Retirement Risks: Strategies for a Secure Retirement.
In an interview, Cindy Levering, a co-author of the report and a member of the SOA’s Committee on Post-Retirement Needs and Risks, discussed this risk and the ways to manage it.
“Public policy changes include several different things,” said Levering.
And in many cases worsen the situation of retirees. Lower interest rates mean lower rates of return on investments such as CDs, Treasuries, and money market funds. There could be, in the future, new types of taxes - VATs, for instance - that could the tax advantages of retirement plans. There could be a reduction in benefits from public programs, such as Social Security, Medicare, and Medicaid. Higher-income Medicare beneficiaries, for instance, are already subject to Income Related Monthly Adjustment Amounts or IRMAA.
And, there are possible changes coming to health care because of COVID-19, and the upcoming election.
How to manage these risks?
Maintaining an emergency fund is more important than ever, says Levering. “Having savings for emergencies can help protect against all risks, not just the public policy risks,” she said.
Consider using tax-favored investments such as municipal bonds, Roth IRAs and Roth 401(k)s. Those investments and accounts have a tax-favored status that offers protection against future higher income tax rates, said Levering.
Converting a traditional IRA to a Roth IRA can provide tax-free growth on Roth IRA assets and tax-free withdrawals from a Roth IRA in retirement.
What’s more, Levering notes that Roth IRAs do not require a person to take any required minimum distributions (RMDS). However, careful consideration must be given to the immediate and long-term tax implications for converting a traditional IRA to a Roth IRA. “You really need to look at that carefully and talk to a tax professional before you do such a conversion,” says Levering.
Use required minimum distributions (RMDs) to make charitable contributions. Current law allows a qualified charitable donation (QCD) by directly transferring up to $100,000 of funds from your IRA custodian to a qualified charitable organization.
Amounts distributed as a QCD can then be counted toward satisfying their RMD for the year and can also be excluded from their taxable income.
Get advice. “I think it's very important to get professional advice,” said Levering. “It’s complicated, especially in the tax areas, and it's changing. So it's important to be up to date on all of the current rules.”