Watching your investment portfolio fall in value is never fun. You and I both wish we had a crystal ball to answer questions like: How long will it last? Is it a good time to buy or shift assets to stocks? How will this impact my retirement plans? Is the best course of action to stay on track?
A historic look at the stock market shows a majority of years with positive returns. Data from accounts that regularly move money in and out of the markets offer evidence that unless the timing is perfect, the account holder is likely to miss periods of growth and/or sell investments at a time that turns out to be less than ideal. With that in mind, in most situations it is good advice to “stay the course”. Based on history, it is appropriate to feel confident that when an account has an ample time frame, recovery does occur after dips.
One action to consider at this time would be to look at your overall balance and distribution of assets. If the current markets are making you feel really uncomfortable, it could be a sign your risk tolerance does not matched your allocations; if so, you can develop a plan to revise your allocations and re-balance your portfolio.
The Secure Act changed required minimum distributions (RMD) rules, allowing individuals to wait until age 72. It is a silver lining for some retirees, allowing recovery time for investments before the first withdrawal is required.
The drop in stock values is also a positive for individuals who have planned Roth conversions. Moving investments at low value will result in lower taxes for the distributions and result in upside growth in a non-taxable account.
Turning the current volatile economic situation into an opportunity to learn more about your finances is also a positive action step. Evaluating your spending and savings habits can lead to reduction of debt, building an emergency fund, and keeping your finances on track.
Mobile banking continues to grow in popularity. The new apps, however, aren’t without risks of errors.
When making payments via transfer be sure to double check the payment and confirm you are using the correct person or business receiving the payment, before hitting send. You can issue a stop payment for a check, dispute credit card payments, or cancel an auto bill payment, but a transfer is permanent and cannot be reversed. If it is the first time you have sent money to someone, ask that they send a request for payment or send them a small test payment to confirm it is the right person.
Money transfers are immediately removed from your account, but the receiver usually has a waiting period before the transferred funds can be spent or withdrawn.
If the transaction will be used to file tax returns, you may want to use an alternative method. The IRS does not consider a transaction valid without printed proof. Apps are revised and updated. The software developer is not obligated to provide you with permanent access to previous transactions.
Fraudulent apps closely resemble the legitimate ones. Names and logos can easily be copied and used to build very close look a-likes. Verify the source of the app by visiting the company through another URL, before downloading and entering personal information or account details.
The Secure Act was originally written to make changes to retirement laws. The act passed through the House last May and was held by the Senate until November when it was added to the Appropriations Bill and signed into law in December.
The law change catching attention is the starting age for required minimum distributions (RMDs). If you are retired and reached 70 1/2 before the end of 2019 you are required to take distributions. Everyone else can wait until the year they reach age 72. The annual RMD amount continues to be based on life expectancy tables published by the IRS.
The other change attracting attention relates to distribution rules for inherited retirement accounts. These accounts, including IRAs, 401(k)s and other similar qualified accounts, generally have named beneficiaries. When there is just one beneficiary and it is the spouse, then the withdrawal rules are the same as if the account originally belonged to the spouse. The SECURE Act did not change this.
However, when the account beneficiary is not the spouse, the rules for taking distributions have changed. In general, the beneficiary must take distributions on a schedule that will liquidate the account within ten years. Stretch IRAs, which set up for distributions over the beneficiary’s life expectancy, are no longer an option. Beneficiaries will want to plan for the tax implications of those distributions.
Exceptions to the ten year distribution schedule include: disabled beneficiary, chronically ill beneficiary, beneficiaries not more than ten years younger than the deceased, and children that have not reached the age of majority. Separate rules apply to these individuals, and also to situations where multiple beneficiaries are named, so professional guidance is recommended.
More about the Secure Act will follow in subsequent posts……
Welcome to part two of our review of the the Secure Act! We’ll introduce you to some of the other retirement plan changes employees can expect to hear about as new rules and options are added to their plans.
A part-time employee who has worked a minimum of 500 hours each year for three continuous years can now begin making retirement savings contributions to an employer’s retirement plan. This change expands eligibility beyond the old rules that allowed an employer to use a 1,000-hours-worked rule before full time employees are allowed to participate in a retirement plan.
New tax credits are available for small business owners who start a retirement plan for their employees. Additional credit is given if the plan uses an automatic enrollment structure. The additional business tax credit is also available if an existing plan is converted to automatic enrollment. The business tax credits range from $500 to $5000 and can be claimed for three years. Small employers can also participate in multiple-employer plans that allow many unrelated businesses to join together to share costs of plan administration.
Old rules allowed employers to include annuity options in their 401K plans, but if the insurance company selling the annuity contract failed, the employer was required to guarantee the continuation of the contract payments. The Secure Act removed the employer’s responsibility to protect retirees. The inclusion of annuities in retirement plan menus is expected to increase.
The cap for auto enrollment contributions to an employer’s retirement plan was 10% of employee pay; the amount has been raised to 15%. Employers must continue to give employees the option, once a year, to change their contribution.
The Secure Act also removes the restriction that prohibited individuals age 70 1/2 or older, who are still working, from making contributions to an IRA.
In our next post we will visit some of the non-retirement changes included in the new Secure Act.
Eligibility for participation in retirement savings plans, incentives for small businesses to establish retirement plans, and rules for contributions and distributions are the main focus of the Secure Act, but there are other changes worth understanding in the new law.
Loans allowed by an employer from retirement funds can no longer be distributed through a credit card account or similar arrangements. If received through a credit card, the funds must be claimed as income and are subject to taxes and penalties.
Withdrawals from retirement accounts can now be made for the birth or adoption of a child within one year of the event. The limit is $5000 per account owner and it has to be claimed as income, but there will be no penalty tax added.
At least once a year, your retirement account report must include a statement of monthly benefits the owner can expect in retirement. The amount will be based on a single lifetime or joint lifetime annuity.
403B and 457 plans have new rules for transferring account funds to a new employer’s plan or to a qualified plan distribution annuity.
And in areas unrelated to retirement accounts:
529 plans can now be used to cover the costs of registered apprenticeships, homeschooling costs, private elementary, secondary and religious schooling. Up to $10,000 can be used to repay student loan debt. (State alignment is necessary so check your state rules.)
The Kiddie Tax on unearned income is being reset to rules in place before the 2017 TCJA law. Under TCJA, unearned income was subject to the Estate or Trust tax rates. Amended returns can be filed for 2018.
The penalty for failing to file a tax return is a maximum of $400 or 100% of the tax due.
Rules and implementation guidelines will further define these changes, so check with financial professionals and your employer’s HR departments for more details.
My New Year resolution is to pick one of the three credit bureaus and request a credit report. I’ll be able to read the full report online, sometimes immediately. Because 80% of us do not follow through and accomplish our resolutions, this one will be a winner.
Credit reports can surprise you. I have found accounts listed that I thought were closed and older ones still listed. Some active loans in repayment are not listed.
Accounts listed on the report, will include contact information. I have used the address to write and ask for the account status to be updated. (Keep a copy of the letter for your own records). I have also written lenders and asked them to report my loan history to the credit bureaus. If you have a thin report, very little credit use, asking a landlord, bank, or store to report your history of payments can enrich your report and result in more favorable interest rates and loan terms. New offer credit cards are averaging 19.21%. Individuals with a track record of using credit and an excellent credit score may be able to land a card with a 15% interest rate.
If your resolution involved raising your credit score, be patient. It is easy for one to drop and usually a long time to build up the points. The Consumer Federation of America and Vantage Score have a 12 point online quiz to help you understand the workings of calculations and actions you take that impact your score. Be sure to read the answers provided when your selection is scored, you can learn valuable tips to change credit use. The average score in the US is 695 for FICO and 673 for Vantage. A favorable score for the best credit offers is 700.
The government has been robbing the Social Security Trust!
Most of us have heard this version of Social Security history. Is it true?
Myth is a more correct answer.
Social Security’s history includes details of social movements taking place long before the Act became law in the 1930’s. The movements focused on providing some level of income security for individuals who aged out of the workforce.
Two decisions – both made at the time the bill was written – explain part of how the Social Security Trust Fund was diminished:
Benefits were earned when a worker had made three years of contributions prior to reaching the age of 65. BUT – to be fair to workers who would not be able to make three full years of contributions prior to their 65th birthday, the legislation granted them annual payments as well. In the period 1937 to 1939, this annual payment resulted in a payout of $25,562,000. The actual amount paid out is larger as the payments would have continued until death.
Social Security was also set up as a “pay as you go” program. What came into the fund was paid out. Ida Mae Fuller is the first person to apply for and receive a monthly benefit. She contributed a total of $24.75 in the three years prior to reaching her 65th birthday. Her first benefit check was $22.54. Because she lived many years past age 65, Ms. Fuller’s $24.75 investment yielded a total retirement benefit of $22,888.92. Part of her payment would have come from new contributions and part from income earned from the excess deposits.
Social Security never achieved the trust fund it needed to give it stability. Benefits paid to American retirees in the early days of the program were far in excess of the contributions. Legislative changes expanding benefits and building in cost of living adjustments have continued to keep the fund from building a sufficient cash reserve that would generate earnings to sustain long term benefits.
The Pilgrims celebrated their first successful harvest in 1621. The feast was a three-day celebration that included the survivors of the Mayflower and Native Americans. The newcomers had adapted to the new environment and learned how to grow and harvest the food they needed to survive the winter months.
It would be awesome to be able to say that as a nation we have developed into a country where everyone is self-sufficient and can meet their own needs, but individuals and families still struggle.
Thanksgiving’s celebration is an opportunity to share, and making contributions to the food pantry would be a great way to support community members. A call to the local pantry can help with ideas of what to purchase. Suggested items are easy to open canned vegetables, fruit, meats, beans, soups, and stews. Peanut butter, cereals, crackers, and pasta are also good choices. Think about complete meals that can be prepared with simple tools and few additional needed ingredients. Don’t overlook spices that can help enhance meals prepared with standard food pantry items.
Another approach is to focus on a specific group – infants, young children, cultural groups living in your community – and bundle together foods appropriate for their preferences and eating habits. More ideas can be found here.
Money Tips authors, Brenda, Barb and I, wish you a joyful Thanksgiving!
I think it is safe to say that you do not really understand how expensive health care can be and what an insurance policy covers until you experience a medical event. Up till then, you’ve just seen the written policy, which has to summarize services for a wide variety of health issues and often uses language that is hard to understand. The result is a book called “Evidence of Coverage.” Not something you find on the bestseller list of reading material.
Knowing that a “book” is not what consumers want to read, insurance marketers will often highlight internet access and wellness coaching, rather than details about out of pocket costs.
Here is an example: Jamie breaks an arm. With a higher-premium policy that pays a larger share of the cost of care, Jamie’s total out of pocket cost would be $4,000. If Jamie had selected a policy based only on premium costs and selected the plan with the lowest premiums, Jamie’s total out of pocket expense for the broken arm would be $6,000, due to a higher deductible and higher co-pays for covered services.
Steps to picking a plan go beyond comparing premiums. You can learn how in a workshop, “Smart Choice: Health Insurance ™ Basics.” This free workshop is offered online on November 6th, 7:00-8:00 pm. Register by November 4th at http://bit.ly/schi14326 .
Getting the most out of your coverage and learning more about navigating the claims process is part of Smart Use: Health Insurance™ Actions. It will be taught online on November 13. To receive log-in information, register for this program by November 11th at http://bity.ly/schi14328.
Choice: Health Insurance™ was developed
by a team of experts from across the nation led by University of Maryland
Questions are part of our Writing Your Retirement Paycheck program. The more common questions are about finances, but every now and then, someone will ask, “How am I going to know when to retire and will I like it?” The question of when is sometimes tied to finances, which is fairly straightforward to discuss, but helping someone like retirement is a challenge.
A number of individuals in the United States practice unretirement. A word being used to describe reentry into the workforce after a formal retirement. In an article published by the National Institute of Health, 80% of near-retirement individuals expect to return to the world of work in some capacity. After 2 years, 25% are working full time. Returning to work is less likely to occur if an individual experiences health issues. Interestingly, financial need does not appear to be a common reason for reentry into the workforce.
Retirement plans are highly individual; one size does not
fit all. The successful transitions all have individual differences, but three
elements are frequently mentioned.
A planned trip or activity to create a bridge
between the everyday routine of going to work and the freedom of setting your
own daily schedule. It creates a distraction and gives a chance for individuals
to refocus on a new lifestyle.
Setting goals to complete in the early years of retirement. If chosen wisely, these goals help with time management, simulate thinking, and can result in enjoyment of new accomplishments.
Developing new relationships with individuals and groups outside of the workplace prior to retirement. New associations can help replace the psychological value individuals gained from their roles in the workplace.
Planning for the transition to retirement is financial, but also includes mental preparation for a new lifestyle. Without that step, we might find ourselves part of the “unretirement” movement.