Would an Early Retirement and Early Social Security Be Smart?

Older employees who have been laid off need to consider the long-term repercussions of taking Social Security early.
Older employees who have been laid off need to consider the long-term repercussions of taking Social Security early.

For older employees who are laid off as a result of the pandemic, the idea of an early retirement and taking Social Security benefits early may seem like the best or only way forward. However, cautions Forbes in the article “Should You Take Social Security Earlier Than Planned If You’re Laid Off Due to COVID-19?,” this could be a big mistake with long-term repercussions.

In the recession that began in 2008, there were very few jobs for older workers. As a result, many had no choice but to take Social Security early. The problem is that taking benefits early means a smaller benefit.

In 2009, one year after the market took a nosedive, as many as 42.4 percent of 62-year-olds signed up for Social Security benefits. By comparison, in 2008, the number of 62-year-olds who took Social Security benefits was 37.6 percent.

You can start taking Social Security early and then stop it later. However, there are other options for those who are strapped for cash.

There is a new tool from the IRS that allows taxpayers to update their direct deposit information to get their stimulus payment faster and track when to expect it. There is also a separate tool for non-tax filers.

Apply for unemployment insurance. Yes, the online system is coping with huge demand, so it is going to take more than a little effort and patience. However, unemployment insurance is there for this very same purpose. Part of the economic stimulus package extends benefits to gig workers, freelancers and the self-employed, who are not usually eligible for unemployment.

Consider asking a family member for a loan, or a gift. Any individual is allowed to give someone else up to $15,000 a year with no tax consequences. Gifts that are larger require a gift tax return, but no tax is due. The amount is simply counted against the amount that any one person can give tax free during their lifetime. That amount is now over $11 million. By law, you can accept a loan from a family member up to $10,000 with no paperwork. After that amount, you’ll need a written loan agreement that states that interest will be charged – at least the minimum AFR—Applicable Federal Rate. An estate planning attorney can help you with this.

Tap retirement accounts—gently. The stimulus package eases the rules around retirement account loans and withdrawals for people who have been impacted by the COVID-19 downturn. The 10% penalty for early withdrawals before age 59½ has been waived for 2020.

If you must take Social Security, you can do so starting at age 62. In normal times, the advice is to tap retirement accounts before taking Social Security, so that your benefits can continue to grow. The return on Social Security continues to be higher than equities, so this is still good advice.

For more information on how the coronavirus has affected retirement planning see https://galligan-law.com/massive-changes-to-rmds-from-stimulus-package/

Reference: Forbes (April 15, 2020) “Should You Take Social Security Earlier Than Planned If You’re Laid Off Due to COVID-19?”

 

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Should You Save for Retirement During the Coronavirus Pandemic?

Short term savings is an important goal during the coronavirus pandemic.
Short term savings is an important goal during the coronavirus pandemic.

As the coronavirus spreads across the US, most of our lives have come to a halt. Some Americans are already out of work and millions may end up losing their jobs during a potential recession, says CNBC in the article “Financial planner: Here’s when you should temporarily stop saving for retirement during the pandemic.” What’s the best course of action for these uncertain times?

Financial advisors typically set a goal of a small portion of household income, usually 10-15%, to be set aside for retirement. Based on your situation, now might be a time to scale that back or stop contributing to retirement accounts, if you don’t have cash savings to fall back on in the short term.

If you don’t have three to six months of emergency funds available—which most Americans do not—then now is one of the only times that the financial professionals are advising putting a temporary halt on contributing to retirement accounts.

What to do with that money? Take the money you would normally be putting aside for retirement and put it in an account for emergencies, if you are able to do so. This is not an ideal time, but hopefully it is a short-term change. Make a commitment to yourself and your retirement to start contributing once you are back on normal financial footing.

Having an emergency fund right now is critical. Legislation to help during the coronavirus pandemic is being passed, but how much help will be available for individuals, and when it will be available, is anyone’s guess. If you or the family’s main breadwinner becomes ill and can’t work, or if your job is among those lost because of the coronavirus, having a cash cushion of any kind will be important.

Every news cycle brings more things to worry about, so having an emergency fund also can provide some peace of mind. When we are worried on a chronic basis about paying for unexpected expenses, the stress can take a toll on our physical well-being.

In addition to moving retirement funds to an emergency fund, now is the time to back off of non-essentials, like subscriptions or memberships that are not being used. Make a list of everything you are paying for that is not essential—recognizing what you and your family really need, versus what you want—and send those savings to your emergency fund. The cuts may be temporary, but they will add up faster than you expect.

The charges you are not adding to credit cards now for things like dining out, going to the movies, etc., may start showing up as smaller credit card bills. However, don’t rush to spend any discretionary income. Rather than apply that money somewhere else, like increased online shopping because you are bored, also put that extra money into your emergency fund.

These are unprecedented times, when the margin for careless spending has become very slim. Be proactive about protecting your financial well-being, so you are able to weather this storm.

As for your physical health, learn more about the Care Plan recommended by the CDC at https://galligan-law.com/covid19-update-cdc-recommends-care-plans-for-both-older-adults-and-caregivers/

Reference: CNBC (March 18, 2020) “Financial planner: Here’s when you should temporarily stop saving for retirement during the pandemic”

Suggested Key Terms: Retirement Accounts Pandemic, Savings, Emergency Funds, Credit Card Bills

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Massive Changes to RMDs from Stimulus Package

The coronavirus stimulus package extended IRA contribution deadlines and waived 2020 RMDs.

Several of the provisions that were signed into law in the stimulus package relief bill can taken advantage of immediately, reports Financial Planning in the article “Major changes in RMDs and retirement contributions in $2T stimulus plan.” Here are some highlights.

Extended deadline for 2019 IRA contributions. With the tax return filing date extended to July 15, 2020 from April 16, the date for making 2019 contributions to IRA and Roth IRA contributions has also been extended to the same date. Those contributions normally must be made by April 15 of the following year, but this is no normal year. There have never been extensions to the April 15 deadline, even when taxpayers filed for extensions.

When this tax return deadline was extended, most financial professionals doubted the extension would only apply to IRA contributions, but the IRS responded in a timely manner, issuing guidance titled “Filing and Payment Deadlines Questions and Answers.” These changes give taxpayers more time to decide if they still want to contribute, and how much. Job losses and market downturns that accompanied the COVID-19 outbreak have changed the retirement savings priorities for many Americans. Just be sure when you do make a contribution to your account, note that it is for 2019 because financial custodians may just automatically consider it for 2020. A phone call to confirm will likely be in order.

RMDs are waived for 2020. As a result stimulus package, the Coronavirus Aid, Relief and Economic Security Act (CARE Act), Required Minimum Distributions from IRAs are waived. Prior to the stimulus package’s enactment, 2020 RMDs would be very high as they would be based on the substantially higher account values of December 31, 2019 instead of the current lower values due to the drop in the market. If not for this relief, IRA owners would have to withdraw and pay tax on a much larger percentage of their IRA balances. By eliminating the RMD for 2020, tax bills will be lower for those who don’t need to take the money from their accounts. For 2019 RMDs not yet taken, the waiver still applies. It also applies to IRA owners who turned 70 ½ in 2019. This was a surprise, as the SECURE Act just increased the RMD age to 72 for those who turn 70 ½ in 2020 or later.  See here for a much fuller description of how the SECURE Act changed retirement planning.  https://galligan-law.com/the-secure-act/

IRA beneficiaries subject to the five- year rule. Another group benefiting from these new rules are beneficiaries who inherited in 2015 or later and are subject to the 5-year payout rule. Those beneficiaries may have inherited through a will or were beneficiaries of a trust that didn’t qualify as a designated beneficiary. They now have one more year—until December 31, 2021—to withdraw the entire amount in the account. Beneficiaries who inherited from 2015-2020 now have six years, instead of five.

Additional relief for retirement accounts. The new act also waives the early 10% early distribution penalty on up to $100,000 of 2020 distributions from IRAs and company plans for ‘affected individuals.’ The tax will still be due, but it can be spread over three years and the funds may be repaid over the three-year period.

Many changes have been implemented from the stimulus package. Speak with your estate planning attorney to be sure that you are taking full advantage of the changes and not running afoul of any new or old laws regarding retirement accounts.

Reference: Financial Planning (March 27, 2020) “Major changes in RMDs and retirement contributions in $2T stimulus plan”

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