Feeling More SECURE in Retirement
If you think that concerns over one’s ability to retire are limited to the young, think again.
Sure, younger generations are saddled with unprecedented student loan debt, and they can no longer count on Social Security as a guaranteed source of income in their later years, as their parents and grandparents could. But a 2019 Northwestern Mutual survey also found that nearly one in five Baby Boomers has less than $5,000 saved for retirement. 1
Read that again: one in five Baby Boomers has less than $5,000 saved for retirement. And 15% of Americans have no retirement savings at all.1 Similarly, a recent study of all Vanguard retirement plans revealed that the median retirement balance is just $22,000.2
Simply put, many Americans now expect to outlive their retirement savings. Is there anything we, as a system, could have done—or more importantly, can do—to help curtail this looming retirement crisis?
In our many years assisting clients as they plan for, approach, and navigate retirement, we have seen time and again that one of the most valuable tools for adequate retirement investment is an employer-sponsored retirement plan. And yet, about half of U.S. businesses do not offer their employees a company-sponsored 401k retirement plan.
Beyond limited access to employer-sponsored plans, individuals today face a host of challenges when it comes to regulations around retirement planning. To name just a few: people are limited as to how long they can contribute to their retirement plans, penalized for early withdrawals (which may defer younger employees worried about near-term liquidity), and may be forced to distribute funds (i.e. terminate the benefit of tax-deferred growth) before they’re ready.
Which brings us to the SECURE (or Setting Every Community Up for Retirement Enhancement) Act, which recently passed in the House in a whopping 417-3 vote and is currently under consideration in the Senate. This bill will meaningfully enhance employees’ ability to better prepare for retirement. Among its nearly 30 provisions, the SECURE Act:
- Makes it easier and more affordable for small employers to sponsor retirement plans by joining together with other small businesses.
- Provides incentives for smaller employers to add automatic enrollment.
- Increases the age at which a participant is required to take distributions from 70.5 years currently to 72 years. This extended tax deferred growth could yield meaningful extra savings.
- Repeals the maximum age for IRA contributions. With many people working later in life, repeal of the current age limit (70.5 years) extends the benefit of tax deferred savings for as long as an employee chooses to keep working and contributing.
- Exempts individuals from the 10% penalty tax for up to $5,000 in early distributions following the qualified birth or adoption of a child. This type of flexibility encourages young plan participants to save more, with the security of knowing they can withdraw funds for this purpose penalty-free.
As debate continues in the Senate, some focus is now being put on an additional provision of the SECURE Act, which eliminates the “Stretch IRA”. Today, you can leave your retirement account to your spouse, child, grandchild, or other beneficiary, who can then parcel out distributions over the course of their lifetime; in the case of a child or grandchild, this could significantly extend (or “stretch”) the lifetime of the IRA’s tax-deferred compounding and result in a sizeable inheritance. The SECURE Act, however, requires any non-spouse beneficiary to distribute the entire IRA within 10 years, which could curtail the tax-deferred benefits to the inheritor.
However, retirement plans were designed to enable retirement, not inheritance. We should be more concerned with the SECURE Act’s retirement planning benefits than its estate planning implications. Our priority must be to address a retirement system in dire need of improvement, a system that is not preparing our nation’s workers for a comfortable and timely retirement. By encouraging greater savings in a myriad of ways, the SECURE Act would represent much needed progress.
Keep your eyes and ears open for news on the bill’s progress in the Senate, and—as always—if you have any questions about your own retirement planning or how new regulations might impact your investment strategy, please do not hesitate to reach out to our experienced team of advisors.
Suzanne T. Mestayer
1https://news.northwesternmutual.com/planning-and-progress-2019
2 https://pressroom.vanguard.com/nonindexed/Research-How-America-Saves-2019-Report.pdf
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