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Mark Miller: Remaking Retirement

Retirees: What You Should Watch in 2018

Retirees should keep the aging bull market, Social Security and Medicare, interest rates and more on their radar this year.

The economy is strong and the stock market is surging. Interest rates are rising a bit, but inflation looks steady. That should mean smooth sailing in 2018 for retirees and people planning for retirement, right? Even the new tax law didn't do much to impact retirement: The final legislation dropped earlier proposals to sharply curtail tax-deferred 401(k) contributions and deductibility of high medical costs.

But at the same time, there's good reason to worry about possible efforts to change our two most important retirement programs--Social Security and Medicare. Further, the fiduciary rule governing retirement advice could be undermined. And higher interest rates actually could be a double-edged sword for retirees.

So let's assess the landscape for the year ahead for retirees and for those nearing retirement. 

Stock Market
Anyone professing to tell you where the markets will go this year is lying or guessing. Still, it's worth noting that we're nearly nine years into a bull market.

"It's always hazardous to forecast these things, but at some point, the bull market will end," says Michael Kitces, partner and the director of wealth management for Pinnacle Advisory Group, co-founder of the XY Planning Network, and publisher of Nerd's Eye View.

Kitces wonders how prepared retirees will be for the next market downturn and the sequence of return risk that entails.

"Substantial caution is merited on retiree spending rates when starting from these elevated levels," he says. "The risk that you might experience an early bear market means you probably shouldn’t spend as much in the first place."

Historically, the average safe withdrawal rate has been 6.5%, Kitces says.

"But it might be wiser for new retirees to just start with a lower initial rate of around 4%," he suggests. That would be better than starting with a higher rate that might have to be cut; it's stressful for most people to ramp up their lifestyle to a higher level and then have to trim it back if a bear market does show up."

Social Security and Medicare
Will Medicare or Social Security face cutbacks in 2018? Both programs are overwhelmingly popular with voters, but some Republicans hope to tackle reform of both programs in 2018. The signals are mixed--House Speaker Paul Ryan wants to move forward, but Senate Majority Leader Mitch McConnell is opposed.

The Republican plan for Medicare has two components. First, it would raise the age of Medicare eligibility to 67 from 65, and shift Medicare to a flat premium-support payment, or voucher, that beneficiaries would use to help buy either private health insurance or a form of traditional Medicare. I explained what these changes would entail here.

Some changes to Medicare could pass the Senate with a simple majority, but changes to Social Security seem less likely. By law, the program's revenue cannot be used to offset federal deficits; that means any changes to benefits would need to pass the U.S. Senate with 60 votes rather than the simple majority that can approve budget-related bills. 

What would Republicans do with Social Security if they could reach that threshold? They would gradually raise the age when workers can receive their full benefit to 69. (Under current law, the full benefit age is 66, and headed to 67 for all workers who were born in 1960 or later.) They would also add new means-testing that slows benefit growth for higher-income beneficiaries and would adopt a less-generous "chained CPI" annual cost-of-living adjustment.

Interest Rates
Could this be the year when returns on fixed-income investments are large enough to be noticeable for the first time since the Great Recession?

The Federal Reserve said in December it would increase its benchmark federal-funds rate by a quarter percentage point to a range between 1.25% and 1.5%. That is the fifth increase in the past two years, and the consensus economic forecast is that further hikes will lift the federal funds rate to a range of 2.75% to 3% by year end.

For retirees, of course, the good news here is that the outlook for low-risk fixed-income investments will brighten for the first time in recent memory. Pricing of annuities also could improve, notes Kitces.

But higher rates could have other implications. Rising rates could nick the total returns of bond funds, as discussed here

"Will investor behavior shift as rates continue to get better?" Kitces wonders. "How good do yields have to get before retirees just say 'this is good enough' and start to ditch riskier stocks?"

Another concern: Seniors have greater debt exposure than before. Research by Olivia S. Mitchell, executive director of the Pension Research Council at the Wharton School of the University of Pennsylvania, finds that Americans are more likely than ever before to enter retirement in debt; that makes older households sensitive to rising interest rates. Retirees also may need to devote a growing fraction of their incomes to servicing the rising debt.

She reports that median household debt among people ages 55 to 64 jumped 64% between 2000 and 2011; for those older than 65, median household debt more than doubled.

"More expensive houses played a very big role," she says. "But we also see people with larger mortgages on the bigger houses because the old rules on putting down a certain amount of down payment have changed with the advent of new mortgage structures."

Social Security COLA
The stage is set for a real Social Security COLA following a disappointing 2017, when a 2% COLA was awarded but vanished into higher Medicare Part B premiums for millions of retirees.

Most economists expect inflation to hold steady; the Wall Street Journal consensus forecast is 2.1%. And the Medicare trustees forecast that the Part B premium will hold steady in 2019 at $134, notes Mary Johnson, a policy consultant at the Senior Citizens League.

"If inflation remains at the current rate of growth and Part B premiums remain the same, hopefully most people can finally dig out of the Part B rut that's keeping Social Security benefits flat," she says.

Fiduciary Rule
It's worrisome that the U.S. Department of Labor is delaying implementation of some provisions of the fiduciary rule governing advice on retirement investments until July 2019. But the heart of the rule is in place, and already having a major impact on retirement investing.

"The delay can make things seem like doom and gloom, but I'm very happy that the impartial conduct standards are in full effect," says Kate McBride, former chair of The Committee for the Fiduciary Standard, a group of industry practitioners and experts. "If firms don't live up to them, they are going to be in trouble."

The advice business is shifting away from commission to fee-based models at an astonishing clip. One small sign of this is the growth in assets under management at custodial firms working with RIAs. Charles Schwab and TD Ameritrade pulled in roughly $200 billion combined in net new assets last year, most of which was parked there by RIAs.

The change also is reflected in annuity sales. The LIMRA Secure Retirement Institute reported recently that total annuity sales fell 13% during the third quarter last year, driven mainly by a drop in contracts sold within IRAs. Variable annuities--which have been a poster child for the expensive products that often don't meet the rule's best interest standard--recorded a 16% drop in sales.

"The drop-off in IRA sales was substantial compared with non-qualified sales," says Todd Giesing, the LIMRA Institute's director of annuity research.

Kitces suspects no-load annuity products could lead the industry to new growth. 

"The annuity industry has insisted that it is doomed if it cannot compensate agents to sell annuities, which reminds me of the mutual fund industry saying the same thing 20 years ago. But when you strip out the commissions, the products get so much cheaper and better that more people want to buy them. Could no-load annuities follow the same path?"

Roth Recharacterizations
The tax bill eliminated Roth "do-overs"--that is, the move permitting reversal of Roth conversions when the move doesn't work out in your favor. This will eliminate several planning options, as Kitces explains here.

New Medicare Cards
The federal government will begin mailing new Medicare cards to all enrollees in April as part of its effort to eliminate Social Security numbers as identifiers. The new cards will carry a new unique, randomly assigned number. But beware: some Medicare recipients have been getting phone calls from scammers telling them that they need to pay for their new Medicare cards and asking for personal information such as checking account and Medicare numbers.

Morningstar columnist Mark Miller is a nationally recognized expert on trends in retirement and aging. He also contributes to Reuters, and The New York Times. His book, Jolt: Stories of Trauma and Transformation, will be published in February by Post Hill Press. The views expressed in this article do not necessarily reflect the views of