Are big changes coming to your 401 (k) and IRA?
Congress is looking at a series of changes. Among them: 401 (k) sponsors would have to show you, on each statement, how much income your balance would generate with an annuity. The goal is to help you better understand where you stand retirement-wise. Lawmakers may also lift age limits on IRA contributions. Right now, it’s 70½ or older, but if that’s raised, older Americans if they’re still working, could deposit up to $6,500 a year in either a traditional IRA or a Roth IRA.
Also being considered: a new type of universal savings account that would offer more-flexible withdrawal rules than existing retirement accounts. Employers could also be allowed to automatically enroll workers into emergency savings accounts. (Employees would be free to opt out.)
Election outlook — and impact on Medicaid and Social Security
What a shocker: Now that the giant tax cuts signed into law last December have kicked in, the federal deficit is surging. The Trump administration recently acknowledged that the deficit will hit $1 trillion as early as next year, which means the national debt — now on track to hit $33 trillion by 2028 — is also growing faster than expected.
Republican leaders in Congress who pushed these tax cuts through now say something must be done to soak up all this red ink. This spring, they introduced a bill requiring Congress to balance the federal budget. It failed to pass, but the underlying mentality — that budget cuts are coming — could mean trouble for entitlement programs. “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,’” Max Richtman of the nonprofit National Committee to Preserve Social Security and Medicare tells AARP. Much of what could happen depends on the outcome of the November midterms, and of course, 2020 itself.
As a reminder, the Trump administration has already warned that Social Security will begin paying out more than it takes in by 2021 — a little more than two years from now — and that benefits could be slashed 23% come 2034, unless steps are taken to prop it up.
What’s Your Retirement IQ?
Only 2% of Americans knew the answers to the most fundamental questions about retirement ages, Social Security and Medicare benefits, according to a recent survey by GoBankingRates. Not knowing the basics could cost you serious bucks. Take it see if you’re as clueless as the rest of America when it comes to your retirement.
That 4% withdrawal rate — you could be shortchanging yourself
You know the rule of thumb that says in retirement you should withdraw only about 4% of your portfolio each year? Perhaps you could do better. Research done by Maryland-based financial adviser Michael Kitces says sticking to that “will most commonly just leave a huge amount of money left over.”
Even accounting for massive stock market SPX, +0.49% crashes — like the wipeouts of 2000-2002 and 2007-2009 — Kitces’ research, which goes all the way back to the 1870s and uses data from famed Yale economist Robert Shiller — found that in more than two-thirds of the time, the average person, after 30 years in retirement, would still wind up with nearly 2.8 times more than what they began with. And that’s adjusted for inflation. In other words, writes Kitces, “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 caveat: Unless there’s another Great Depression.”
On top of this, MarketWatch’s Dana Aspach points out that the 4% rule often fails to consider other sources of income that you’ll have, like Social Security and a possible pension, and the timing of when you’ll begin tapping into them.
For example, let’s say you quit working at age 60, before these other things kick in. Why stick to the 4% rule when you know they’ll soon begin generating cash? “Many retirees won’t do this,” she writes, “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.” As usual, talk this kind of thing over with your financial adviser.