As per Don Fletcher, in recent times, the coronavirus pandemic has caused confusion and frustration for plenty trying to plan their retirement. Thankfully, retirement accounts currently have temporary lenient and flexible rules. Additionally, some people are working from home, while others have found employment elsewhere. However, the pandemic timing couldn’t have been worse for the group who were already behind on their retirement planning.
Social Security Importance
Although it’s no surprise based on previous recessions, there are now three main threats to older workers:
• Loss of business
• Loss of jobs
• Loss of retirement accounts (due to declines in the stock market)
With this, they’ll be forced into claiming Social Security much earlier than initially intended. For Baby Boomers, they might fight to stay in employment for a handful of years. Sadly, this won’t be an option for everybody, as long as the economy remains in this state, companies continue to lay off staff. Whenever this happens, there’s a need for immediate income – wherever they may find it.
Considering that retirement benefits are available as soon as one turns 62, this isn’t the option for many. As you may know, the problem with claiming early is that you’re locked into lower payments indefinitely. In normal circumstances, we would recommend holding on for as long as possible because, up to the age of 70, being patient is worth up to 8% per year (in terms of the monthly check).
Back in 2009 and amid a global financial crisis, it’s believed that 42.4% of those aged 62 claimed Social Security, an increase of 4.8% from the year before. In the current situation, the biggest concern regards individuals and families who are being hit the hardest by the economic downturn. As the disruptions continue not only for the US but all over the world, lower-income households struggle, and the reliance on Social Security may grow.
Withdrawal vs. Loans
As things stand, there are options for anybody who needs to dip into their retirement account. For example, some will take a loan against their 401k. Alternatively, another option is to withdraw permanently from a 401k or IRA. Traditionally, we would advise against a hardship distribution (permanent withdrawal) because it would affect you later in retirement. Furthermore, account holders would pay an early withdrawal fee as well as a tax on the amount. On the other hand, no tax or penalties traditionally came with loans.
According to Don Fletcher, the government has addressed the pandemic with the CARES act for COVID-19, so does this change things? Although a loan is still the better choice, the 10% penalty for distributions has been removed, which makes it slightly better. If you’re currently debating your options, one of the most significant considerations is your financial future. Are you looking for temporary help, or has the weak employment market meant that you’re seeking long-term assistance?
Experts are advising against even the no-penalty withdrawal when retirement planning, and we must remember that stimulus checks have been introduced to help. History tells us that it takes an average of 30 months to overcome a recession in the future. With this, we could face a difficult job market for around two-and-a-half years. Alternatively, some have predicted a faster rebound, given that it didn’t occur under normal circumstances.
By taking your withdrawal when the value of the account is depressed, there’s a potential of missing out on a rebound.
Roth Accounts Taking the Lead?
According to Don Fletcher, while the CARES act didn’t address Roth IRAs, it’s important to note that those generating a lower income may fall into the income-eligibility contribution limits. For singles earning under $124,000 or couples making under $196,000, full Roth contributions will be available. As the stock market continues to tumble, switching to a Roth is quickly growing as an attractive option. You might be worried about the taxes due on the switching amount, but this shouldn’t play a significant role for lower balances.
All investors have an option to withdraw from a traditional IRA as long as they place it into a second retirement account inside three years, and this includes a Roth (with tax).
Interesting Times to Come
If one thing is for sure, it’s going to be a confusing time in an area where things were already strained. Assuming the employer agrees to the changes, for example, participants in a 401k can temporarily borrow up to $100,000 (they can even drain their accounts). Previously, this rule allowed $50,000 up to a maximum of 50% of funds. Circumstances leading to such measures include reduced hours, getting laid off, and getting furloughed.
According to Don Fletcher, if a permanent distribution is necessary, taxes will apply, but you can waive the 10% penalty. As long as you repay within three years, you may be able to avoid tax after finding a new job or deciding the money isn’t needed. For anybody over 72, RMDs (required minimum distributions) have also been suspended under the CARES act. Again, it’s a confusing area since account holders can take a similar amount to before, or perhaps more.
It seems as though new guidance comes into effect every day, which will continue in the time ahead. Above all else, it’s essential to follow the advice and contact an expert before making a decision that could negatively impact your retirement planning.
