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Cypen & Cypen
April 18, 2019

Stephen H. Cypen, Esq., Editor

Taxpayers may need to take money out of their individual retirement account or retirement plan early. However, this can trigger an additional tax on top of other income tax they may owe. Here are a few key things for taxpayers to know:

  • Early Withdrawals. An early withdrawal normally is taking cash out of a retirement plan before the taxpayer is 59½ years old.
  • Additional Tax. The IRS charges a 10 percent penalty on early withdrawals from most qualified retirement plans. There are some exceptions to this rule.
  • Nontaxable Withdrawals. The additional tax does not apply to nontaxable withdrawals. These include withdrawals of contributions that taxpayers paid tax on before they put them into the retirement plan.
  • Rollovers are a nontaxable withdrawal. A rollover happens when taxpayers take cash or other assets from one retirement plan and put the money in another plan within 60 days. A rollover can also happen when they direct their plan administrator to make the payment directly to another retirement plan or to an IRA.
  • Form 5329. Taxpayers who took an early withdrawal last year may have to file Form 5329 with their federal tax return.
  • Use IRS e-file. Early withdrawal rules can be complex. IRS e-file is the easiest and most accurate way to file a tax return. The tax software will pick the right tax forms, do the math, and help find tax benefits. 

Issue Number: Tax Tip 2019-36, IRS Tax Tips, April 4, 2019.
Losing a spouse is hard. I know that firsthand. When I was in my 30s, I met a fellow financial advisor and fell in love. We married and made a decision to combine our lives and our practices. A few years later we found out we were expecting twins. I was just one month into my pregnancy when my husband passed away unexpectedly. The life I had imagined – raising our twin girls together, working as a team in a field we loved and supporting our young family – evaporated in the blink of an eye. I was thrust into a new reality, in which so many responsibilities I thought we’d share as a couple suddenly fell onto my shoulders alone. In the 11 years since, I’ve grieved with many clients who have also lost their spouse. That first conversation can be very emotional, but there’s a comfort that comes with them knowing that I’ve personally experienced loss as well. Once we’ve achieved a certain level of comfort, we can then talk about what comes next. As a first step, I advise my clients to meet with an attorney to review their late spouse’s will. This process can come with varying levels of complexity depending upon family structure, which might include former spouses and children from previous marriages. This is also a time to figure out if probate is necessary based on the amount of assets and how the estate was originally established. Once the estate is settled, I advise my clients to do an inventory of both assets and liabilities, managing them side-by-side. It’s important to understand what kinds of assets may be coming to them now, such as life insurance proceeds or investment proceeds from an IRA.  Some widows and widowers choose to use such proceeds to pay off debts, including mortgages, while others may choose to invest. If they had assets that were owned jointly, like a house, bank or brokerage accounts, or an annuity policy, they will need to have those re-titled without their spouse’s name. If their spouse was employed at the time of his or her death, my client will need to contact their spouse’s company to understand which employer-sponsored benefits they may have inherited. Spouses are automatically designated as beneficiaries on 401(k) plans, unless they had previously waived that right. Surviving spouses may also be entitled to certain equity compensation benefits. (If you’re working, this is also a reminder to update the beneficiary on your own workplace plans to a non-spouse, such as a child or other family member.) Depending on the occupation, there may be specialized benefits involved, such as veterans’ benefits for surviving spouses. For couples in their 60s, there is also Social Security to consider. The surviving spouse should understand which benefits they may be entitled to and how these fit into their overall financial picture. One thing that tends to be overlooked is the necessity of identifying any online financial accounts that late spouses had managed, and making sure passwords are obtained. You may need to work with the financial institutions to ensure you have access and that you are authorized to manage those accounts going forward. This is also a time to grapple with tax implications. It’s wise to meet with an accountant to go over all the changes to your situation. Your filing status may change to filing Single, Head of Household, or Qualifying Widow(er) with dependent child. This is also an opportunity to revisit charitable donations, which can impact your taxes. If you and your spouse made significant contributions to a favorite nonprofit or religious institution, you’ll have to decide whether you can and wish to continue, and whether it will be at the same level. If you and your spouse were funding education for children or grandchildren, you’ll have to evaluate whether that will continue as well. You will also need to consider whether you’ll get a job if you weren’t working, or get a second job if you were. There is a lot of financial uncertainty in the immediate aftermath of losing a spouse. Your household now has half the income but the same amount of financial obligations, if not more. That’s why it’s so important to build a checklist of those obligations and set priorities. My experience taught me that this is a time when budgeting becomes very important. You need to ensure you’re still preparing for retirement while addressing current expenses both small and large. This is a complicated process in which I am very familiar. During my first meeting with a widow or widower, there are a lot of tears and a lot of confusion. But by the end of our second meeting, he or she will have a better sense of control after completing a thorough financial inventory. They are now prepared with a checklist and more confident in what to do next. I know all too well how hard it is to hear “It’s going to be OK” when you’ve just experienced a tragedy. In my situation, enough time has passed that I can say I really am OK now. My kids are thriving, and we’re enjoying life. What I tell my clients who have lost a spouse, and would tell anyone in this situation, is that you have to take things one day at a time. Allow yourself to grieve, but keep moving forward. Having supportive people around you, including professionals who can help you navigate your responsibilities, can make all the difference. Linda Donovan is a Houston-based Senior Vice President, Financial Advisor and Senior Portfolio Manager with RBC Wealth Management – U.S. She has grown her career as a financial advisor while raising twin girls as a single mom. Linda Donovan,, March 2019.
Bruce Dangerfield doesn’t know when his only son began to be haunted by post-traumatic stress disorder. It may have been in 1998, when he spent hours finding, piece-by-piece, the body of a 9-year-old ripped apart by a shark north of Jaycee Beach. Perhaps it was years later, when he recovered the drowned body of a 4-year-old child, who was the same age as his own son. Or, maybe it was in 2013, when he was one of the firefighters lowered from a helicopter into western Indian River County swampland to retrieve three bodies from a plane crash. "They had to cut the bodies up and put them in bags to get them back on the helicopter," Bruce Dangerfield recalled his son telling him. David Dangerfield, 48, killed himself in late 2016, shortly after posting a message to Facebook about PTSD and its devastating effect on first responders. He was a 48-year-old battalion chief who had spent 27 years working for Indian River County Fire Rescue. He left behind two teenage boys. "He had a lot of things going for him. And this disease did this," his dad said. A new Florida law, entitled Workers' Compensation Benefits for First Responders that went into effect Oct. 1, can't help David Dangerfield now, but it could help save the lives of other first responders suffering from PTSD. The law expanded workers' compensation benefits, enabling first responders to be paid lost wages as they seek treatment or take time off following a PTSD diagnosis. That diagnosis doesn't need to include a physical injury. Its passage was fueled by the 2016 Pulse nightclub shooting in Orlando, as well as testimony from Dangerfield’s cousin-in-law, state Rep. Erin Grall (R-Vero Beach), and Josh Vandegrift, a retired Brevard County fire medic who returned to work despite his own struggles with PTSD.
'It sneaks up on you'
Working with PTSD can be dangerous for all involved in a rescue effort, rescue and health officials said. "Given the nature of first-responder work, ideally, we would want them to be at their emotional and physical best performing duties," said Palm City-based licensed clinical psychologist Agnieska Marshall. PTSD is two to five times more prevalent among first responders than in the general population, according to statistics from Badge of Life, a nonprofit that educates and trains law enforcement on mental health and suicide prevention, and the Firefighter Behavioral Health Alliance. Symptoms of PTSD vary but can be debilitating, Marshall said. At any time, a person could be triggered into re-experiencing a traumatic event, or feel a sense of detachment or a desire to avoid certain places and situations. That's not ideal for an emergency worker on the job. First responders on the Treasure and Space coasts agree the new law provides some much-needed help to those suffering from PTSD. Still, they said, many with the disorder won't qualify for the help. "The bill hasn't worked the way they said it's going to work," said Mike Bramford, president of the International Association of Firefighters Local 2969 in Brevard County. Traumatic events that don't involve death -- like being taken hostage, or seeing tortured animals or child pornography -- are not covered in the new law. “There are officers all around the country who specialize in sexual child abuse … It has a cumulative and horrid effect on them," said Dennis Slocum, a retired sheriff's deputy and the legislative director for the International Union of Police Associations. Rather, claims must have been the result of a so-called "qualifying event" involving the death of a child or an adult, but only if the adult dies by one of eight injuries specified by the Florida Department of Financial Services. Those injuries include decapitation, exposure of certain internal organs or third-degree burns to 9 percent or more of the body. That’s not the way PTSD works, Bramford said. "When you come in and see something horrific … the stress is there, whether the person died or not," he said. Many cases of PTSD among first responders are cumulative, Bramford said, resulting from the progressive effects of daily exposure to trauma. "It's not just one call," added John O'Connor, president of the International Association of Firefighters Local 2201 in Indian River County. "It sneaks up on you."
‘A starting point’
The law gives an expiration date of 52 weeks from the qualifying event, leaving out those diagnosed before Oct. 1, 2017. That excludes, ironically, those for whom the law was originally crafted -- including the Orlando first responders present when former Fort Pierce resident Omar Mateen killed 49 and wounded 53 others inside the Pulse nightclub; as well as Josh Vandergrift, who testified in Tallahassee prior to the bill’s passage. Vandegrift was with the first Cocoa Fire Department crew on the scene when a pedestrian was struck by a van on U.S. 1 in Cocoa in July 2016. The pedestrian turned out to be his 31-year-old brother, Nate Vandegrift, who died at the hospital that night. Josh Vandegrift said he was diagnosed with PTSD not long afterward. He recalls debilitating anxiety and emotional distress, which left him unfit for the unpredictable, high-pressure work he had done for 11 years. "It was a daily mental wrestling match, to fight my brain enough to convince it I was going to be OK," he said. "The city I worked in (Cocoa) was small. Three stations, 14.2 square miles … I couldn't do anything without seeing the intersection." He said he had flashbacks of seeing his brother lying on the ground, and the visual reminders meant repeatedly being dragged through the stages of grief. "It was hard to see dead people, because it would remind me of the accident," he recalled. "It was hard for me to run calls where I didn't know what I was going to see and how it was going to affect me." His disability claim filed through workers' compensation was denied. He used vacation and sick leave donated from friends in the department. When that ran out, he went without a paycheck. About six months after the crash, he said he was given an ultimatum: return to work or lose your job. So he went back to work. "Looking back on it, I should have never gone back. It was just destroying me -- mentally, emotionally. It was having an effect on my family," he said. "As a firefighter, you're supposed to be the strong one, not the one breaking down on the side of the road." He struggled for almost two years before retiring in August, the condition of a settlement with the City of Cocoa over the denial of his disability claim, he said. Under the new law, Vandergrift said he might not have been forced to choose between his health and his career. "It's a starting point," he said about the law. "We had nothing. Now we have something to start with and expand on and make better."
First-responder agencies on the Treasure and Space coasts have reacted to the law by gearing up to provide additional training to employees. St. Lucie County sheriff’s Sgt. Troy Norman recently went through two days of training in a program planned to be administered throughout the Sheriff's Office. "They talk about how law enforcement sees things that normal people should never see or generally don't ever see," Norman said. Norman, who has been with the agency for about 19 years, said the classroom training demonstrated how to differentiate PTSD from other work-related stressors, emphasizing the importance of talking about symptoms as they arise -- in oneself or in others. Cops generally don’t like to voice their emotions, he said. "You're expected to just cowboy up and tough it out," said Slocumb, the retired sheriff's deputy, noting recruits have not historically been prepared to recognize PTSD and know how to get help. Garrett Riggs, who is in charge of curriculum development for the Florida Department of Law Enforcement, said PTSD and mental health are briefly addressed in the 770-hour curriculum the state's law enforcement officers are required to take. "We basically have an introduction to what the symptoms are and what some of the effects can be, but really in-depth training ... that comes at the agency level," Riggs said. Jeff Dill fought fires for 26 years before founding the Firefighter Behavioral Health Alliance. He said he's seen a sea change in the conversation surrounding PTSD since his organization gave its first workshops in 2011. "When I walked in and said we'll be talking about PTSD and suicide awareness, you'd think I had leprosy, because we don't talk about those things," he said. "Yet here in seven short years, look where we've come -- from zippo to now states are having laws and training and peer support." O'Connor, who has been with Indian River County Fire Rescue for nearly two decades, said it often feels easier to close oneself off or cope by using alcohol, but he wants first responders to know there are healthier alternatives. "You deal with it. You talk about it. You try to help other people that are suffering from the same things. You go to counseling," he said.
State Rep. Erin Grall speaks on House floor about PTSD
State Rep. Erin Grall, R-Vero Beach, talks about the importance of treatment for post-traumatic stress disorder and David Dangerfield, the late Indian River County Fire Rescue battalion chief.
What's next?
When Rep. Erin Grall testified on the floor of the Florida House about David Dangerfield’s PTSD-related suicide, she was in tears. "I remember reading that post on Facebook. And my husband seeing it for the first time. I said, 'What’s going on with David?'" Grall said. "Until something like this happens, you don't realize the deficiencies in the system." State Rep. Matt Willhite, a congressman from Palm Beach County who has been a firefighter for 23 years, co-sponsored a version of the Workers’ Compensation Benefits for First Responders law in the Florida House before the Senate passed its version in March. Willhite acknowledged criticisms of the new law but said, like most legislation, the bill was a compromise between disparate groups and interests. In the end, he said, it's better than nothing. "It recognizes something that hasn't been recognized for years and years," he said. Willhite said he doesn't intend to propose changes to the law anytime soon. No amendments are slated for consideration in the 2019 legislative session. But, he said, he's willing to take another look at the law if problems emerge. "It's been in place four months. We haven't even got the oil in the engine yet to see how this thing is going to run. Let's see how it works," he said. "If this was a good start, we can always build on that." Mary Helen Moore, Eric Rogers, Will Greenlee, Sara Marino, Treasure Coast Newspapers, TC Palm, March 22, 2019.
Americans of all political stripes are worried about retirement security and want government to play a bigger role, according to a research report published Tuesday by the National Institute on Retirement at its Washington policy conference. "Retirement Insecurity 2019: Americans' Views of the Retirement Crisis," is based on 1,250 online interviews conducted by Greenwald & Associates in January. Asked if there is a retirement crisis, 80% of Democrats, 75% of Republicans and 75% of independents agreed. Eighty percent of respondents said that government should do more to expand workplace retirement savings options, but 84% did not think that Washington policymakers understand the need -- even as "they see states doing something," NIRS Executive Director Diane Oakley said at the conference. "Washington seems to not be getting retirement," Ms. Oakley said. "On a local level, states seem to be doing more." Among respondents, 71% thought a state retirement program was a good idea and 25% saw it as "a very good idea." More than a third said they would participate in a program if it was offered and another third said it was somewhat likely. The prospect of a program with portability appealed to 90% of respondents. The survey found strong support for pension plans for state and local workers and for pensions in general, with 70% saying that the average worker cannot save enough for retirement on their own. Millennials expressed the most concern about financial security in retirement and more willingness to save more. They are also "very responsive to the idea of a defined benefit plan. We have an opportunity to help them get ready for retirement," she said. Three-fourths of those surveyed said that employers need to contribute more, Ms. Oakley said. "Workers really want help. They want help from the government; they want help from their employers." Hazel Bradford, Pensions & Investments, February 26, 2019.
Total assets of the 1,000 largest U.S. retirement plans continued to climb last year, reaching $11 trillion as of Sept. 30, representing a 6.4% increase from a year earlier, and a 31.8% increase from five years prior, Pensions & Investments' annual survey found. Defined benefit plans within the P&I 1,000 universe represented $6.91 trillion in assets, while defined contribution plans in the group accounted for nearly $4.1 trillion in assets as of Sept. 30. Among the 200 largest retirement systems, asset growth among defined contribution plans, which oversaw $2.47 trillion in assets, once again outpaced that of DB plans, with $5.46 trillion in assets, the survey found. Of note, assets of DB plans in the top 200 grew 4.4% compared to the previous year and 22.4% compared to five years earlier. Assets in the top 200 defined contribution plans grew 10.7% from a year earlier and 53.5% from five years earlier. The asset growth differences can be attributed to a number of factors, including DC plans "benefiting from market gains and new contributions," said Jay Love, an Atlanta-based partner and U.S. director of strategic research at investment consultant Mercer. "(Among) the top 1,000 DB plans, I would imagine that half of them are probably frozen and another 20% to 30% are closed," he added. For the 12 months ended Sept. 30, the Russell 3000 index was up 17.58%, while the MSCI ACWI IMI ex-U.S. index was up 1.79% and the Bloomberg Barclays U.S. Aggregate Bond index was down 1.2%. There was no change at the top as the three largest retirement plans by assets remained unchanged from last year. The Federal Retirement Thrift Savings Plan, Washington, retained its No. 1 spot with $578.8 billion in assets as of Sept. 30, up 8.9% from last year. Sacramento-based California Public Employees' Retirement System again ranked second with $376.9 billion, increasing 11.9% over the year, followed by the California State Teachers' Retirement System, West Sacramento, up 6.5% to $230.2 billion.

DB plans return to active
The DB plans among the 200 largest showed an increased interest in domestic active equity and domestic active bonds, which respectively had $405.1 billion in assets, up 16.2% for the year, and $756.8 billion in assets, a 12.9% increase from the prior year. By comparison, assets invested in passively managed U.S. equities were up just 0.8% to $605.2 billion in the year ended Sept. 30. For overall passive indexed equity, assets increased 1.9% to $942.1 billion over the year, while assets in passive indexed bonds among these plans dropped 4.6% to $136 billion since Sept. 30, 2017. For DC plans among the 200 largest, passive indexed equity assets increased by 14.5% in the 12 months ended Sept. 30, to $538.8 billion, while passive indexed bond assets remained unchanged over the year, at $50.2 billion. DC plan clients in particular have recognized "that you don't want to be so dogmatic (when considering) active vs. passive" approaches in your portfolio, said Josh Cohen, Chicago-based head of institutional defined contribution at PGIM Inc. "We think there is a case for active and passive," depending on the asset class, Mr. Cohen said. With this in mind, very few institutional investors -- whether DB or DC, non-profit or insurers -- are going into passive fixed income, he added. "A lot of it has to do with the portfolio construction of the benchmark in fixed income," Mr. Cohen explained. "And, historically, managers' ability through thoughtful security selection and asset allocation (has allowed them) to outperform the benchmark," he said of concerns about passive fixed-income investments. Among the DB plans in the 200 largest systems, international active equity assets dropped 0.5% over the year ending Sept. 30, to $437.9 billion. Additionally, assets in active and indexed global equity fell 1.3% to $266.6 billion, while assets in active and indexed emerging markets dipped 5.9%, down to $191.5 billion as of Sept. 30. Across the entire P&I 1,000 universe, corporate DB plans saw their average allocation to domestic stock shrink to 16.4% of their total portfolio in 2018, down from 21.5% the previous year. The average allocation to international stock also dropped to 10.5% from 14.1% a year prior. Meanwhile, average allocations to global equity and domestic fixed income, respectively, increased to 9.3% and 43.5% of their total portfolio, up from 4.3% and 38.8%. Allocations at union plans among the top 1,000 did not significantly change over the year by asset class. More than half of their total portfolios continued to be allocated to domestic stock (26.7%) and domestic fixed income (28.3%), as of Sept. 30. Union plans had 27.8% allocated to domestic stock and 26.9% to domestic fixed income a year earlier.
Allocations to alts rise
Public DB plans within the 1,000 largest retirement funds are seeing their allocations to alternative investments, private equity and real estate equity increase, the P&I survey found. In fact, on average, the percentage of public DB plans' total portfolio dedicated to private equity was 9.2%, up from 8.7% a year prior; real estate equity was 8.1%, up from 7.9% the year prior; and public DB plans' average allocation to other alternatives was 7.5%, up from 6.9% last year. Of note, DB plans in the top 200 saw assets in private equity, specifically, increase by 10.7% to $367.2 billion as of Sept. 30. For public DB plans in particular, "many of them do have deficits, and they need exposure to higher-return asset (classes)," said Michael Moran, chief pension strategist at Goldman Sachs Asset Management, New York. "That's a continuation of a trend we've seen in the past few years," he said about public DB plans increasing their allocations to alternatives. Among DB plans in the top 200, assets in hedge funds largely stayed the same, increasingly only 0.1% to $159.7 billion as of Sept. 30, according to the P&I survey. Increased volatility in the fourth quarter, however, might prompt some pension plans to see a bigger role for hedge funds in their portfolio in 2019, said Sona Menon, Boston-based head of North American pensions and outsourced CIO at Cambridge Associates LLC. "This gave an opportunity for hedge funds to have a little bit of a comeback … hedge funds showed that they can protect on the downside," Ms. Menon said. "Over the last several years, (pension plans have) dialed down their allocation to hedge funds, and some have even eliminated them, but the volatility (last quarter) may help plan sponsors to think about whether there is an increased role for alternatives in their portfolio."
One of the toughest
The fourth quarter "was one of the toughest quarters for the S&P 500, with one of the highest drawdowns since the financial crisis. In the fourth quarter, the S&P 500 index was down 13.5%," Ms. Menon added. P&I estimated that the 1,000 largest retirement plans lost $765 billion in total assets during the three-month period ended Dec. 31, a 7% decline from Sept. 30. Defined benefit plans fared better than their defined contribution counterparts, insulated by relatively higher allocations to fixed income. Among the 200 largest sponsors, DC plans held about half of their total assets in global equities, the bulk of which was in U.S. equities. Index data was used to estimate weighted average asset class returns for the three-month period ended Dec. 31. Internally managed assets among the defined benefit plans in the top 200 increased over both the 12-month period ended Sept. 30 as well as over the five-year period. Over the survey year, the top 200 plans' internally managed DB assets rose 7.5% to $1.3 trillion. The trend also has gained steam, as internally managed assets grew 31.2% from $987.7 billion over the five-year period ended Sept. 30. The move toward internal management shows that external active managers increasingly are having to demonstrate the value for the fees they charge clients, said Julian Lyne, the New York-based chief commercial officer for Newton Investment Management, a boutique asset manager that is a part of BNY Mellon Investment Management. "In certain asset classes, plans that have good resourcing can do (internal management) more effectively. In my experience, the allocation to external managers tends to be some of the more non-vanilla products and capabilities. I think it's about value for money, and in some areas, taking assets in-house is the right move," Mr. Lyne said. The P&I survey found that DB plans in the top 200 internally managed $516.7 billion in domestic equity (active and indexed), up 14.2% from the prior year; $416.4 billion in domestic fixed income (active and indexed), up 23.5%; and $158.2 billion invested in active and indexed international equity, up just 1% from the year prior. In contrast, internally managed assets in active and indexed global equity, and international fixed income noticeably declined, respectively dropping 37.2% to $58.2 billion and 26.5% to $19.1 billion.
Other highlights
The 10 largest retirement plans remained the same this year, with three plans changing positions. Assets in AT&T Inc.'s DB and DC retirement plans increased 9.3% over the year to $124.1 billion in total assets, putting the corporate plan in the No. 8 spot, up from No. 10 last year. AT&T's retirement assets were boosted by its June acquisition or Time Warner Inc., which was estimated to have $7.2 billion across its defined benefit and defined contribution plans as of Sept. 30, 2017, and ranked No. 284 last year, according to P&I data. In the shift, Boeing Co., which had $123.7 billion in assets across its DB and DC plans, up 1.6% from the prior year, dropped one spot to No. 9 on the list, while the New York State Teachers' Retirement System, Albany, also dropped one spot to No. 10 on the list, with $120.1 billion in defined benefit assets, a 3.8% increase from the previous year. Separately, this year, P&I included for the first time in its survey a question for DB plans asking if their fund incorporated environmental, social and governance factors into their portfolio management process. The number of funds in the top 200 that responded "no" to the ESG question was 46, while 18 funds said they were using ESG factors, the survey revealed. Not all plan sponsors responded to the question. Also, among defined benefit plans in the top 200, assets in factor-based equity increased 86.4% to $38.4 billion from $20.6 billion the previous year, led by CalPERS increasing its exposure by 52% to $19 billion.
Danielle Walker, Charles McGrath, Pensions & Investments, February 4, 2019.
According to The Pew Charitable Trusts’ recent survey of American workers ages 18-64, many people are uncertain when--or even if--they’ll fully retire. Nearly two-thirds of the 2,918 respondents said they were likely to work past age 65, a finding that was most prevalent among male, low-income, and full-time workers. And while some said they prefer to work past 65, the majority felt they would be forced to do so out of financial necessity. The uncertainty many workers feel about when to retire can stem from such trends as stagnant wages, increasing life spans, and lack of health insurance coverage. But changes in how Americans earn a secure retirement also play a critical role -- in particular, the 40-year transition from traditional defined benefit pension plans to defined contribution retirement savings plans such as an IRA or 401(k). Defined benefit plans, what we often call pensions, promise a precise benefit for life beginning at a specific age or after a certain length of service, which greatly helps in planning for retirement. In contrast, planning with a defined contribution account is more difficult because the accumulated savings can vary depending on the amount contributed and the investment returns. Even when retirees know the amount in their account, many find it challenging to determine how much to periodically withdraw to cover what could be an extended retirement. As a result, many Americans lose control over the timing of their retirement. According to the Transamerica Center for Retirement Studies, only a third of retired Americans stopped working when they had planned. Perhaps reflecting this loss of control over retirement, many Americans are staying on the job longer. According to respondents to the Pew survey, workers across the income spectrum said they would continue to work out of necessity. Not surprisingly, those in households earning $100,000 or more were the least likely to say they would continue to work out of necessity. People with high-paying jobs may not need to work longer, but they often are in a better position to do so because their work is usually less physically demanding and allows for more flexible hours. Retiring earlier than planned has its own challenges. Workers who choose to, or are forced to, retire early might not have enough savings to cover a longer-than-expected retirement, which in turn may require federal and state governments to provide additional assistance to low-income retirees. There are ways for employees to gain greater control over the timing of their retirement, allowing them to leave the workforce when they planned. Perhaps the most effective is starting to save early. According to Transamerica, 31 percent of retirees started saving before age 40, while 39 percent started saving after that age. And an alarming 30 percent of retirees didn’t save for retirement at all. Planning for retirement is difficult, but it’s a challenge that policymakers can help address. To give people greater certainty about their financial futures, decision-makers should look for ways to increase access to retirement savings plans and boost participation and savings rates when workers do have access to a plan. Doing so will help ease the concerns of Americans about when they can begin -- and whether they’ll be able to afford -- a comfortable and secure retirement. John Scott, Forbes, February 4, 2019.
Measuring retirement security -- or retirement income adequacy -- is an extremely important topic. In recent years, there has been an increasing emphasis on the retirement income adequacy of widows and single women. EBRI’s Retirement Security Projection Model® (RSPM) can assess the size of households’ retirement deficit by modeling Retirement Savings Shortfalls (RSS). In this Issue Brief, an RSPM® module classifies households by the following gender and marital statuses: single female, widow, single male, and widower. Key findings are:

  • The retirement deficit -- or additional savings required to meet basic needs in retirement -- is higher for both widows and single females:
    • The average RSS is $18,476 per individual for married households where the female dies first (widowers).
    • The average RSS is $22,783 for married households where the male dies first (widows).
    • The average RSS is $37,690 for single males.
    • The average RSS is $72,883 for single females.
  • When households for which no shortfall is projected are excluded from the analysis, the average size of the shortfall is $76,896 for widows vs. $82,937 for widowers. Single females in the lowest pre-retirement wage quartile have an average RSS of $110,412 vs. those in the highest quartile with an average RSS of only $28,951. For single males, the gender discrepancy in average RSS goes from $29,736 for those in the lowest wage quartile to $12,465 for those in the highest quartile.
  • Not only are single females more likely to have retirement deficits, their retirement deficits are likely to be significantly larger than those of other cohorts.
    • Single females are the only cohort with at least 50 percent of households having a deficit.
    • The median RSS for this group is $19,900.
    • 10 percent of single females have an RSS of at least $222,592.
  • Nearly half (48 percent) of single females at the lowest income quartile have at least a $100,000 RSS (connoting serious potential financial complications in retirement).
    • This compares to a third (33 percent) of single males and 42 percent of widows.
    • Even in the highest income quartile 13 percent of single females have an RSS of at least $100,000, vs. 7 percent for single males, 4 percent for widows, and 3 percent for widowers.
  • Lack of eligibility for participation in a defined contribution (DC) plan significantly increases savings shortfalls.
    • Single females with no future eligibility in a DC plan have an average RSS of $97,325 vs. the $24,486 average RSS of those with at least 21–30 years of future eligibility.
    • The average RSS is $39,016 worse for single females than for single males with no future DC plan eligibility.
    • The discrepancy in average RSS between widows and widowers with no future DC plan eligibility is $6,529.
  • In contrast, future eligibility in DC plans can dramatically reduce serious potential financial complications in retirement.
    • 42 percent of female households with no future DC plan eligibility have an RSS of at least $100,000 compared with 11 percent of those with 21–30 years of future eligibility.
    • 13 percent of widows with no future DC plan eligibility have an RSS of at least $100,000, vs. 3 percent with 21–30 years of future eligibility.
  • Auto portability -- where a participant’s account from a former employer’s retirement plan would be automatically combined with their active account in a new employer’s plan -- can also have a large impact.
    • For those with 21–30 years of future DC eligibility, auto portability reduces average RSS by 21 percent for single females to as much as 38 percent for widowers.

 Jack VanDerhei, EBRI, January 17, 2019.
The U.S. floating rate Treasury note celebrated its fifth birthday in January 2019. The Treasury’s newest securities have grown into a $357 billion market, generating robust investor demand and providing the Treasury with needed flexibility in managing the duration of its liabilities. For more than a few investors, however, the securities remain a curiosity.
Q: What are Floating Rate Treasury Notes, and how are they different from Treasury Bills and Notes?
Floating rate Treasury notes are securities whose coupons are linked to movements in short interest rates. Each day, their coupon rate is reset off the auction yield for the most recent 3-month Treasury Bill, plus or minus a fixed spread determined at the securities’ initial issuance. Since auctions for new 3-month Treasury Bills occur once a week, the coupon rate effectively changes weekly. Interest is accrued daily and distributed quarterly. Like all Treasury securities, they are backed by the full faith and credit of the U.S. government and are exempt from state and local taxes. Each issued note has featured a 2-year final maturity. This contrasts with Treasury Bills, which don’t pay a coupon and are instead issued at a discount to the principal at maturity. Income is generated as the security rises to par at maturity. Treasury notes, on the other hand, pay semiannual coupons and repay the principal at maturity. All types of U.S. Treasury securities are exempt from state and local taxes.
Q: How big is the market? 
Very large and growing. Since the initial auction in January 2014, the outstanding market value for floating rate Treasuries has grown to $357 billion (as of October 31, 2018). At this same point in its genesis (December 2001), the universe for TIPS was only $127 billion. As of October 31, 2018, the Bloomberg Barclays U.S. Treasury Inflation Notes Index had a market value of $1.14 trillion. The index universe for floating rate corporates maturing in fewer than five years is only $477 billion. On the issuance side, the Treasury has followed a fairly methodical approach. A new floating rate note (FRN) is auctioned every quarter, with monthly reopenings between each new auction. This has led to a stable investor base with deep liquidity. In terms of demand, the bid-to-cover ratios -- interest for the given supply of the notes at auction -- have consistently exceeded 3x, similar to ratios associated with bill auctions and much higher than levels corresponding to note and bond auctions.
Q: What has been the performance of Floating Rate Bonds relative to similar maturity Treasury Bills and Notes?
Floating rate Treasuries as an asset class have performed well relative to similar short duration products with comparable volatility since inception. However, the performance advantage of FRNs really started to accelerate once the Federal Reserve began lifting interest rates in December 2015. With gradual Federal Reserve tightening likely to continue next year (in our view), investors need to remain cognizant of the interest rate risk embedded in Treasury notes of even 1-year to 2-year maturities.
Q: How is the Floating Rate Mechanism different from most Floating Rate Corporate Bonds?
Most floating rate corporate notes offer coupon streams that are indexed to the 3-month London Interbank Offered Rate (LIBOR) plus some spread in basis points (bps). Typically, their coupon rates reset quarterly. Income tends to be distributed quarterly as well. Since corporate floaters reset less frequently than Treasury floaters, they may be less responsive to changes in Fed rates. With the coming migration of floating rate issuance to a new benchmark by 2021, the Secured Overnight Financing Rate (SOFR) appears to be the most likely candidate to replace LIBOR as the benchmark reference rate. Interestingly, approximately $10 billion in floating rate notes that are linked to SOFR and employ a similar reset mechanism to floating rate Treasuries have been issued.
Q: Why has focusing on Floating Rate Treasury Notes with maturities greater than one year been prudent?
When we designed our Index with Bloomberg, we decided to exclude FRNs with maturities of less than 12 months for the following reasons:

  • Benefits from Supply/Demand Dynamics within Money Market Funds: Money market investors who are heavily constrained by maturity restrictions are often interested in purchasing short-term paper right around the 1-year threshold. This dynamic has enabled securities to be removed from the Index at a premium (in larger proportions). At maturity, the floating rates notes are redeemed at par. As illustrated on the next page, the magnitude of the premium varies, but has remained persistent over the last three years.
  • Takes Advantage of Any Positive Term Premium for Floating Rate Treasuries with Longer Maturities: Floating rate Treasuries with maturities of greater than a year have, on average, offered 6 bps more in yield than those securities with less than a year to maturity. Currently, the yield spread is 6 bps.
  • Mitigates Government Shutdown Anxiety: While any noise is likely to be short term in nature, anxiety about government shutdowns over the debt limit is an all-too-frequent occurrence for investors in short-term debt. Limiting Index constituents to those with more than a year to maturity diffuses some of this anxiety by mitigating principal risk. With the recent shift in control of the House of Representatives, this periodic headache of government shutdown brinkmanship is probably not going away anytime soon

Q: Can Floating Rate Treasury Notes be employed across market environments as a low-volatility asset?
Floating rate Treasuries were designed as a cost-effective alternative to the strategy of rolling Treasury Bills, an approach often employed by institutional investors. More frequent resets will lead floating rate Treasuries to outperform Treasury Bills in stable to rising rate environments. However, the opposite will also be true when the Fed is cutting rates. The speed and magnitude of the rise or fall in rates will drive the degree of outperformance or underperformance. There are risks associated with investing, including possible loss of principal. Securities with floating rates can be less sensitive to interest rate changes than securities with fixed interest rates, but may decline in value. The issuance of floating rate notes by the U.S. Treasury is new and the amount of supply will be limited. Fixed income securities will normally decline in value as interest rates rise. The value of an investment in the Fund may change quickly and without warning in response to issuer or counterparty defaults and changes in the credit ratings of the Fund’s portfolio investments. Due to the investment strategy of this Fund, it may make higher capital gain distributions than other ETFs. Please read the Fund’s prospectus for specific details regarding the Fund’s risk profile.
Rick Harper, Head of Fixed Income and Currency, WTGM-1641, Wisdom Tree Research, Pensions & Investments.
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What was the best thing BEFORE sliced bread?
Your work is going to fill a large part of your life, and the only way to be truly satisfied is to do what you believe is great work. And the only way to do great work is to love what you do. If you haven't found it yet, keep looking. Don't settle. As with all matters of the heart, you'll know when you find it. - Steve Jobs
On this day in:

  • 1906 San Francisco earthquake and fire kills nearly 4,000 while destroying 75% of the city
  • 1954 Colonel Gamal Abdal Nasser seizes power & becomes Prime Minister of Egypt
  • 1990 Bankruptcy court forces Frank Lorenzo to give up Eastern Airlines
  • 1990 Supreme Court rules states could make it a crime to possess or look at child pornography, even in one's home
  • 1991 US Census Bureau said it failed to count up to 63 million in 1990 census
  • 1991 Congress ends railroad worker 1 day strike


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