Aging Alaskans face uncertainty in retirement planning

Uncertainty over the market and taxes might be difficult to contend with, but Alaska has one sure thing: aging residents are an increasing part of the picture.

According to data from the Alaska Department of Labor, the average age of Alaskans has always skewed young, but the figures are shifting upward. In 2000, just more than 5 percent is of Alaskans were older than 65. By 2030, the department predicts that will increase to 17 percent.

Those retirees and soon-to-be retirees are keeping financial planners busy looking into the future, said TerriLee Bartlett, a Wells Fargo wealth advisor in Anchorage.

Uncertainty is the bottom line for many of the soon-to-be retirees, but Wells Fargo advisors said that having a plan for retirement is the key to weathering any future changes.

David Kennedy, a Wells Fargo communications officer, said 87 percent of people with a plan say it gives them comfort, a figure that has increased over the past year.

“Having a plan really sets people at ease,” he said.

Among the major unknowns are what taxes will look like in coming years with several increases scheduled to take effect Jan. 2 unless Congress acts. A slew of possible tax changes mean investors and soon-to-be retirees might not know what to prepare for, but planners suggest that a diverse income stream helps with adaptability in the future.

“I always tell clients don’t let the tax tail wag the dog,” said Jave Ragan, a Wells Fargo wealth planning strategist.

The potential tax changes include an expiration of the 2001 and 2003 income tax cuts enacted under President George Bush, the end of President Barack Obama’s payroll tax cuts, changes to taxes on dividends, the end of the alternative minimum tax patch, a new Medicare tax on investment income, and a steep increase in the estate tax, also known as the “death tax.”

The death tax could rise from a 35 percent rate for estates greater than $5 million to 55 percent for estates greater than $1 million. If the current 15 percent capital gains tax rate expires, dividends could be taxed at ordinary income tax rates.

Ragan said that when income taxes go up, people often save less. But the real ramifications of the upcoming changes are hard to predict because of nobody knows what Congress will decide to do in the coming months of an election year.

Having a diversity of assets means that retirees won’t be hit as hard by any one change. That is one of Wells Fargo’s main recommendations, Bartlett and Ragan said, and is advice that holds true for business owners and non-business owners alike.

Bartlett said that uncertainty over the future exists for all income levels.

“People that might have several million dollars might think, ‘Do I have enough to live on?’” she said.

Ragan said having a solid plan for retirement finances helps.

“Without a plan, it’s difficult to now how much is enough,” he said.

Ragan said creating a plan starts with an understanding of the complete bottom line — all of an individual’s accounts, future capital expenditures, property purchases and sales, and any other expenses or sources of income that are known.

“The analytic piece of that is forecast that into the future,” Ragan said.

Bartlett said part of the process includes something called discovery cards, which allows people to review their spending and saving options, and prioritize them.

“They can tactically move these cards around,” she said. “It creates discussion that possibly they’ve never had before.”

Bartlett said that people sometimes forget that retirement can be expensive.

“The monies spent at that time actually go up when they’re ready to retire,” she said.

Having fun is one cause for that spending – vacations, rental homes, and other pastimes can add up quickly. And then, added medical needed at a more advanced age can also add up.

Ragan said that defining spending can be the most challenging part of retirement planning. Part of the plan also includes preparing for giving, whether to children or charities, Ragan said.

Once that’s nailed down, there are equations to help figure out how much is needed.

Bartlett said that many of those nearing retirement are in the sandwich generation – they have kids in college, and are also helping to support their parents. That can make it harder to save for retirement. But such savings are still key, Bartlett said.

Taking advantage of an employer’s match in a 401k is a smart move, Bartlett said.

“That’s free money for them,” Bartlett said.

Part of the plan includes looking at what happens after death. Often, there are just nine months to pay Uncle Sam after someone dies, Bartlett said.

Ragan said part of Wells Fargo’s planning process includes analyzing the liquidity of an estate. While the current, cloudy tax situation makes it a little difficult to plan for what taxes might be, it’s crucial to have enough liquidity to pay for them, Ragan said.

Succession planning

Ragan said the company has some business-specific ideas for retirement planning as well.

Retirement planning can be a little different because an owner’s net worth is in their business, but the basic guideline – diversify – holds true.

Ragan said that looking more than just four to five years into the future is crucial.

Part of future planning for a business includes having a succession or transition plan for the owner.

Ragan said three are four primary exit alternatives – an outright sale to a third party, a sale to a key employee or group, and a transition to children. Winding down a business is also a possibility, although it generally doesn’t result in the same return toward retirement.

Hopeful-retirees often also find themselves preparing for the unexpected when they sit down and start planning. That means it’s also time to look at succession plans, including a buy-sell agreement if needed. Ragan said surprising number of businesses don’t have a plan or agreement, or have them but don’t have the liquidity needed to carry them out.

If the plan involves one partner buying another out, the funds need to be ready to execute that plan, Ragan said.

As far as metrics go, not all the data is a bad sign.

According to the Labor Department, the percent of Alaskans remaining in the workforce past retirement age has gone from 15 percent in 2000 to 22 percent in 2010. That number is expected to keep growing in 2020, and beyond, as baby boomers continue to age.

While the increasing number of seniors remaining in the workforce is sometimes the result of those without enough savings to comfortably retire, there’s also a non-financial component.

Kennedy said part of that is because people are living longer.

Bartlett said she sees a lot of people who like what they’re doing, so they keep doing it. Other times, people explore other fun jobs, and stay in the workforce in a new position.

Molly Dischner can be reached at molly.dischner@alaskajournal.com.