Don DrakeCelebrating the American Worker and Planning for Retirement - How Things Have Changed
Updated: Sep 8, 2020
It is the Labor Day weekend, traditionally signaling the end of the summer season. Much has changed through the years since Labor Day first become a holiday, including for those who retire from decades of work live in retirement. At one time, workers earned barely enough to squeeze out a meager living with no such thing as retirement, meaning most worked right up to their deaths. As unions gained a foothold, negotiated contracts guaranteed many a pension plan as the reward for years of service to the company.
But these pension plans proved to be a financial hardship for many companies as they were forced to pay for those in retirement while at the same time replacing that worker with another salary. As the American health system improved and people began living longer, these pension plans became unsustainable, forcing companies out of business or to move their plants off-shore to avoid unions, high taxes, and oppressive regulations. Today, things have changed yet again, as unions no longer hold the power they once did with pension plans proving to be financial backbreakers for the few who have them (mostly municipal workers). As a result, the majority of Americans now save for their own retirement, to supplement the social security check they receive monthly.
Unfortunately, state and local governments have found ways through increased taxation of cutting into these retirement plans and retaxing monies that in many cases have already been taxed as earnings.
What we will discuss in this week's blog is how Labor Day started, how the face of employee and employer relations has changed through the years, planning to protect your assets and the best and worst states in the United States for retirees.
The Genesis of Labor Day
The mid to late 1800s was the height of the industrial revolution in this country where the average American had to work 12 hours, seven days a week, just to barely survive. Even worse, children as young as six or seven years old were working in factories and mines across the country, earning even less than adults (see the story below about Rhode Island's contribution to child labor during this time).
With the onset of unionization, those who represented workers began to seek basic rights, safe workplaces, and livable wages for the employees. Management, who wanted to keep their high-profit margins, refused to give in. This led to massive strikes at locations across the country.
Then on September 5, 1882, New York City union leaders organized what is now considered the nation’s first Labor Day parade. Over ten thousand workers marched along city streets in an event culminating in a picnic, speeches, fireworks, and dancing. They continued to host the parade in the years after, and in 1884 the event was set to occur on the first Monday of September from that point forward.
In May of 1894, the employees of the Pullman Palace Car Company in Chicago went on strike about wages and the firing of a union representative. The strike carried on into June when a union rep ordered a boycott of Pullman rail cars crippling railroad traffic and commerce nationwide. In response, the federal government sent troops into Chicago to break the walkout unleashing riots and the deaths of more than a dozen workers.
In the wake of this massive unrest, President Grover Cleveland and Congress, in an attempt to repairs ties with American workers, made Labor Day a legal holiday. Although this is the official beginning of the day, others say that the founder of the holiday was Peter J. McGuire, the leader of the Carpenter’s Union and the co-founder of the American Federation of Labor (AFL), who suggested the holiday to honor those "who from rude nature have delved and carved all the grandeur we behold."
How Things Have Changed
Throughout the years, Labor Day has undergone a change in how the holiday is celebrated. Its origins saw massive parades, political speeches, and huge festivals where families would celebrate the American Dream. Today, it has moved away from such festivities to a more modest celebration featuring back to school sales, end of summer events, and small family gatherings.
As we celebrate this day honoring American employees, we cannot ignore the changes that have occurred in the American workplace. The days of pension plans and other employer-sponsored retirement packages are quickly going the way of the massive Labor Day celebrations. Because of this, it is important that Americans understand the importance of estate and retirement planning.
Baby Boomers and Retirement
Prior to the most recent election, Baby Boomers, who thought that retirement would end up being a life of leisure, were seeing this dream dashed by a much different American economy. Many of the industrial giants have moved their factories off-shore and the workplace shifted to a service-oriented economy dominated by small businesses with the gold watch good-bye accompanied by a great pension is gone.
In the early 1980s, over half of American workers were promised a pension by their workplace and nearly 8 out of 10 could expect that pension to be supplemented by their social security payments. Since then, pensions have quickly disappeared as city, state, and union pension plans have gone broke threatening the well-being of those retired or heading for retirement. Company pension plans are gone and being replaced by the 401(k) plans or a number of other investment strategies for the American worker.
Poor planning and employers who have not helped employees understand this new reality of retirement have forced retired Americans to work well into their 70's and beyond. This, accompanied by rising healthcare costs, low-interest rates for fixed income investments, and traditional savings showing little or no return for their investments causing many to dial back their retirement expectations.
The group that will be affected most by this change are the millennials (those born between 1982 and 2000). For this group, it is imperative that they begin planning for retirement today.
A recent report prepared by the Employee Benefit Research Institute showed that 6 in 10 employees reported feeling confident that they were prepared for retirement but less than 2 in 10 reported that this confidence was built on real information and preparation. And of this group, 4 in 10 stated that they had little or no retirement savings or plans for the future. Many even reported that they had concerns about covering even the most basic life needs upon leaving the workforce.
The Trump Administration has made a concerted effort to bring manufacturing back from foreign soil to this country, but even if another industrial revolution occurs, there is little chance that pension plans will be revived. So although there may be plenty of work and money to be made (post-pandemic and pending the results of the presidential election), Americans will still need to learn how to protect their money and investments so they can retire successfully.
And, successful retirement includes planning for investments using smart tax strategies, having a safety net in place in case of a major health crisis, and even where to retire to, as some states are much more friendly than others to retirees. So let's check out some of the best and worst states for retirees.
The Best States for Retirement
Based on a 2019 report by Kiplinger, they were able to put together a list of the ten best and the ten worst places to retire. This was based on taxes on sales, social security, retirement distributions, property, estates, and inheritance. And being on a fixed income made this something to consider. The list below is just an overview of the positive aspects of these states for retirees. If you are thinking of retiring to any state, make sure you do your homework. We are going to start with the ten best.
10. ARIZONA
Ok, so it's darn hot there, but Arizona is a great choice for retirees. There is no estate or inheritance tax there and social security benefits are exempt from state income taxes. And, up to $2,500 in income from federal and Arizona government retirement plans is also exempt. Another plus, homeowners 65 and older can “freeze” the value of their property for real estate tax purposes for three years if they’ve lived in the home for at least two years and their annual income is below $37,008 for a single owner or $46,260 when there are multiple owners listed on the property deed.
9. GEORGIA
Georgia has become a retirement destination all its own even though it's a proverbial stone's throw away from the retirement mecca, Florida. Social security income is exempt from state taxes and so is up to $65,000 of most types of retirement income for those 65 and older. For married couples, the threshold is $130,000 - pretty tempting. Retirement income includes pensions, annuities, interest, dividends, net income from rental property, capital gains, royalties, and the first $4,000 of earned income, such as wages.
8. FLORIDA
Florida has no state income tax, no estate tax, no inheritance tax, and multiple other exemptions for people over 65. Retirees can get a property tax exemption of up to $50,000 from some city and county governments and/or an exemption equal to the assessed value of the property. Added to that is the number of retirement communities located there and the warm weather year-round.
7. MISSISSIPPI
Mississippi has no estate or inheritance tax and exempts Social Security benefits from state income tax. Even more important, the state does not tax withdrawals from IRAs and 401(k) plans, income from public and private pensions, and other types of qualified retirement income. It's a state worth a look.
6. TENNESSEE
In the Volunteer State, there is no estate or inheritance tax, no taxes on social security benefits, pensions, or distributions from retirement plans. There’s also no state income tax. In lieu of that, there’s a 2% tax on interest and dividends. But even so, retirees come out ahead — anyone 65 or older who has an annual income of $37,000 or less is exempt from that 2% tax.
5. SOUTH CAROLINA
Not only rich in history, but this state is also very senior-friendly. There is no estate or inheritance tax here, and social security benefits are totally exempt from taxes. To further enhance the draw for retirees, taxpayers 65 or older are allowed to exclude up to $10,000 in retirement income from taxes.
4. ALABAMA
Here, the income tax is 2% on taxable income of $500 or less for single filers and $1,000 or less for joint filers. The vast majority of residents pay 5%, which is the rate for those who have a taxable income of over $3,000 for single filers and over $6,000 for joint tax returns. And, there is no estate or inheritance tax in the state, with social security benefits and payments from traditional pension plans, such as defined-benefit plans, being exempt from taxes as well.
3. DELAWARE
Just a short trip down Route 95, Delaware offers a lot for retirees, including no sales taxes. There are also no estate or inheritance taxes. The average property tax in Delaware is $604 per $100,000 in home value. For a $400,000 home that’s about $2,414 annually, making it the sixth-lowest in the United States. In addition, some seniors in the state qualify for a school property tax credit of as much as $400.
2. NEVADA
You don't need to hit it big at the Casinos to come out ahead in this state. Nevada has no income tax, no estate tax, and no inheritance tax meaning your retirement savings go a long way here. But one drawback is the average state and local sales tax which is 8.14%. But, the average property tax is $693 per $100,000 in home value.
1. WYOMING
Part of the wild west with fewer residents living in the state than some large cities have, so you would assume that taxes would be astronomical. But this is not the case thanks to oil and mineral revenues. As a result, Wyoming doesn't have to charge a state income tax, estate tax, or inheritance tax, with retirees here having the lowest overall state and local tax burden in the country. The average state and local sales tax is 5.32%, but seniors who meet income requirements can get refunds of $800 to $900. Not bad.
The Worst States for Retirement
Now the worst states, and it is probably no surprise that most in the top ten here are in the Northeast with three being in New England, including our very own Rhode Island. Here we go;
7. RHODE ISLAND
It may be called Little Rhody because of its size but it's Big Rhody when it comes to the amount of income and property taxes its citizens pay. Let’s start with income taxes.
Seniors pay taxes on social security benefits if their federal adjusted gross income is more than $85,150 for a single filer or $106,400 for a joint return. Seniors at the upper end of the income spectrum also do not qualify for a state income tax exemption of as much as $15,000 for cash taken from private, government, or military retirement plans.
As for property taxes, Rhode Island has the 11th highest in the nation. The average property tax is $1,723 per $100,000 in home value. For a $400,000 home that’s about $6,892 annually. However, homeowners 65 and older who earn $30,000 or less qualify for a state tax credit. There’s also a steep estate tax in Rhode Island, as high as 16%. The tax hits estates worth $1.561 million or more. That’s noteworthy because it means Rhode Island is one of just three states in the country that tax estates worth less than $2 million.
6. VERMONT
Taxes in the Green Mountain state are not cheap either. In fact, the state taxes all or part of social security benefits for single residents who have a federal adjusted gross income of more than $45,000 for a single filer or more than $60,000 for married couples filing a joint return. Property taxes are $1,908 per $100,000 in home value. That means the property tax bill annually on a $400,000 home would be about $7,634, which is the seventh highest in the United States. If you like to dine out as many seniors do, you’ll pay the price here as well. There’s a 9% tax on prepared foods, restaurant meals, and lodging. The estate tax in Vermont is 16% for estates that exceed $2.75 million.
2. CONNECTICUT
Retirees may want to steer entirely clear of Connecticut. For those residents who have a federal adjusted gross income of more than $75,000 ($100,000 for joint filers), 25% of social security benefits that are taxed at the federal level are also taxed by the state of Connecticut. Though social security payments are exempt for taxpayers below that threshold of income.
As of 2019, Connecticut added at least one small perk for seniors — 14% of income from a pension or annuity is exempt for taxpayers earning less than $75,000 in federal adjusted gross income, or less than $100,000 for joint filers. The property tax in Connecticut is $2,114 per $100,000 in home value, so a $400,000 home would cost $8,456 annually, that’s the fourth-highest property taxes in the country. Connecticut is the only state in the country that imposes a gift tax, which applies to both real and tangible personal property in the state. This tax also applies to intangible personal property anywhere for permanent residents.
Rounding out this infamous top ten worse states for retirees include New York, New Jersey, Illinois, Minnesota, Wisconsin, Kansas, and Nebraska, which comes in at number one.
The Importance of Estate Planning
There was a time when estate planning was considered to be only for the rich. Today, given the tax burdens placed on those with even moderate assets, estate planning has become a necessity. Most families who work hard and save so to pass on what they have built onto their loved ones. But increasingly, states have tried to tax these assets even though taxes have already been paid on these earnings. Fortunately, there are ways to protect this money.
"Estate planning is really about protecting those you love," said certified elder law attorney RJ Connelly III. "There are many aspects to estate planning, one of which is transferring assets to your heirs with limited tax burdens." But, what if you don't have much?
"In many cases, this is even more important for families. Just a bit of estate planning can reduce much or even all federal and state estate and inheritance taxes," continued Connelly. "There are also ways to decrease the income tax beneficiaries may need to pay. With a small estate, not having a plan could mean a significant portion of the assets will go to the government."
Planning for Medical Needs
The country's population is aging. Today, there are more than 46 million older adults age 65 and older living here. In just 30 years, that number is expected to grow to almost 90 million. And in the next ten years, the last of the baby boomers will reach the age of 65 adding another 18 million people to this group. This means by 2030, 1 in 5 Americans is projected to be 65 years old and over. And with age comes physical breakdown, including heart ailments, Alzheimer's disease, and other conditions of aging. This needs to be planned for as well in order to keep assets protected.
"Every senior over 65, and preferably those over 50, need to have an estate plan or update their estate plan to include long-term care considerations with an effective Medicaid plan," stated Connelly. "If this is not in place, and you end up needing long term care, you will likely spend everything you have saved over your lifetime in a very short time to provide for that long term care meaning that what you wanted to pass on will be spent on nursing home care."
Just how expensive is this care?
"Here are the numbers," said Connelly. "The nationwide average is about $228 a day. In Rhode Island, the daily cost is $255. In Connecticut, that amount is $357 daily and Massachusetts about $353 a day. Again, this is an average, some are higher and some are lower, but in any case, these are significant expenses that will rapidly deplete a family's assets."
Indeed they are. Based on these numbers, the annual cost in Rhode Island would be $93,000, in Connecticut, $130,000, and Massachusetts $129,000. Not having a plan would wipe out savings for most families with a small to moderate estate within a few years.
"With the cost of long-term care, even substantial estates are at risk," stated Connelly. "Without appropriate planning, these costs will quickly wipe out a family's assets, nullifying plans for the succession of their estate to heirs. And for a married couple, inadequate planning around these costs can cause the spouse who continues to live at home to become impoverished and without sufficient assets or income to provide for their own needs."
So when enjoying the Labor Day Holiday, think about two things. First, why the holiday was put in place and the sacrifices American workers made during the industrialization of this country and second, develop an understanding that retirement has changed drastically through the years meaning that today, you are responsible for your own future and that planning needs to start immediately. Happy Labor Day!
