1. MANY RETIREES SPENDING MORE THAN THEY EXPECTED:
Thirty-nine percent of retirees are spending more than they had expected, according to the “Global Atlantic Retirement Spending Study: Perception vs. Reality.” Forty-nine percent of pre-retirees believe planning for retirement is more difficult for them than it was for their parents. The typical non-retired U.S. consumer over the age of 40 spends an average of $2,993 a month, and retirees spend 32% less ($2,008), according to Global Atlantic Financial Group. The areas where retirees are spending less are entertainment (29% less), dining out (24% less), traveling (18% less) and housing (23% less on mortgage payments and 22% less on rent). When a retiree has a pension, they spend 39% more than those without a pension ($2,379 vs. $1,709), and 20.5% less than pre-retirees. Retirees with an annuity spend 37% more than retirees without an annuity ($2,545 vs. $1,850) and 17.6% less than pre-retirees. The areas where the retirees with a pension or an annuity spend more are on rent, dining out and recreation. “Many Americans adjust their lifestyles and cut spending once they see how quickly costs add up in retirement,” says Paula Nelson, president, retirement, at Global Atlantic Financial Group. “Our study indicates that while those with pensions and annuities still often make changes as they age, there isn’t as much of a need drastically to adjust their spending. This doesn’t surprise us, as guaranteed income beyond Social Security can help retirees maintain the lifestyles that they are accustomed to, even after they stop working.” Asked to rate the importance of income to pay for basic living expenses in retirement on a 10-point scale, 56% of non-retirees give it a 9. Sixty-six percent think they are on track to generate enough income to meet basic needs in retirement. Global Atlantic Financial Group asked retirees what their top three financial regrets are. They said not saving enough (36%), relying too much on Social Security (20%) and not paying down debt before retiring (12%). Forty-two percent of those with an annuity have financial regrets, compared to 58% of those without an annuity, and 43% of those with a pension have financial regrets, compared to 65% of those without a pension. Global Atlantic Financial Group’s findings are based on a Echo Research survey of 4,223 people age 40 and older, conducted in September. Lee Barney, Planadviser, December 4, 2018.
2. STUDY FINDS MALE PARTNERS MAKE AN AVERAGE OF 53% MORE THAN FEMALE PARTNERS AT TOP LAW FIRMS:
The difference in average compensation for male and female partners at top U.S. law firms amounts to a 53 percent pay gap, according to a survey released. Average compensation for male partners responding to the survey was $959,000, which is 53 percent more money than the average of $627,000 paid to female partners, according to the partner compensation survey from Major, Lindsey & Africa. Average compensation for all partners was $885,000. The National Law Journal and Bloomberg Law have coverage. Only one female partner was among the group of highest-paid partners with compensation above $4.1 million. Nearly 1,400 partners responded to the survey, which was emailed to more than 63,000 partners in large and mid-size law firms on lists published by the National Law Journal and American Lawyer. Some of the partners also responded as a result of a LinkedIn campaign. Major, Lindsey & Africa sponsored and developed the survey in association with legal market intelligence specialist Acritas. In a 2016 survey, the pay gap was only 44 percent. A press release cautions against concluding that the pay gap is widening, however, because partners responding to the survey likely vary each year. Most male partners don’t perceive a problem with pay differences, according the new survey. Eleven percent of the males said they believe a pay gap exists, compared to 67 percent of the women. Only 23 percent of all the partners say law firm management has addressed the possibility of a pay gap. A majority of the partners indicated they were satisfied with compensation: 21.8 percent were very satisfied, 34.8 percent were moderately satisfied, and 9.5 percent were slightly satisfied. Nineteen percent of female partners were very satisfied with compensation, compared to 23 percent of male partners. Lucy Leach, technical research director of Acritas, said in a press release that differences in originations and billing rates were responsible for nearly 75 percent of the overall variation in compensation. “While the data do not suggest a conscious bias against women,” Leach said, “they do suggest that the predominant compensation model in BigLaw today, which heavily rewards partners for their originations and hourly rates, may fail to recognize other contributions to firms and may be putting women at a disadvantage.” Average originations for male partners was $2,788,000, compared to $1,589,000 for female partners. Average hourly billing rates for male partners was $736, compared to $650 for the women. Debra Cassens Weiss, ABA Journal, December 6, 2018.
3. WHY PRO ATHLETES MAY LOSE A FORTUNE BECAUSE OF THE NEW TAX LAW:
Because of changes to the tax law that went into effect this year, professional athletes might need to put their CPAs on speed dial. That’s because players in sports leagues like the NBA, NFL, MLB, WNBA and NHL have traditionally been able to deduct tens or hundreds of thousands of dollars for things that they no longer can. “One of my players makes $2 million a year, and it will cost him $80,000 more now because he can’t deduct state taxes [over $10,000], agent fees, workout clothes, meals and entertainment, and his cellphone,” says Steven Goldstein, a CPA with Grassi and Co. in New York who works with over a dozen professional athletes and celebrities. And players who make tens of millions of dollars a year will potentially pay hundreds of thousands more a year in taxes. The reason athletes are taking this hit is because individuals can no longer deduct more than $10,000 for state and local taxes (SALT) or declare miscellaneous itemized deductions for work-related expenses and investment fees. And these changes, especially the latter, will cost pro athletes more than most people. Of course, the median household income in the U.S. is about $63,000, so why should most people care about these tax hits that still leave the majority of pro athletes incredibly well paid? In reality, not all of them make millions of dollars a year. As Goldstein points out, a third of NFL players make the league minimum, which this year is $480,000, and the average NFL career is only about three years. Plus many pros are in the minor leagues, where they can make less than minimum wage. But admittedly the tax hits mentioned in this article are largely an issue for “the 1%.” Residents in all but seven states pay income tax; the highest rate is in California, where it’s over 13%.The so-called “Jock Tax” essentially means athletes pay different amounts of taxes in different states. If an athlete lives in Florida, where there is no state income tax, he pays none for his home games. But if that same athlete plays a game in New York, he pays New York’s income tax rate on the amount he made for that game. Some athletes try to play for a team in one of the no-income-tax states, so that they pay no state income tax for their home games, and their endorsement earnings. And other players choose to live in one of these states, even if they play for a team in another state. Washington, Texas, Nevada, Florida, Alaska, Wyoming, and South Dakota charge no personal income tax -- and only the first four of these have teams in the major sports leagues. Also, Washington, D.C., isn’t allowed to charge income tax to non-residents, and both New Hampshire and Tennessee charge no tax on income, but they do tax dividend income and interest. Speaking of the no-tax states, MarketWatch’s own Tax Guy, Bill Bischoff, says it’s probably not a coincidence that the recent Tiger Woods vs. Phil Mickelson golf match was played in Nevada, where Mickelson, who years ago was vocal about his dislike for the taxes he paid as a California resident, made $9 million for winning. When it comes to living in a state other than where your team is based, a downside is that you have to prove you were in your “domicile” state for at least 183 days that year. Goldstein says he stresses to his players how important that is. And Sean Packard, a CPA and the Tax Director with OFS Wealth in McLean Va., which works with over 200 athletes and celebrities, adds that some states are especially tough. “New York is aggressive with auditing when high earners try to claim residency somewhere else. I’ve had players go through it.” Teams in the no-tax states know they have an advantage attracting players. An executive for a team in a low-tax state recently asked Goldstein to crunch the numbers on how much more a player on a team in California would have to make to take home the same amount of money as a player in its state. Packard points out that certain teams have always tried to play up the fact their states have low taxes. “We had a free agent with offers from three teams, and the GM for the Texas team said, ‘If you take our salary, they’d have to offer you this much to match it.’ The agent asked if they were accurate.” A lot of athletes can’t be choosy about where they play, though. Younger players need to focus on making a team and making some money first, Packard says. And veterans with kids in school often don’t want to move. What can athletes do to soften these tax hits? Goldstein recommends some set up an LLC for income they earn for things like endorsements. And Packard says, “For our guys who have higher endorsement earnings and more of a business presence, we use loan-out corporations to save some tax money.” But he says the added administrative costs of running an S-Corp can be high, so “a cost-benefit has to be done to ensure the player is actually saving money.” Packard also says that the new tax law’s highest bracket being lowered from 39.6% to 37% will mitigate some of the losses -- especially for the highest paid athletes. What about the argument that superstars like LeBron James make tens of millions of dollars a year but also live in high-tax states like California? “LeBron made a business decision when he went to the Lakers,” Goldstein says, referring to the additional endorsement and entertainment-related money he can make by being in Los Angeles. He adds that losing 50% to taxes (37% federal and 13% state) of, say, $10 million, is still $5 million. In the end, even though specific tax issues can amount to a lot of money, they are just one of many things for athletes to consider. “I always tell people the amount of taxes is a consideration, but not the end all be all,” Packard says. Steven Kutz, Market Watch, December 9, 2018.
4. PENSION FUNDING INDEX DECEMBER 2018:
In November 2018, the funded status of the 100 largest corporate defined benefit pension plans improved by $7 billion as measured by the Milliman 100 Pension Funding Index (PFI). The deficit fell to $100 billion primarily due to a robust investment gain of 0.72% for the month. Pension plan liabilities improved marginally during November as the benchmark corporate bond interest rates used to value those liabilities slightly increased. As of November 30, the funded ratio increased to 93.7%, up from 93.2% at the end of October. The market value of assets rose by $7 billion as a result of November’s investment gain of 0.72%. The Milliman 100 PFI asset value increased to $1.485 trillion at the end of November. The cumulative investment return in 2018 has been a loss of 1.49% year-to-date, making it likely these plans will miss the expected return assumption. The projected benefit obligation (PBO), or pension liabilities, decreased by $1 billion, settling at $1.585 trillion at the end of November. There was a meager increase in the monthly discount rate of one basis point, resulting in 4.41% for November from 4.40% for October. Over the last 12 months (December 2017 – November 2018), the cumulative asset return for these pensions has been 0.21%, but the Milliman 100 PFI funded status deficit has improved by $105 billion primarily due to rising discount rates. Discount rates have increased over the last 12 months, moving from 3.67% as of November 30, 2017, to 4.41% a year later. Charles J. Clark, Zorast Wadia, Milliman, December 10, 2018.
5. DB PLAN FUNDED STATUS SHOWS SLIGHT IMPROVEMENT IN NOVEMBER:
The estimated aggregate funding level of defined benefit (DB) plans sponsored by S&P 1500 companies increased by 1% in November 2018 to 91%, as a result of an increase in U.S. equity markets, according to Mercer. As of November 30, the estimated aggregate deficit of $197 billion decreased by $11 billion as compared to $208 billion measured at the end of October. The S&P 500 index increased 1.79% and the MSCI EAFE index decreased 0.31% in November. Typical discount rates for pension plans as measured by the Mercer Yield Curve decreased by one basis point to 4.42%. “We saw a slight increase in pension funded status thanks to a rise in equity markets at the end of November,” says Matt McDaniel, a partner in Mercer’s US Wealth business. “We continue to see volatility in equity markets which is a concern for plan sponsors. Many plan sponsors with glide paths in place were able to lock in gains earlier this year while others may be in a tough position as market volatility has continued.” Wilshire Consulting’s estimate of the combined assets and liabilities of corporate pension plans sponsored by S&P 500 companies with a duration in-line with the FTSE Pension Liability Index – Intermediate found the aggregate funded ratio increased by 0.7 percentage points to end the month of November at 90.3%. The monthly change in funding resulted from a 0.3% increase in liability values, which was more than offset by a 1.0% increase in asset values. The aggregate funded ratio is up 5.7 percentage points year-to-date and up 4.5 percentage points over the trailing 12 months. According to October Three, pension finances stabilized in November, with both model plans it tracks treading water during the month. Plan A eked out a fractional improvement in November and is now up 6% for the year, while the more conservative Plan B was unchanged last month and remains ahead by less than 1% through the first eleven months of 2018. Plan A is a traditional plan (duration 12 at 5.5%) with a 60/40 asset allocation, while Plan B is a largely retired plan (duration 9 at 5.5%) with a 20/80 allocation with a greater emphasis on corporate and long-duration bonds. October Three says a diversified stock portfolio added more than 1% in November and is now up 1% for the year. Bonds gained close to 1% last month, as Treasury rates moved down more than 0.1% while credit spreads increased by almost as much, leaving corporate bond yields down just a couple basis points. Through November, a diversified bond portfolio is down 3% to 5%, with long duration bonds and corporates doing worst. Corporate bond yields fell a couple basis points in November, pushing pension liabilities up less than 1%. For the year, liabilities remain down 4% to 8%, with long duration plans seeing the biggest drops. Legal & General Investment Management America’s (LGIMA)’s Pension Solutions’ Monitor shows pension funding ratios slightly increased throughout the month of November, primarily driven by widening credit spreads and positive equity returns. These gains were somewhat offset by a decrease in Treasury rates. It estimates that the average plan’s funding ratio increased 0.7% to 90.3% during the month of November. LGIMA estimates the discount rate’s Treasury component decreased by 11 basis points, while the credit component increased 12 basis points, resulting in a 1-basis-point increase. Overall, liabilities for the average plan decreased approximately 0.3%, while plan assets with a traditional 60/40 asset allocation increased approximately 1.1%. According to Northern Trust Asset Management (NTAM), during the month of November, the average funded ratio for S&P 500 corporations with pension plans basically remained steady, just inching up from 88.6% to 88.7%. This was primarily driven by a slight increase in asset returns partially offset by a drop in discount rates. NTAM says global equity markets were up approximately 1.5% during the month, and the average discount rate decreased from 4.16% to 4.13%. Rebecca Moore, Planadviser, December 10, 2018.
6. REVISED N-2018-97: GUIDANCE ON THE APPLICATION OF SECTION 83(I):
Revised copy of Notice 2018-97. The error is on page 18, in the second paragraph under “Request for comments,” changing “IRS-2018-97” to “IRS-2018-0039. IRS Guidewire, Issue Number: Revised N-2018-97, December 7, 2018.
7. DID YOU KNOW BENJAMIN FRANKLIN SAID THIS?:
“Wish not so much to live long as to live well.”
Why are a "wise man" and a "wise guy" opposites?
9. INSPIRATIONAL QUOTES:
It is not what you do for your children, but what you have taught them to do for themselves, that will make them successful human beings. – Ann Landers
10. TODAY IN HISTORY:
On this day in 1980, Calvin Murphy (Rockets) begins longest NBA free throw streak of 78.
11. REMEMBER, YOU CAN NEVER OUTLIVE YOUR DEFINED RETIREMENT BENEFIT.