Waiting for the Second Act to Begin
by Keith J. Hardman
The COVID-19 pandemic has caused many Americans to reassess how they are thinking about retirement. In a survey taken by Schwab in 2020 just over half of Baby Boomers said that the pandemic has made them more focused on developing a financial plan for retirement. Another survey from last year, this one done by TD Ameritrade, found that just over 70% of U.S. adults anticipated that the pandemic would affect their retirement plans. And almost 40% of the Baby Boomers surveyed said that they had delayed, or thought about delaying their retirement.
These surveys help to highlight some shifts in how people are thinking about retirement and point to the importance of planning. Retirees are not just weighing decisions about retirement assets but also their living arrangements and long-term care insurance. Some retirees find themselves in an unfortunate position where they need to consider downsizing or moving to more affordable housing. Although these surveys indicate that most of the Baby Boomers felt pretty confident in their retirement savings, estimates show that many retirees’ assets might not last much more than 10 years of retirement if they do not consider reducing their spending.
Adding to this retirement quandary, some economic analysts are projecting that, due to the pandemic, the Social Security trust fund may run out of money earlier than originally expected. While it is highly unlikely that the federal government would ever allow our Social Security system to go broke, this concern may cause those nearing retirement to consider starting their S.S. benefits early – age 62 is the earliest age possible. For retirees the timing of when to decide to file for benefits is one of the most critical retirement decisions one will make. Generally speaking, we suggest to those that are in good health, and with the ability to do so, wait as long as possible (up to age 70) to start Social Security benefits.
There may be some positive retirement policy changes coming out of Washington that may give aid to those planning for retirement. Back in February of 2020, I wrote in a Partner Talk® on the topic of the SECURE Act of 2019, with the bill having taken effect at the beginning of last year. Then, in November of 2020 the U.S. House of Representatives proposed a new retirement-related bill. The purpose of this “SECURE Act 2.0” is to further strengthen the U.S. retirement system and potentially provide more flexibility for retirement savings. The bill originally had broad bipartisan support but there are some specific provisions in the bill that have eroded that support. Republicans are weighing the costs of such a bill and reconsidering their backing of it. That said, while there may be some policies that Democrats and Republicans disagree on, there are many involved still hopeful that this bill has a chance of being voted on this year.
The SECURE Act 2.0 would expand automatic enrollment in employer retirement plans and it would increase the Saver’s Credit. It intends to raise catch-up contribution limits and offer additional assistance to student loan borrowers. All of this with the goal of getting people to save more for retirement.
If this bill passes, it would further improve retirement plans for savers by delaying the required minimum distributions (RMD). As the original SECURE Act increased the age required to start making withdrawals from their retirement accounts from 70 ½ to 72, the SECURE Act 2.0 seeks to push this timeline out once again, to age 75. This would also allow some older workers to make additional contributions to their retirement accounts. RMDs give the U.S. Treasury the chance to start collecting tax revenue from tax-deferred savings accounts, they also prevent these accounts from becoming an estate planning tool. And while many Americans will use their RMDs to help cover living expenses, these extra three years would give wealthy retirees, not relying on the RMDs for income, more time to avoid the taxes associated with taking these mandatory distributions.
One interesting feature of this retirement bill would be to make it easy to buy annuities in retirement accounts. One such type of annuity (a savings vehicle that offers guaranteed payments for a specified number of years), the Qualified Longevity Annuity Contracts (QLACs) are made more appealing by increasing the amount of retirement savings that one is allowed to use to buy a policy. This bill would make it easier for retirement plans to offer annuities by easing the technical RMD requirements for annuity options.
The question remains though, does the SECURE Act 2.0 do enough to meet its goal of getting Americans to save more for their retirement? If the objective is to make sure that most Americans end up saving enough to allow them to enjoy a comfortable standard of living during their retirement years, then one might be disappointed by the provisions of SECURE Act 2.0. The reason for this is that the bill does not really address why people do not have enough saved for retirement.
Critics have noted that one of the biggest reasons behind the ongoing American retirement crisis is that there is not a universal coverage by personal retirement savings plans. Workers might go long stretches without having access to a retirement savings plan, or choose themselves not to save. An interesting report from the Bureau of Labor Statistics found that the typical person born between 1957 and 1964 held more than 12 jobs between the ages of 18 and 52, with half of those jobs occurring before the age of 25. When a worker moves in and out of jobs with this frequency it naturally leads to gaps in employer-sponsored retirement plan coverage. And with a high number of American workers moving in and out of jobs frequently all of this job movement exposes another problem – money leaking out of existing retirement accounts. This becomes evident with young workers, as research has shown that many of those under the age of 40 will cash out some portion of their retirement savings when they switch jobs. This decision will potentially cost workers years of gains and compounding investment returns and typically brings about a 10% tax penalty. SECURE Act 2.0 seeks to expand the auto enrollment into employer plans as a way to address this issue. The problem now is that only about half of small businesses offer retirement plans, according to a current JPMorgan survey. Clearly there are some fundamental issues at play here when discussing how to make sure Americans have enough retirement savings.
So, while we wait and see what Washington does regarding policy changes related to retirement planning, we live with our new realities brought on by this pandemic. It has forced many of us to face our own vulnerabilities. And with that, we must consider such things as to whether or not insurance coverages are adequate, or do we have basic estate planning documents in place? Now is the time to review these matters, as we do what we can to prepare for uncertainties.
As we navigate current trends of low interest rates, tax uncertainty, and ever evolving financial and retirement needs, the need for a having a plan becomes even more important. Wealth management, investment planning and financial planning should be done in concert to help you reach your financial goals. PMA is ready to help our clients understand the implications of these changing government policies and market trends. Please do not hesitate to contact us as new planning situations arise.