“How you invest during retirement is as critical as how you invest in preparing for retirement," ----
- Daniel R. Solin, author, "7. Steps to Save Your Financial Life."
BY JULIA ANDERSON
The big virus crisis stimulus bill passed by the U.S. Senate and now headed to the House and the President, suspends for the rest of 2020 the requirement that seniors over 70 1/2 take RMD (Required Minimum Distribution) withdrawals from their tax-deferred savings accounts.
We said this was a possibility a few days ago in our most recent post here at sixtyandsingle.com but suggested it might not happen until later this year. Now, Congress is charging ahead.
RMD withdrawals are determined as a percentage of your nest egg such as a Rollover IRA at the end of the prior calendar year. In 2020, retirees were required to take RMD withdrawals from their tax-deferred nest egg based on the value of their funds on Dec. 31, 2019 before the big market crash.
Now, this year’s withdrawal requirement has been suspended. This is long-term help for seniors already worried that they might run out of money before they die.
Tax law requires RMDs to begin the year you turn 71/2, (now 72 with the recent change).
RMD money, by the way, is taxed as ordinary income on your federal income tax return.
The suspension is good news for two reasons:
1. Seniors can avoid taking taxable money out of their retirement savings when their investments have likely been hit by the 30 percent market downturn. The money stays and helps reinvest in the expected recovery over the long-term.
2. The RMD suspension lowers seniors’ taxable income in 2020. We will be getting out their calculators to see how much less they can withdraw but still pay their basic household bills. Or we may choose to live without RMD income all together. Either way our taxable income in 2020 will be lower. That’s good news going into 2021 when we pay estimated taxes based on 2020 income.
For those not yet over age 70, the IRS uses a life-expectancy actuarial chart to calculate percentage withdrawals for you that increase each year. For example:
If you are 72 this year and had $500,000 in your retirement tax-deferred nest egg on Dec. 31, 2019, the required withdrawal amount would have been $19,531 or $1,627 a month. Next year, the withdrawal amount would increase to $20,565, ($1,713 per month) assuming that the value of our nest egg increased from earnings by 5.5 percent.
If you are 72 this year and had $1,000,000 in your retirement tax deferred nest egg on Dec. 31, 2019, the IRS required that you withdraw $39,062 from that account this year. That’s $3,255 a month. Under normal circumstances, next year, the withdrawal amount would have increased to $41,131, if your remaining balance went up in value thanks to earnings by an estimated 5.5 percent.
All that is on hold thanks to the suspension. Take it or leave it, it’s up to you.
IRS RMD basics: click here
IRS RMD worksheet: click here
Nerdwallet.com click here
Kiplinger.com "Everything you need to know about RMDs." click here.
“Only when the tide goes out do you discover who’s been swimming naked,” --
Warren Buffett, investor, 1930 --
BY JULIA ANDERSON
Here’s hoping that my 65-and-older friends have a cash rainy-day fund to draw on while they endure the market virus crisis. It seems like an economic deck of cards has been thrown up in the air but has yet to land. Right now, where we end up, nobody really knows.
In three days, we went from a greedy over-extended 12-year bull market to a snarling bear market downturn as the coronavirus pandemic began to claim victims. Businesses shutdown, offices and restaurants closed. Airlines cut operations. Boeing is facing bankruptcy. We all are sitting in quarantine at home wondering what’s next. It’s global.
With so many questions and so few answers when will things calm down, turn around?
What should I do with my long-term retirement portfolio?
Are we headed for a Depression with a 30 percent jobless rate, bread lines and displaced people?
When will the number of new virus infections begin to slow?
Can our federal banking system and financial agencies pump enough money into the system to avoid a melt-down? A total of 37 million jobs could be at risk.
When Disney closes its parks, you know it’s serious.
A real recovery marked by sustained and reasonable stock buying might be three months or longer away. A sustained sensible recovery might not happen until fall or (depending on virus and economic news), not until the end of the year after the U.S. presidential election.
That’s a long time to hold your breath.
How to manage your portfolio depends on your age:
70-plus age group: Those in retirement, living on their nest egg and required to take RMDs (Required Minimum Distributions):
The IRS dictates how much you must withdraw from your regular tax-deferred Individual Retirement Accounts once you reach 70 ½ or now 72. Bottom line: Let’s hope you have cash on hand so that you can avoid selling stocks or bonds that are in the tank to pay out the RMDs. Your cash reserve inside your IRA should cover RMD withdrawals for at least 12 to 18 months. That way you’re not selling at a discount to generate cash. Let the rest of your portfolio continue to reinvest dividends and earnings. After all, stocks are now on sale.
There’s been some talk of suspending RMD withdrawals to help people hold on to cash through the virus crisis. “Suspension of 2020 RMDs and other types of financial plan participants, while possible, isn’t likely to be enacted and made effective this year,” say experts at Retirement Income Center (retrementincomecenter.com). “If the economy and stock market continue their downward trend for the next six months or so, it’s more likely that legislation suspending RMDs and delaying the commencement of the (new) nonspouse beneficiary 10-year rule on tax-deferred accounts, or potentially changing to a 12-year rule, would be enacted at the end of 2020 effective 2021.” Remember that Congress made a similar move during the Great Recession of 2007-08.
In the short-term, I am delaying RMD withdrawals until later in the year in the hope that Congress might make the change sooner. And I am tightening up my household spending. We have cancelled our planned big trips and instead will make quicker regional getaways. Could we live on Social Security benefits, alone? Maybe.
Those 55-70: People nearing or in early “active” retirement.
Money managers say don’t retire into a bear market. If you take money out of our nest egg at the start of your retirement when stocks are down, you undermine the long-term growth and sustainability of your funds.
Keep working or at least work part-time. Delay tapping into your retirement savings and instead let them recover in value while continuing to reinvest dividends. If you can, put off taking Social Security benefits to increase the annual benefit amount.
Ages 25-55: Those working full-time and happy with the job.
Do nothing, stay the course.
Stocks are on sale, right now. That means your reinvested dividends can buy more shares at a cheaper price. Keep in mind that it is impossible to “time” the market by jumping out at a market peak then jumping back in when it dips. Those that bailed out of the market after the Great Recession missed the first four months of recovery when stocks made the biggest gains.
For the past six months, maybe a year, I have been telling myself that the increasing value of my stock portfolio was fake money and didn’t exist. I estimated what a 20-30 percent selloff would look like. Sure enough, that’s what my portfolio now looks like. Ouch.
The thing is, we’ve been overdue for a retraction or a correction for more than two years, so the virus triggered a predicted decline. But the total economic shutdown has put us into new harsh territory.
For my money, the longer the bull market continued, the more brutal the sell-off would be (with or without the virus). Yes, the virus is new territory, the Boeing implosion is a problem, global oil prices are too low, and the political climate isn’t helping. But here we are. Through every dark time, U.S. capitalist markets have persevered, delivered dividends and created wealth for all of us in terms of assets, jobs and profits.
Sadly, this sell-off will scare some out of the market at the bottom, never to return. They will miss dividend earnings going forward. Inflation will eat into their cash. That’s when a good financial adviser can help by explaining why staying with markets is the way forward.
I am not into doomsday scenarios. As my mother, the ultimate investor, often told me, “things will come back.”
According to Google research: Before the current correction, there have been 37 declines of at least 10 percent in the S&P 500 since the beginning of 1950. Each of these drops, many of which lasted less than 3.5 months from peak to trough, were completely erased by a later bull-market rally.
Here are the positives of the global market meltdown:
Energy costs are dropping. Oil, gasoline and diesel prices are dropping. That helps with household expenses, helps with business operating budgets, helps trucking companies, helps airlines. They all need help.
Stocks are cheap and present a buying opportunity for those with a long-term horizon. Use dollar-cost-averaging to routinely buy in.
Until the virus hit, the U.S. economy was the best of the past 30 years with a low unemployment and strong job demand. That isn’t going to disappear.
Housing will continue to be in demand. A key part of the economy.
The Fed is pouring money into banks. That means cheaper cheap loans or refinanced loans that will help people get by until a paycheck returns.
Experts are saying the virus outbreak could peak by June, then likely decline. Many expect a return to more normal economic activity and a run-up in stocks whenever that happens. The rapid and huge sell-off tells me there could well be a rapid and huge market recovery whenever it becomes clear that we are getting through the virus-induced downturn.
“Market Bottom: Are We There Yet? – Fidelity.com https://www.fidelity.com/learning-center/trading-investing/markets-sectors/stock-market-drops-2020
“Control the One Thing you Can" by Jason Zweig writing at the WSJ -- https://www.wsj.com/articles/stocks-are-cratering-control-the-one-thing-you-can-11584055737?mod=hp_featst_pos1
RMDS. Will Congress suspend withdrawals? Retirement Income Center -- https://www.retirementincomecenter.com/will-congress-suspend-2020-required-minimum-distributions/
“I’m Scared. That’s a Reason to Buy." WSJ -- https://www.wsj.com/articles/im-scared-thats-a-reason-to-buy-11584984021?tesla=y&mod=article_inline
ll information provided here is for informational purposes only. Consult your financial adviser.
I meet women all the time who face job and money transitions and who want to do them right. It’s about building confidence and taking charge of the future. This is your money. No one cares more than you do!
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