RETIREMENT INSIGHTS

News and information for current and future retirees.

COULD YOU RETIRE AT 55?

Suppose you suddenly had to, or the opportunity presented itself. This prospect would not call for disregarding your carefully considered retirement strategy, but it would create some challenges.

Social Security, Medicare, and popular retirement accounts were all created with the assumption that Americans would need retirement benefits and sources of retirement income, sometime in their 60s. A typical 55-year-old has ten years to wait to enroll in Medicare and is seven years away from the chance to claim Social Security. Withdrawing money from a qualified retirement plan before age 59½ often triggers a 10% early-withdrawal penalty. (The CARES Act waives the 10% penalty in 2020 in certain situations.) So, one challenge is to generate income in your 50s from sources apart from retirement plan distributions and Social Security, perhaps using accounts that allow you penalty-free access to assets. There is also a big-picture consideration that comes into play regarding your income if you retire before 60. It means you will have saved for retirement for comparatively fewer years than some of your peers have, and you may end up paying for more years of retirement than they will. The other big challenge is to stay healthy and find and sustain health insurance coverage (remember, COBRA coverage usually lasts no more than 18 months if you retire early). Should you retire at 55 by choice or chance, the circumstance calls for discussion, and a review of your income and insurance options.1

Under the SECURE Act, once you reach age 72, you must begin taking required minimum distributions from your retirement plans in most circumstances. Withdrawals from your 401(k) or other defined-contribution plans would be taxed as ordinary income.

FIGURING OUT WHEN TO START YOUR SECOND ACT

Many Gen Xers and baby boomers look forward to retiring on their terms.

In such a circumstance, the key question becomes when to walk away from work. According to the Center for Retirement Research at Boston College, the average retirement age is now 65 for men and 63 for women.  You may retire before or after that age, depending on a few critical factors, which can vary per individual.

First, what do you see yourself doing in retirement? If you have a strong, clear vision of what you want to do, then you might be mentally prepared to retire sooner rather than later. If your sense of identity and your friendships are linked to your career, you may want to put off retiring while working on that clear vision of the future. A second factor is your health. This argument says to retire while you are still healthy rather than working until your health compels you to retire. The third is the nature of your job. If you do hard, physical work or work that cannot be done remotely, you may want to anticipate an earlier retirement compared to some of your boomer or Gen X peers. Fourth is the amount of retirement savings you have. Should you need to increase that amount, you could delay your retirement and postpone claiming Social Security retirement benefits. Even holding off on both for a year or two might give you more compounding and more monthly retirement income.*

 

*USA TODAY, July 22, 2020

WHY ROTH IRA CONVERSIONS MAY NOW BE ADVANTAGEOUS

Thanks to a couple of factors, some investors are thinking about this move before 2020 ends.

Roth IRAs have attracted retirement savers since their introduction in 1998. They offer the potential for tax-free retirement income, provided Internal Revenue Service rules are followed.

Do Roth IRAs seem even more attractive these days? Perhaps. You can cite two factors: current tax rates and the passage of the Setting Every Community Up for Retirement Enhancement (SECURE) Act. 

Roth IRAs differ from traditional IRAs. Typically, distributions from traditional IRAs must start once you reach age 72, and the money distributed is taxed as ordinary income. When distributions are taken before age 59½, they may be subject to a 10% federal income tax penalty (although, the CARES Act does allow for some exceptions to those penalties for the 2020 tax year).1  

On the other hand, if you are the original owner of a Roth IRA, you do not have to start taking distributions at age 72. And if you are least 59½ years old and have owned the Roth IRA for at least five years, any distributions you take may be exempt from federal taxes.2

Remember, this article is for informational purposes only. It does not replace real-life financial or tax advice. Be sure to consult a tax or financial professional before making any decisions regarding your traditional IRA or Roth IRA.

Converting a Traditional IRA to a Roth IRA is a taxable event. You pay ordinary income tax on the converted amount. And federal tax rates are now near historic lows, thanks to the Tax Cuts and Jobs Act, and they are scheduled to stay there through 2025.3   

The SECURE Act ruled that a non-spouse beneficiary of an IRA must completely withdraw that inherited IRA balance within 10 years rather than over the beneficiary’s lifetime (the previous guideline). The distribution can be taken as a lump sum or in payments over the 10 years. There is no set guideline other than it must be empty in 10 years.

The rules are similar for a non-spousal beneficiary of a Roth IRA. The new owner must deplete the inherited IRA in 10 years. However, there may not be any federal income taxes on the withdrawn amounts, assuming I.R.S. rules have been respected.3

A Roth conversion may be appealing purely from an income tax perspective. Taxable incomes have declined for many households due to recent economic slowdown, resulting from the COVID-19 pandemic in 2020, and it might put some traditional IRA owners in lower tax brackets this year. Add in the fact that federal income tax rates are low, to begin with, and 2020 could be a good time to go Roth.3

A Roth conversion may also play a role in an estate strategy. If you inherit an IRA today, you don’t have to take annual Required Minimum Distributions (RMDs) from it in 2020, thanks to a provision in the SECURE Act. However, you have to make sure that IRA is empty within 10 years.3

So, if you inherit a Roth IRA, you could give the assets in that Roth IRA a chance to grow and compound for another decade without tapping them. You could draw down the entire balance at once after 10 additional years of potential growth and compounding. Not so, in the case of a traditional IRA, however; that lump-sum withdrawal would be taxed as regular income.3

Remember that any Roth IRA conversion is a taxable event, and these conversions cannot no longer be undone.  Also, keep in mind that tax rules change from year to year, and future tax changes may affect IRAs.

There is no guarantee that the tax treatment of Roth and traditional IRAs will remain the same in the future.3

 

 

1 – TheStreet, May 13, 2020

2 – NerdWallet, July 31, 2020

3- Bankrate, July 21, 2020

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On the Bright Side

A May 2020 report from the Society of Actuaries found that 41% of U.S. retirees felt that their current financial situation met their pre-retirement expectations. Another 36% said they were doing either “somewhat better” or “much better” financially in retirement than they thought they would.

Source: Society of Actuaries, May 2020

Did you know?

Parts of one South American country have seen some long dry spells.

Chile has some of the aridest regions in the world. In fact, one locale in the famed Atacama Desert, Calama, has never had any recorded rainfall. Arica, a city on the Pacific Ocean, once went nearly 15 years (October 1903 to January 1918) without rain, and its average annual rainfall was 0.03″ across a period of 59 years.

Source: Arizona State University, September 1, 2020

Investment Advisory Services offered through BCJ Capital Management LLC., a (SEC) Registered Investment Adviser. Information presented is for educational purposes only. It should not be considered specific investment advice, does not take into consideration your specific situation, and does not intend to make an offer or solicitation for the sale or purchase of any securities or investment strategies. Investments involve risk and are not guaranteed, and past performance is no guarantee of future results. For specific tax advice on any strategy, consult with a qualified tax professional before implementing any strategy discussed herein. DISCLOSURES