FORECASTS & TRENDS E-LETTER
By Phil Denney
July 16, 2024

IN THIS ISSUE:

1.  Social Security Myths

2.  Protection for Your Retirement Accounts

3.  Should You Max Out Your 401k?

Today our focus is on your retirement dollars. I hope to clear up the biggest myth about Social Security, inform you about protections for your retirement accounts and whether you should max out your 401k.

Social Security Myths

I found an interesting article recently on the biggest myths that lead people to claim their Social Security retirement benefit. Below are some key points from the article.

Fears about Social Security’s future should not be the primary reason for claiming retirement benefits at the earliest claiming age of 62. “The biggest myth about Social Security is that when the trust fund runs out, the program is just going away,” said Emerson Sprick, associate director of the economic policy program at the Bipartisan Policy Center. Even without the Social Security trust fund, the program will still have revenue from payroll taxes. Remember that I wrote an E-Letter on the viability of Social Security back in April.

The most popular age at which to claim is 62, with 29% of beneficiaries claiming at that earliest possible age in 2022, according to a Bipartisan Policy Center report based on Social Security Administration data. But those beneficiaries take about a 30% benefit cut by not waiting until their full retirement age — the point when they stand to receive 100% of the benefits they have earned. Most beneficiaries — 62% — claimed before their full retirement age in 2022.

My wife Brenda is about five years younger than I am. Women in her family have lived to their late nineties. Assuming she outlives me, I delayed taking my benefit until age 70. That way she will get a bigger survivor benefit check after I have transitioned to a new life in eternity.

I only see two reasons for taking Social Security prior to your full retirement age. Perhaps for medical reasons you cannot work any longer, or perhaps you are in a financial bind and need additional income. Remember that if you take your benefit early there is a limit on how much you can earn and your benefit is reduced. Please do not take it early just because you believe the myth that the government is running out of money.

Protection for Your Retirement Accounts

In most cases, your retirement accounts are safe if you file for bankruptcy or a creditor seeks a judgment against you. Accounts that are part of an ERISA plan have unlimited protection. The Employee Retirement Income Security Act of 1974 is a federal law that addresses workplace retirement benefits. In addition to setting operating requirements for employer-provided plans, ERISA provides bankruptcy protection to participants.

Plans covered under ERISA, also commonly referred to as “qualified plans,” are fully protected up to any dollar amount. This is a key distinction. Creditors cannot make a claim against money held within an ERISA plan when you file for bankruptcy. Common examples of ERISA-qualified plans are 401(k)s, some 403(b)s and profit-sharing plans.

ERISA coverage does not extend to IRAs. One reason often given for leaving your money in a workplace retirement plan – rather than rolling it over to an IRA – is that qualified plans are protected from creditors and IRAs are not. While it is true that ERISA does not cover traditional and Roth IRAs, these accounts are protected in bankruptcy by a different law: The Bankruptcy Abuse Prevention and Consumer Protections Act of 2005, or BAPCPA.

A key difference between the protection the two laws provide is the dollar amount. ERISA protects the entire amount held in qualified plans with no maximum dollar limit. BAPCPA, on the other hand, caps the value. For 2024, the protection extends to account values up to $1,512,350. This adjusts every three years for inflation. Any amount above that limit is subject to creditor claims in bankruptcy.

However, that isn’t completely true. First, money rolled over from a qualified plan retains ERISA protection. Second, IRAs are covered another way. The protections offered by ERISA and BAPCPA are limited to bankruptcy and certain legal claims. They don’t protect your retirement accounts from all types of claims or judgments in every situation. Specifically, you may still lose a portion of your retirement funds in these cases:

• A judge orders a split of your retirement account in divorce proceedings or a judgment related to child support or alimony. If this happens, you’ll receive a domestic relations order outlining how the account is to be divided.
• The IRS levies your account for unpaid back taxes.
• You owe fines or penalties related to federal crimes or civil judgments.

Hopefully, you will never need to file for bankruptcy. However, the risk of a creditor taking you to court for damages caused by you, a family member or an employee is real. The protections from creditors are the same as for filing bankruptcy.

Should You Max Out Your 401k?

Amy Arnott at Morningstar says “most investors don’t need to worry about oversaving.” She lists reasons you may not want to max out your 401k contributions and then reasons you may need to. In either case, have you put pen to paper or done an Excel analysis to know your number? The number I am talking about is the size nest egg you will need in retirement.

Hoping it will all work out is not a strategy. You need to take a stab at it if you haven’t already done so. It may be a rough estimate of the retirement income, but you need it to calculate your nest egg. Your number may be what you need to shock you into taking action or hopefully confirm that you are on track.

You will need a few calculation inputs. You need the estimated rate of return, an estimate of inflation, and the number of years (until retirement and then in retirement). The rate of return and your estimate of inflation are probably different when accumulating your nest egg versus when spending it.

The number of years until retirement is changing. I see people working after they are eligible for Social Security. The main reason is that Social Security is not enough and they have not saved enough to cover the shortfall. Social Security covers about 40% of the average retiree’s income needs. The other reason is they like what they do and it offers them flexibility in retirement. Though at some point even that will need to end. Even for me.

If you are behind in your retirement savings, I caution you to not reach for the moon and chase yield. Keep in mind that the higher the potential return the greater the potential risk to your retirement. Looking only at annual returns and average returns can hide a lot of volatility within those periods. Know an investment’s worst losing period.

Words of wisdom:

“The more you have, the more people come to help you spend it. So what good is wealth—except perhaps to watch it slip through your fingers!”

Thanks for reading,

 

Forecasts & Trends is published by Halbert Wealth Management, Inc., a Registered Investment Adviser under the Investment Advisers Act of 1940. Information contained herein is taken from sources believed to be reliable but cannot be guaranteed as to its accuracy. Opinions and recommendations herein generally reflect the judgement of the named author and may change at any time without written notice. Market opinions contained herein are intended as general observations and are not intended as specific advice. Readers are urged to check with their financial counselors before making any decisions. This does not constitute an offer of sale of any securities. Halbert Wealth Management, Inc., and its affiliated companies, its officers, directors and/or employees may or may not have their own money in markets or programs mentioned herein. Past results are not necessarily indicative of future results. All investments have a risk of loss. Be sure to read all offering materials and disclosures before making a decision to invest. Reprinting for family or friends is allowed with proper credit. However, republishing (written or electronically) in its entirety or through the use of extensive quotes is prohibited without prior written consent.