How Do I Stop COVID-19 from Eating Up My Retirement?

Covid-19 has complicated retirement planning.
Covid-19 has complicated retirement planning.

COVID-19, as well as the efforts taken to slow the spread of the disease, have caused financial and health crises throughout the country, especially for seniors. As a result, financial and other life decisions for seniors and those planning for retirement are much more complicated than they were just a few months ago.

The USA TODAY recently published an article entitled “What you can do if coronavirus is threatening your retirement” that examined some of the challenges and opportunities people should consider as they move into retirement, especially during the current pandemic.

Decrease your 401(k) contributions. As you hit 50, you’re able to make catch-up contributions to your 401(k) and IRA accounts. For 2020, you can contribute up to $6,500 annually to a 401(k) and, if you’re over 50, up to $1,000 above the $6,000 annual limit to either a traditional or Roth IRA. You might look at reducing your contributions. If you have credit card debt or a car loan, paying that off that before retiring might be more important than building your nest egg. When you retire, your savings would be your main source of income.

Take some money out of your IRA. You can withdraw funds from either an IRA or a 401(k) at age 59½. If you’re still working, and your employer has a 401(k), you can continue to contribute to it as long as you are eligible. However, you must start withdrawing funds when you reach 72. You can’t continue contributing to a traditional IRA once you reach that age, but that’s not the case with Roth IRAs. The longer you can leave your savings untouched (or keep adding to them), the more you will have when you retire.

Think about your wheels. Ask yourself if you really, really need a new or fairly new car at all. If yes, notice that the down payment on a lease is typically lower and so are the monthly payments. After the lease term is up (usually three years), you can get a lease on a new car and do it again. Know that it takes about five years to pay off a new car loan and you will be driving it payment-free for 10 or more years, if you keep it for 15 years. Therefore, buying an affordable vehicle may be a better choice.

Take your Social Security now. When you turn 62, you can start collecting Social Security retirement benefits. You’ll get another opportunity at age 65 or later (depending on your birth year) and at 70, you’re required to take it. In 2020, if you begin collecting benefits at age 62, the maximum monthly payment is $2,265; at 65 or later, the monthly benefit is $3,011; and at age 70, the maximum benefit is $3,790. Usually, you’d want to wait as long as you can to take the benefit, because your monthly income will be higher when you need it most (i.e., when you’re older).

Look into a reverse mortgage. They often get a bad rap, but there are situations when it may make sense. If your home is your largest asset, and you need cash and have no other way to get it, a reverse mortgage may be your best option. However, to get one, your mortgage must be paid off (or nearly so).

Downsize. Consider selling your home and buying smaller digs. By downsizing, you might be able to pay cash for a smaller home and use the rest of the proceeds from the sale of your old house to pay off other debt.

Other Ideas. You can also lessen your debt load, plan to keep your current car a few years loner and plan to work a year or two longer. A few other ideas are to join AARP, trim your household expenses, see if you can cut your cellphone bill, take advantage of senior discounts and pre-plan your funeral.

For more information on Covid-19 and retirement planning see https://galligan-law.com/should-you-cut-retirement-savings-efforts-during-the-coronavirus-pandemic/

Reference: USA TODAY (April 13, 2020) “What you can do if coronavirus is threatening your retirement”

 

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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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Social Security Survivor Benefits for Spouses

Clients often think of Social Security for retirement planning, but Social Security survivor benefits, especially for spouses, should be considered as well.

Social Security is the main retirement income source for more than 60% of Americans, which is why it is usually the focus of news about retirement income. However, there’s more to Social Security survivor benefits, including how it helps surviving spouses. Social Security survivor benefits can be a critical part of retirement securities when families lose a loved one, says the article “Understanding the Basics Of Social Security Benefits for Surviving Spouses” from Forbes.

The rules about Social Security survivor benefits for spouses can be complicated. There are four basic categories of survivor benefits. Here’s a closer look:

Survivor benefits at age 60. At their full retirement age, the surviving spouse can receive full survivor benefits based on the deceased individual retirement benefit. The amount from the survivor benefit is based on the deceased spouse’s earnings. At full retirement age, the survivor receives 100% of the deceased individuals’ benefit or their projected benefit at full retirement age. If they collect benefits before full retirement age, you’ll get between 70% to 99% of the deceased spouse’s benefit.

You cannot receive both your benefit and your deceased spouse’s benefit. In most cases, it makes sense to defer whichever is the higher benefit, taking the lower benefit first while the larger benefit continues to increase.

Lump sum payment. This was originally intended to help survivors with certain funeral and end-of-life costs. However, the amount has never been indexed for inflation. Therefore, it won’t cover much. To get the payment, the surviving spouse must apply for it within the first two years of the deceased individual’s date of death.

Disabled benefit. If you qualify as disabled, you can receive survivor benefits as early as age 50. Divorced spouses can also receive survivor benefits, if the marriage lasted for at least ten years. If you remarry, you cannot receive survivor benefits. However, if you remarry after age 60, or age 50 if disabled, you can continue to receive survivor benefits based on your deceased spouse’s benefit, if you were married for at least ten years. You can even switch over to a spousal benefit based on the new spouses’ work history at age 62, if the new benefit would be higher.

Caring for children under age 16. A surviving spouse of any age caring for a child who is under age 16 may receive 75% of the worker’s benefit amount. The child is also eligible for a survivor benefit of 75% of the deceased parent’s benefits. A divorced spouse taking care of the deceased ex’s child younger than 16 is also entitled to 75% of the deceased spouse’s benefit. In this case, the ex does not need to meet the ten-year marriage rule, and they can be any age to collect benefits.

You can also see this article from Mary Galligan that discusses the timing of these benefits.  https://galligan-law.com/social-security-benefits-what-happens-when-a-spouse-dies/

One thing to consider: the rules surrounding Social Security benefits are complex, especially when it comes to coordinating benefits with an overall financial plan. Contact our office and your financial planner to learn how these rules may help protect your family and children.

Reference: Forbes (Dec. 30, 2019) “Understanding the Basics Of Social Security Benefits for Surviving Spouses”

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