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Journal of Financial Service Professionals - Current Issue

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Vol. 72, No. 3, May 2018

FOCUS ON Pensions, Retirement & Financial Planning

The Optimal Time for Claiming Social Security Benefits: A Methodological Note
Joseph Friedman, PhD
The decisions about the optimal age for starting Social Security benefits are subjects of a number of recent papers. It is generally agreed that initiating or postponing benefits may have significant consequences, but there is less agreement on how to model the problem or measure its financial implications.
By law, benefits are paid only to live beneficiaries. Thus, the anticipated future benefits should be weighted by the recipient’s survival probability—the probability that the recipient is alive when the benefits will actually be received. Many published papers assume that benefits will be received “on average” throughout the recipient’s expected remaining lifetime and estimate the present value of Social Security benefits by discounting the cash flow through life expectancy.
This paper will show the preferred approach is to estimate the actuarial present value (APV), which weights each future payment by the probability that it will be received. Based on survival probabilities and life expectancy tables that are compiled by the Centers for Disease Control, the paper demonstrates that the present value through life expectancy approach overstates the APV by approximately 10 percent. Therefore, timing decisions that are not based on the APV are probably suboptimal.

Extending the 60-Day Rollover Period
Kevin Tacchino
With the release of Revenue Procedure 2016-47 in April of 2016, clients now have a new way of avoiding the complications of a missed 60-day rollover period. Clients can now self-certify their eligibility for an extension if certain requirements are met, eliminating the need for IRS preapproval. Therefore, planners need to explain to clients the events that could trigger the self-certification process and, perhaps more importantly, identify specific requirements that could arise under each option for self-certification. This paper examines private letter rulings regarding 60-day waivers to clarify how IRS thinking will apply to a client’s specific situation. After studying the various circumstances under which waivers were granted (and perhaps more importantly, denied), a clear pattern begins to emerge. By applying these historical trends to a client’s current situation, planners can help their clients identify situations in which they may receive a waiver for the 60-day rollover rule.

Public Pension Issues and an Examination of CalPERS, the Largest of the Nation’s Public Pension Programs
James Estes, PhD, MBA, CFP, CLU, ChFC, CPCU, Janine Kremling, PhD
This paper explores the status of public pension funding and issues facing legislatures in the United States. It looks at the two main decision matrices used to fund the pension plans, their evolution, and the consequences of each. The paper analyzes state plans, focusing on California’s plan, CalPERS, the largest public pension fund in the United States. The paper examines the methodology of investing, the funding alternatives, and trends and consequences of present and past decisions on the increasing funding gap presently facing California. The paper then suggests several specific changes that would reduce or eliminate that gap.

A Financial Advisor’s Guide to Avoiding Required Minimum Distribution Land Mines
Alisha M. Harper, JD, LLM, Jonathan P. Smith, CRPC, APMA, Patricia Miller Selvy, PhD, CPA, CGMA
In 2016, approximately 2.5 million taxpayers turned 70 years old. In 2017, these baby boomers turned 70½. People with money in tax-deferred retirement accounts (other than Roth accounts) are required to begin taking distributions from these accounts at age 70½ and pay income taxes on those distributions. The yearly minimum distribution amounts are calculated using account values and ratios set forth in IRS tables of longevity. Exceptions and adjustments apply to surviving spouses, and different rates apply to nonspouses who inherit IRAs. This article provides guidance on these distributions.


Editor’s View
Retiree Voices Offer Lessons to Planners
Anna Rappaport, FSA, MAAA, MBA, Kenn Beam Tacchino, JD, LLM
Financial planners have traditionally focused on rational drivers of retirement planning, and on expectations that people will save, invest prudently, and put together a reasonable plan to use assets during retirement. But the Society of Actuaries’ research with individuals at different stages of retirement indicates that retirees often do not fit into the expected pattern. It also demonstrates that some of the most important decisions that many middle-income American families will need to make are different from the traditional issues of saving and investing, and this research helps us focus on potential gaps in the current state of retirement planning.

Advice for the New Planner
Employee Benefits: Thinking beyond the Paycheck
Emily Purdon, CFP
As a new financial planner, take the time to help your clients through periods of transition by educating them on how their employer-provided benefits package creates stability. The purpose of this column is to highlight common life events clients face and to offer the new planner advice and guidance about how employee benefits are intertwined with these events.

Economics & Investment Management
Another Look at Risk-Profiling
John E. Grable, PhD, CFP
Best practices around the use of risk-tolerance scores and risk-profiling methodologies are rare in the finance and economic literature. This issue’s column discusses the appropriate use of financial risk profiles, while introducing the notion that clients likely have more than one risk profile. The possibility that clients have generalized and specific risk profiles helps explain what often appear to be biased or contradictory client behaviors.

Estate Planning
Estate Taxation: Greater Certainty for a While
Dennis Reardon, JD, LM, CLU, ChFC
With the passage of the Tax Cuts and Jobs Act of 2017, estate planners now have greater certainty as to the future of federal estate, gift, and generation-skipping taxation—at least, for a while. We look at several techniques that can be used if or when the estate tax resumes in 2025.

Ethics & Regulation
Self-Interest and Autonomy
Ronald Duska, PhD
Is “business ethics” an oxymoron? This contention has to do with two disturbing aspects of our current culture. The first is confusion about and careless use of the terms “self-interest” and “selfishness.” The second is that our society has promoted an extreme individualism characterized by the notion of autonomy. This column looks at these to see how they affect the ethics of the financial service professional.

Executive Compensation
The Impact of the New Tax Law on Executive Compensation
Paul J. Schneider, JD, LLM
Three principal provisions of the Tax Cuts and Jobs Act of 2017 (PL 115-97) affect executive compensation. These provisions expand the application of Internal Revenue Code Section 162(m); impose an excise tax on excess executive compensation and parachute payments paid by tax-exempt organizations; and establish a new form of qualified stock plan. In light of these provisions, the affected taxpayers should review their executive compensation practices and agreements to determine what changes are required in order to comply with, or to take advantage of, such provisions.

Financial Gerontology
Financial Gerontology: What Is It? Do We Need It? What Can We Learn?
Sandra Timmermann, EdD
As the financial services field moves toward holistic retirement planning and away from a transactional environment, the piece that is often missing is a deep knowledge of aging consumers and how their needs change over time. Some financial professionals believe their role is to focus on finance and leave these aging-oriented topics to other professionals or family members. But the financial professionals who involve themselves with nonfinancial issues like those described in this column will develop stronger relationships with their clients and are better equipped to help them as they navigate the aging continuum.

Health Insurance
Prescription Drug Costs and Health Insurance Plan Design
William S. Custer, PhD
The role of pharmaceuticals in achieving and maintaining health has grown in importance over the last 25 years. The characteristics of the private health insurance market will determine the ultimate value delivered to consumers.

Insurance & Risk Management
A Split-Dollar Renaissance in the Making?
Andrew J. Rinn, JD, CFP, CLU, ChFC, Troy D. Branch, JD, CLU, ChFC
Loan regime split dollar has been the beneficiary of an advanced-planning renaissance due to low interest rates, increasing clarity in split-dollar regulations, and a surging economy that provides a fertile ground for executive benefit arrangements. The recently passed Tax Cuts and Jobs Act of 2017 [PL 115–97 (2017)] provides an additional incentive to take another look at this effective planning vehicle.

Practice Management
Revisiting Supplemental Executive Retirement Plans after the Tax Law Change
Douglas B. Richards, JD, MBA, CLU, ChFC
Businesses derive no immediate tax benefit from nonqualified-benefit funding. However, after-tax funding of these benefits could be less costly under the new tax scheme. Further, utilization of creative benefit designs with more meaningful balancing of corporate and executive interests and a fundamental awareness of the limitations of who may be included in “top-hat” groups helps ensure that financial service professionals who embark on a journey of increased proficiency in this rewarding field are likely to find it a satisfying pursuit.

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