What does the 'big beautiful bill' mean for your retirement?

Yahoo

2 days ago

As the Trump administration's budget bill works its way through Congress, many people are wondering how the bill's provisions on taxes and Social Security will affect their finances. On this episode of "Decoding Retirement," Robert 'Bob' Powell speaks with Lisa Featherngill, national director of wealth planning at Comerica Bank. Lisa discusses what deductions are likely to stay in the bill, the solvency of Social Security, and how retirees may have to adjust their spending.
Yahoo Finance's Decoding Retirement is hosted by Robert Powell.
Find more episodes of Decoding Retirement at https://finance.yahoo.com/videos/series/decoding-retirement.
The big beautiful bill is now in the hands of the Senate, and it may be a while before it becomes, or some version of it becomes the law of the land. And here to talk with me about this is Lisa Featheringgill. She is the national director of wealth planning at Wealth Management. Lisa, welcome.
Thanks, Bob. Great to be here.
Oh, it's a pleasure to have you here. It will be a pleasure to have you talk about the big beautiful bill and where it stands and what you think will stay and why people should be planning for it, if at all.
Yeah, that, you know, it, it went through the house pretty quickly and within a week it was uh passed out of ways and means and off the floor and over to the Senate. Well, that's
partly because, by the way, it's partly because some people didn't read it.
It's lengthy. It's very lengthy. Over
1000 pages, I think, yeah.But anyway, I interrupted you.
No, no, but, um, so even on the news this morning I was watching CNBC and they were um uh and there were people on talking about how even the Republican senators are not super excited about it, so there will probably be some changes coming out from the Senate. Uh, we're just in a wait and see mode.
So for seniors, for anyone really, don't make any plans based on what may be.
That is one thing I have learned over the years. You do not take the House version or the Senate version and make any plans, at least waiting until we've got something coming out of conference committee.
All right. So let's just play a what if game. Uh, there are some things in the bill as it currently stands that are somewhat interesting. There's a bonus deduction for seniors, which is being put in place to make up for not for the president.Uh, and Congress not, uh, to be able to, uh, do away with taxes on Social Security benefits in the absence of a new law. So, any thoughts about whether the bonus deduction stays?
Uh, you know, that's interesting. It's only $2000 per individual aged 65 or over, and it's only for 4 years. It's really it's an additional um personal exempt it's an add-on to the personal exemption.So I don't know the numbers, but based on the number of people turning 65 this year, it's probably pretty significant about
4 million people, yeah,
yeah.Yeah.
So, all right, so it stays or goes, What do you think?
You know, it affects a lot of people and it's not a huge dollar amount. I'm gonna say itstays.
All right. Uh, there has been much talk ever since it was introduced about the salt deduction going down to $10,000 in the new bill, it goes up to 40,000, I think, somewhere around there.
That's fair.Oh that's a tough one. I don't think it's gonna look like it looks right now. So when it came out of um Ways and Means, it was a maximum of $30,000 but it was gonna phase out starting at $400,000. Well, that didn't to me when I saw that, I thought the phase is out at $40,400,000 and phases out pretty quickly for people who are high earners or who have a lot of real estate property tax.They're, they're gonna blow through that that $30,000. At least there's a $10,000 cap. So on the house floor, they changed it to a $40,000 deduction with $500,000 phase out. Um, you know, for the high income earners in California and New York, it they're still not gonna get a huge amount of benefit out of that deduction. So I don't know, I, it's got a lot of energy behind it. I'm gonna, I'm gonna guess that it changes.
Yeah.All right, and the last thing that people are talking about is the estate tax and whether it gets extended or gets repealed.
Well, in the bill, it says, uh, the exemption goes up to $15 million you know, it's at 13.99 this year, goes up to $15 million and then it adjusts for inflation going forward. There hasn't seemed to be much controversy around that, so I think that has a good chance of of moving forward, which is um.Yeah, pretty exciting and in the business that we're in because a lot of people had been waiting to see what was gonna happen. Actually, a lot of people were motivated to act because they thought that it was gonna drop in half on January 126.
And it's interesting because uh I just came back from a conference in California where some of the discussion was around whether I should use a slat or a CRT or some advanced charitable giving strategies, but maybe the need to do that is less if the estate tax uh gets extended.True,
but you know, I've been looking at how often the tax, the estate tax laws have changed since the beginning of this decade, or this of this millennium. Think about it. We had, we had the big change uh from a million to 5 million, then it dropped down to 0 for a year, then it went back up and then it doubled.I just don't think anything is permanent when it comes to a state tax anymore. Yeah.
So job security for uh estate planning attorneys and and CPAs, I guess too, along with that.All right, so, I, I want to turn my attention to, uh, something that I think is quite interesting in the opportunity that presents. The R&D age goes to 75 for those who reach age 74 after December 31st, 2032, and there's some planning opportunities that are created because of this increased to the R&D age.
Yeah, so think aboutit. Some retires at 65, 66, 67, somewhere in there, even if they've got payouts for a couple of years, if they're waiting to take RMDs, they might have 3 or 5 years that are gonna be really low income cause they got nothing coming from their employer. Maybe they've got Social Security, but that's not gonna throw them into a high tax bracket. And so there's an opportunity there to accelerate income before taking RMDs, and what it actually will do isIf if you take the RMDs early, if you need the money, or convert some of the um money that's in the IRAs to Roth and use up some of those tax brackets, you'll end up smoothing out the income in the later years because you'll either have lower you'll have lower RMDs and therefore maybe can keep your bracket levellower.
Yeah.So with respect to uh Roth IRA conversions, two things at least I think, to consider. One is, do you have outside money to pay for the taxes due, uh, otherwise, maybe that creates a problem for you. And then secondly, a lot of times people think about RMD Roth conversions with a break even point and that there may be a number of years that you should consider before it makes sense. Is that fair to say?
Yeah, normally we think about the, the break even point if we're looking at theirBeing a lower tax bracket later. So what, well, excuse me, no, let me say that differently. Um, usually there's a break even point because you're accelerating the tax expense, right? And so, at, at what point would you have been better off just waiting to take that money. So you have to look at what's your tax bracket gonna be down the road versus if you brought in that income through the rock conversion.
So, and then in terms of having outside money to pay for the taxes due on the conversion, that's an absolute must, right there. It's a non-starter to even to think about doing a Roth conversion if you don't have the money outside.
Absolutely. Even if you're thinking about small Roth conversions, you need to have money.You need to have liquidity to pay the taxesup front.
Right. And and and when I think about the taxes due, there's the tax on the distribution from the IRA and then perhaps if you have money in a taxable account that you're using to pay for the uh for the bill due, you might have a capital gain perhaps on.The taxes that you use to sell your stock
that'sright. If you have to sell stocks or something to create the liquidity to pay the taxes, you could be, yeah, you could be hit with that that capital gains. But the, the thing to remember is that it's not just the rates, it's the brackets. And one of the things that this um tax, the beautiful tax bill does is it keeps those wide brackets for the lower um income tax rates.And so whereas it used to be, you would get into the 39% bracket at about $400,000 and that in the current world, you're not even getting into the 37% bracket until you're well above that. So there's a lot of room to to plan and and to do some, uh, you know, good tax arbitrage.
Yeah.So it's, it's hardly an episode of the coding retirement goes by where we don't talk about the Social Security Trust fund and it becoming depleted in 2033 and the possibility of benefits being reduced by 20 cents on the dollar. And, uh, you have a contrary point of view on Social Security and, uh, the, the common advice, Lisa, right, that we get from mostly everyone is delayed at age 70 if you can, and rarely is, uh, are we telling people to claim sooner than that, butEager to hear your country point of view.
You know, I, I, I ran, I, I had somebody run my numbers, right? And, um, and clearly, right, if everything goes as planned, it makes sense to wait till age 70, get an 8% bump a year. Now I'm of the age where full retirement age is 67, so I would have 3 additional years, you know, that would be another 24%.Uh, um, income, which sounds great. However, in reading the annual report from the Social Security Administration, I'm a little worried if, if they hit that, uh, if they deplete their reserves in 2033, which now we have a couple of years' worth of um them saying that's the case, then they're only gonna be able to pay out what what is coming in, and that's expected to be 80% of current benefits.So it's almost like a bird in the hand type of thing that maybe you should go ahead and take it earlier cause you're getting 100% of something rather than waiting and getting a smaller number.
Yeah, so you're getting 100% for a little bit of time until 2033, at which point you'll get 80% of what you were getting.
That's right. So maybe I would have, let's see, 6768, 69, uh, maybe I would have 33 or 4 additional years of uh 100%.Versus waiting and getting, you know, 24% extra, but then it's gonna go down by by 20. I, I haven't run the numbers, but my gut is telling me.That it, it's gonna make sense to go early if I'm concerned about the fund.
Right. Now, there is the possibility, as many people have told us on decoding retirement, that yes, there's the possibility that it goes down to 80 cents on the dollar, but more more likely than not, someone in Congress, some brave soul who doesn't mind not getting re-elected, will vote to.Uh, put forth a bill that says we're going to either raise taxes or cut benefits. And, uh, and if we do any of that, it's going to affect younger people in their 20s, 30s, and 40s perhaps as opposed to anyone in their 50s, 60s, and older, right? I mean, is that fair to say that if you're a betting person that it's notgonna get
we haven't had legislation that's passed that's affected Social Security tax.Taxation or benefits a long time. Remember there was a bill about, I don't know, 5 years ago that that were there or there was some, there was some discussion about um decreasing the benefits and increasing the tax rate on Social Security income. So I think there's, there's, there's gonna be more of a sense of urgency as we get closer to to depleting the fund, you know, we have, what is it?5 million people turning age 65 this year or something like that, so it's gonna be even more pressure on the fund every year as as the baby boomers, you know, more and more and more start taking Social Security.
Yeah. Lisa, we have to take a short break and when we come back, I want to talk about your son's most recent graduation and what you're helping him do. Don't go away.Welcome back to Decoding Retirement. I'm speaking with Lisa Featheringgill. She's the national director of wealth planning at Comerica Wealth Management. Lisa, uh, before the break, I promised that we would talk about, uh, your son who recently graduated from college, and perhaps unlike other college graduates, you're doing something somewhat unique for him that I didn't quite expect. Tell me what you're doing.
So I'm very excited. My son graduated with his master's in accounting. He was a finance undergrad, and I planted the seed a couple years ago about the shortage of accountants, and so he went ahead and he got his accounting degree, and he's going to work for a CPA firm starting this summer.Well, you know, coming out of college, even if you're making a decent wage is so expensive, um, and real estate has gotten so expensive. He's in Raleigh, North Carolina, and while it may not sound really expensive if you're in the Northeast, but to, you know, to buy a condo in in Raleigh is, you know, it's hard to find something for under $300,000. So I am doing something that my mother actually did for me when I got out of college, and it's called a shared equity agreement.So I am, I am putting down the down payment.And he will make the monthly payments on the mortgage. Well, I, I do a modified version. I'm actually giving him some financial assistance that tapers off um over 3 years. But I put everything into writing, you know, what my investment is, what my expectations of him are, and how we'll split the profits going forward. So, um, so I, I put the upfront money in.I said that any additional improvements will decide how that's paid, but if I pay for it, it, it obviously increases my investment in the property, and when the property is sold, I get my investment back, pay off the mortgage, and then we split 50/50. So it gives him a chance to um also have a stake in the appreciation of the property, and he's super excited, you know, he's gonna have a a a townhouse not too far from where he works, and he's staying um where he went to school, so.Yeah, it's a nice thing to be able to pay it. So
that's really fantastic. Um, does your husband know about this deal, by the way?
Yes, he does.
All right, because you sounded like you made the agreement.
So that's true. I did write up the agreement and he and Walker and I are on the uh on the deed and the mortgage together. But here's an interesting thing that I hadn't thought of, and this actually my sister-in-law is a realtor and told me about this when she said, think about how you want to title the property.Right, so if I was to pass away, I don't necessarily want this property being joined with right a survivorship, or my investment would automatically go to my son. I want my husband to have the opportunity to to get that investment back, so we title it as tenants in common.
That's a, that's great. Well, you, but, but, so you bring, you bring up an interesting point, which is, in order to do these things, you need to have access to good advice, right? Like that, that to me is almost a hurdle that most people face when they think about what could I do to help my son, daughter, whatever it might be. And having access to advice goes a long way toward helping you solve these problems, overcome these hurdles.
Well, and, and when you think about it, I've been in this business almost 40 years, and I've had a, a shared equity agreement, but the whole idea of how to title the property didn't even cross my mind until a couple of weeks ago. So you really have to have advice and probably for more than one person.
Uh, Lisa, I want to turn my attention back to retirement. Uh, I'm fond of quoting research that says spending declines on a real basis throughout retirement.But that's not the case with your client base. Um, tell us what you're seeing about how retirees are spending money when every day is Saturday.
Well, very early in my career, client said to me, Lisa, my expenses are not going down in retirement because every day is Saturday. And the clients that I talked to say, you know, I'm gonna travel more, I'm gonna, you know, indulge in my hobbies more, and I think that if you don't have 8+ hours that are dedicated to the office where you're not shopping or traveling or spending money on other things.There's just a lot more time to spend money and, you know, um, this generation is more spenders than maybe the early earlier generation. So and you know, that doesn't even factor in the health care, you know, we're living longer, we're gonna have more money that we're spending on health care, whether that's um cosmetic or or medically necessary, um, there's just a lot more opportunities, I think, to spend money than there ever were.
Yeah. So the implications of that, Lisa, I think are twofold for me. One is, you might need to save even more than you thought, given that you're going to spend more than you anticipated. And secondly, maybe you should work a little bit longer to save that much more so that you can enjoy your years uh of that spending.
Sothere there are a couple of things you can do to uh to affect that expense number. One of them is to work longer, so your net expenses are less, which means that you have more money for later on.Um, another thing is just, you know, uh, budget so that you are spending to a certain amount. Um, it used to be people talked about the 4%, you know, the endowment method of drawing down your assets 4%. I don't think that works so well anymore, but at least having some kind of an estimate, a projection.Of what your income and expenses are going to look like. So cash flow and balance sheet year by year really helps to put things inperspective.
Yeah, I, you know, I always think that the hardest part about these factors is your life expectancy, Lisa, right, which is to say, I don't know if I'm going to live 10 years or 20 or 30 or 35 years in retirement, and to me that makes all the difference in the world is the sort of the, we're trying to make something certain out of uncertainty. How do you deal with all that?
I try to be as conservative as possible, so with clients where we're running the numbers, we run them out to age 95.And
that that scares some people, right?
It does, it, it does, but better to overs save and better to be conservative than as my clients used to say. I don't want to be eating dog food when I'm 85 years old.
Yeah.I, I used to think that if instead of um mutual fund companies showing people on yachts and beaches in retirement, that they should show people maybe eating dog and cat food to say, if this is what you want to have happen, fine, just keep doing what you're doing. But if you want to live on the yacht and be on walk on the beach, you should save a little bit more maybe.
Now if you look at the stats and how much people have saved for retirement, that's probably a really good idea to, to start influencingbehaviors.
I can't get anyone to think that they want to run that ad for what it's worth. You you know.All right, but, but in, in retirement, right, a lot of folks have the ability maybe to control some of their destiny. You're an avid biker, I'm an avid biker. The need to stay healthy in retirement, uh, if you follow Peter Atia and this notion of, you know, being having functional sort of strength and being able to lift groceries and lift grandchildren and walk up steps, really important in retirement. What, what, I mean, obviously, you, you practice what you preach.
Yeah, I wish I didn't have such an expensive hobby, you know, they always say with bikers, the number of bikes you need is the number you have plus one.And they, uh, oh, and so.
I know we take up
running that pretty cheap hobby.
Yeah, I'm, I'm afraid my, my wife and I have somewhat maybe two expensive hobbies. When I have a number of bikes in my fleet, uh, gravel road, and, and mountain, and then my wife is a stand-up paddle boarder and she has a number of paddle boards in our garage. So we can never downsize because we, there's not enough, you know, there was no space would be big enough except for what we have for all our toys.
Yes, but it, it, you know what, I think it keeps you happy, it keeps you healthy, and that's, that's really the name of thegame. Yeah,
I, I, we've almost run out of time, but as you think about happiness in retirement, I'm often reminded, Lisa, there was a study done by the Center for Retirement Research at Boston College that said by and large, most people, irrespective of how much income they have in retirement, are satisfied if 3 things are true.Uh, one is that they retired on their own terms, 2, that they're in good health, and 3, that they're married. And, um, I've always debated the third one. Just kidding.
I might have been a man who saidthat.All right.
I, I think we've run out of time unfortunately, but, uh, I want to thank you for sharing your knowledge and wisdom with our listeners and viewers. It's so greatly appreciated. Can't wait to have you come back on a future episode.
Really enjoyed it.Thanks, Bob.
So that wraps up this episode of Decoding Retirement. We hope we provided you with some actual advice to help you plan for or live in retirement. Don't forget, if you've got questions about retirement, you can email me at YF podcast@yahoo Inc.com and don't forget you can listen to Decoding Retirement on all your favorite podcast platforms.
This content was not intended to be financial advice and should not be used as a substitute for professional financial services.
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