Retirement News: Big changes to your 401(k) and IRA and more

Could Changes be Coming to Your 401 (k) and IRA?

Among a series of changes Congress is looking at, one, in particular, is that 401(k) sponsors would have to show how much income your balance would generate with an annuity on each statement, with the goal of helping you understand where you stand on a potential retirement level. Lawmakers may also lift age limits on IRA contributions. Currently, the threshold stands at 70½ or older. However, if that is raised, then Americans who are older and still working could deposit up to $6,500/year (in either a traditional IRA or a Roth IRA).

Another consideration is a new type of universal savings account. This account would include more flexible withdrawal rules over existing retirement accounts available. Employers could automatically enroll employees in emergency savings accounts, but not to worry, employees would also have the freedom of an “opt-out” option.

Impact on Medicaid and Social Security & Election outlook

The deficit is surging now that the significant tax cuts signed into law last December have started to kick in. Recently, the Trump administration has acknowledged that the deficit could hit nearly $ 1 trillion, beginning as early as next year. The national debt, which is now on its way to hit $33 trillion by 2028, is also growing much quicker than expected.

Now Republican leaders who pushed for these tax cuts say something must be done. These Republican leaders introduced a bill this spring that requires Congress to balance the federal budget, but it failed to pass. The underlying mentality that budget cuts are coming could potentially spell trouble for entitlement programs.

Max Richtman, of the nonprofit National Committee to Preserve Social Security and Medicare, told AARP, “What we continue to worry about is that the next shoe to drop will be Congress saying, ‘Now we have to look at Social Security and Medicare because now we have this ballooning deficit.” The outcome of what could happen depends on the outcome of the November midterms as well as 2020.

By 2021, Social Security will begin paying out more than it takes in, the Trump administration has already warned, and benefits could potentially be cut 23% by 2034. That is unless steps are taken to build it up.

How Are Retirement Savvy You?

According to a recent survey by GoBankingRates, when asked about the most fundamental questions about Social Security and Medicare benefits and retirement ages, only 2% of Americans knew. Unfortunately, not knowing these answers can cost you big! It would be wise to take it and find out if you are in the same knowledge boat as the rest of America.

When it comes to that 4% withdrawal rate, you could be seriously shortchanging yourself.

There is a general “rule of thumb” when it comes to retirement saying that you should withdraw only 4% of your portfolio each year, but you may be able to do better. Maryland-based financial advisor Michael Kitces has researched this and says that living by that rule “will most commonly just leave a huge amount of money left over.”

Kitces’ research (going way back to the 1870s and using data from famed Yale economist Robert Shiller) also accounts for massive stock market SPX, +0.46% crashes like the wipeouts of 2000-2002 and 2007-2009, and he found that the average person (more than two-thirds of the time) ends up with nearly 2.8 times more than what they started with. That’s even with adjustments for inflation. Kitces says, “it’s overwhelmingly more likely that retirees will have opportunities to ratchet their spending higher than a 4% rule than ever need to spend that conservatively in the first place!” The only thing to be wary of would be another Great Depression.

Dana Anspach of MarketWatch also points out that typically the 4% rule fails to consider that there may be other sources of income, such as Social Security and maybe even a pension, as well as the timing of when those sources could be tapped into.

If you were to stop working at the age of 60, for example, would it make sense to stick with the 4% knowing that they will soon generate cash? Aspach says that many retirees won’t do this “because the popularized rule of thumb has made them fearful that they’ll run out of money if they don’t follow the rule each year. In fact, when done properly, often the opposite is true. Customized withdrawal plans increase the odds your savings will last longer.”

No matter what, these things are always best to discuss with a financial advisor.

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