Retirement Planning For 2022: New Rules And Considerations – Seeking Alpha

Retirement planning handwritten in a note.

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The new year is an important starting point for a lot of our reminders in life. Have you checked your smoke alarm batteries? How’s your fire extinguisher looking?

Among the items and places to look deeper and investigate, you should also keep your portfolio in mind. It is a good idea to review your investment plans periodically. January/February is a good time to do this as we suggest a yearly review at the minimum. You need to check new laws that went into effect and look to see what new proposals are on the table. You should also confirm if you are saving enough. Finally, you should evaluate whether your current investments are well suited to both the current economy and what you think the economy will do in the short to medium term.

Change on the Horizon?

When planning for the year ahead, it is always a good idea to keep an eye on what proposed changes are floating around. It also helps to understand the new rules for 2022.

The IRS has changed both when RMDs (Required Minimum Distributions) must start and the tables used to calculate them. Both are good news, as investors will have nearly 2 more years before they have to start taking RMDs, and the new withdrawal tables are based on folks living longer (so each year the required distributions will be smaller). Here is a link to a table comparing the old RMD percentages to the new ones. Notice that the new tables assume you will live as many years after age 72 as the old ones assumed you’d live after age 70.

As it does every year, contribution limits have also been adjusted. The new maximums are as follows:

  • 401(k): $20,500 vs. $19,500 in 2021.
  • 401(k) catch up: $6,500, unchanged from 2021.
  • Traditional or Roth IRA: $6,000, unchanged.
  • Traditional or Roth IRA catch up: $1,000, unchanged.

While the Build Back Better bill seems dead now, its proponents are determined, and the bill might be resurrected or some of its provisions might become part of other bills. So, what changes might be on the horizon?

Critics have long derided supersized 401(k) accounts and IRAs as tax shelters for the wealthy. So, the BBB Act bars account owners from making additional contributions to their retirement accounts if any combination of their retirement account balances tops $10 million. This prohibition would apply to single filers with income over $400,000 and married joint filers with income over $450,000. If you are retired and have an account of $10 million and pulling just 4% that puts you pretty close to those income levels. In the House bill, this measure was slated to take effect after December 31, 2028.

While that may sound like a big balance, it isn’t unusual for a married couple, with both working, to have $5 million total in their retirement accounts. It doesn’t take long for that to double.

Also, on the table are far larger RMDs for high-balance accounts. The basics would be this: You’ll have to withdraw 50% of the portion of a Roth or traditional IRA balance that exceeds $10 million in the following year. It will be even worse if you are over $20 million where you will be required to pull all of the balance above $20 million in the year after your accounts hit that threshold. This will trigger significant taxes unless the funds are coming out of Roth accounts.

The BBB Act would end back door Roth conversions. Investment gains in a Roth IRA and typical withdrawals in retirement are free of tax. RMDs are not required with a Roth IRA while the original account owner is alive. However, you can’t contribute to a Roth IRA if your income is too high. In 2021, single taxpayers can’t directly contribute to a Roth IRA if their income tops $140,000, or $144,000 in 2022.

The back-door Roth gets around that by converting money in a non-deductible traditional IRA (which has no income limit on contributions) to a Roth account. You can even convert money that was put into the traditional IRA by paying the tax on it at your current top marginal rate.

The BBB Act would eliminate after-tax contributions to 401(k) and similar plans from being converted to Roth IRAs. For single taxpayers whose income exceeds $400,000 and joint filers whose income tops $450,000, the BBB would also ban conversions of pretax IRA savings to a Roth as well.

How Are Your Saving Levels?

Saving money is essential for retirement. Let’s look at an example to see how small changes can make a big difference at retirement. Let’s look at 45 years old and start with a 401(k) balance of $63,000 – the average for all 45-year-olds with IRAs at Fidelity. Suppose the 401(k) grows an average of 7% a year which is a fairly conservative estimate on total returns from stocks.

Our example saver earns $60,000 a year and gets a 1% pay raise a year and puts away only 5% of that a year in a 401(k). The company will contribute $1 for every $4 the employee contributes up to 6% of salary (so yeah, the employee is leaving money on the table in our example).

So what happens? By the end of the year that our saver hits 67, there is $523,984 in the retirement account. The employee will have contributed $77,149 and the employer match will total $19,287. Having over half a million dollars isn’t bad considering the employee only contributed about a third of the 15% of income that many suggest. Don’t forget, the employee didn’t contribute enough to get the full employer match either.

How can we improve that? We one way is to bump the contribution up to 6% of salary. That will push the total contributions by the employee up to $92,579. It will also get a bigger contribution from the employer, $23,145. And the portfolio will finish with a value of $569,050.

What if you can’t afford such a bump to your contribution in the first year but can down the road. One way to do things is to increase the percentage you contribute each year. How would it work out if you increased the percentage at a rate of 1% a year (so year 2 would be 6%, year 3 would be 7%, etc.) up until you are contributing 15% of your income?

The result would be the ending balance increasing to $764,330. The employee’s total contribution will increase to $197,437 (but only $41.50 in the 2nd year). Employer contributions will be $22,995 (remember this still leaves $150 on the table in the first year but gets the maximum employer match after that).

Are you Prepared for Inflation?

It should not be news that inflation has picked up over the last year. With the PPI (producer price index) coming in at 9.7% in January, it should be clear that inflation will be an issue in the new year. Picking investments that will do well in an inflationary environment is a must for 2022.

Antero Midstream Corporation (AM) is an MLP that owns, operates, and develops midstream energy infrastructure focusing on natural gas and natural gas liquids. The Gathering and Processing segment includes a network of gathering pipelines and compressor stations that collects and processes production from Antero Resources’ (AR) wells in West Virginia and Ohio. The Water Handling segment offers fluid handling services. Inflation, particularly in energy prices, will help AM with its business.

Natural gas prices have come down in the U.S. due to weather forecasts for mild weather. Yet even around $4, prices are still high relative to prices we have seen over the past decade, despite a relatively mild winter so far.

Natural Gas Prices 5 Year History

Source: Natural Gas Prices 5-Year History

With higher prices in the U.S., and even higher prices in Europe, it is a great time to be an NG/NGL producer, and AR is taking advantage of this opportunity to expand and improve its balance sheet. AM is positioned to benefit as AR strengthens its balance sheet making it a higher-quality customer and as AR expands, AM will be there to grow along with it.

AM has improved its balance sheet and has enough free cash flow to fully fund its capital expenditures and its dividend. AM is growing without taking on any new debt or issuing new equity!

Natural gas is in high demand, and shortages overseas provide an opportunity for the U.S. to expand its role as an exporter. Add in additional tailwinds from inflation that will keep commodity prices higher, and you have a recipe for great growth for AR and AM over the next two years.

AM converted to a regular corporation several years ago and so issues a 1099.

Amid all the carnage to start the year 2022, one asset class has continued to rise in value. And it does well in a rising rate environment as well since both its debt and its assets are floating-rate loans. And rates will rise in reaction to inflation even if the Federal Reserve doesn’t follow through on its plans to raise rates to combat inflation. As treasuries, bonds, and even equities are lower, “leveraged loans” continued their steady march upwards.

These loans are bundled into “CLOs” (Collateralized Loan Obligations), such as those that Eagle Point Credit Company (ECC) invests in. With defaults low (and much lower than expectations), these loans are doing well. Having a floating rate also means that cash flow will increase as rates go up. So, with the price down 1.6% this year, now can be a very good opportunity to get shares at a great value.


S&P/LSTA U.S. Leveraged Loan 100 Index

Source: S&P Global

When packaged into a CLO, institutions can pay a premium to get a reasonable rate with a very conservative risk profile by being first in line to be paid by buying the senior tranches. We’ve discussed regularly how very high demand for senior CLO tranches has created a glut of junior and “equity” level tranches. This allows funds that invest in the more junior debt levels and the “equity” to get very high cash flows.

ECC saw its cash flow restricted in 2020 as safety features kicked in to redirect payments to senior tranches. By paying the senior tranches off ahead of schedule, cash flow has improved for the lower tranches. Because the underlying borrowers still owe the same amount of money, after the senior tranches are repaid, the equity tranche ends up collecting more once the CLO returns to normal cash flows and when the loan is repaid as agreed. Since the massive wave of defaults projected never materialized, ECC has seen its cash flow increase considerably.

ECC December Monthly Report

ECC December Monthly Report

Source: ECC December Monthly Report

ECC is substantially out-earning its dividend. This can be seen in real hard cash as ECC was forced to pay $0.50 a share special distribution for 2021 to bring its distribution payments to the required amounts based on its taxable income for the year. This past week they also announced a 17% dividend increase, and had a great earnings report. Their current outlook leads us to expect another dividend increase this year.

Additionally, ECC lowered its interest costs by issuing new baby bonds at 5.375% to redeem ECCB, ECCY, and $32.4 million of ECCX. The substantially lower coupon for the new issue will reduce interest costs by $1.73 million/year or approximately $0.045/share.

ECC is set up to have a stellar 2022 with lower interest costs and a significant number of assets that are set to begin paying interest this year. We are happy to take advantage of the recent market declines to keep adding to our position and growing our income.



Final Thoughts

Every year, tax laws and the rules for retirement accounts will change. Often new proposals will be floated and never see the light of day. January/February is a good time to look at the changes and the proposed changes and determine if your portfolio is positioned well for those changes. This year, inflation looks to once again be rearing its very ugly head after a long period of low inflation. Now is a good time to review your retirement plan and your portfolio holdings. You can then decide what changes need to be made.

Retirement is a time of relaxation and joy, but like Spring cleaning, you need to occasionally make adjustments and evaluate your current standing. Take some time today, this weekend, or schedule a meeting with your advisor to make sure your financial house is in order, then keep on working your retirement plan. If you find yourself without a plan and lost, feel free to read some of our prior articles on retirement planning and investing to see how my team and I tackle the big questions about retirement, investing, and budgeting. You can do it! I’m pulling for you.