How to overcome bad timing for retirement
Both of Stephanie McElheny’s parents had personal experience with a retirement that came at the worst possible time. Her dad was about to retire in 2008 and decided to delay a few years. Her mom retired at 62 on Feb. 28, right into the market meltdown.
Her mother’s retirement “looked at the time like almost comically bad timing,” said McElheny, president of wealth planning at Aspen Wealth Strategies in Arvada, Colorado.
But McElheny had built plenty of contingencies into the retirement income projections she had made for her parents, including a longer life expectancy and higher-than necessary setasides for health care spending.
If your situation has just drastically changed, take a hard look at all your options, including these five rules in the time of COVID.
1. Review your income game plan. Establishing a budget and a discipline for keeping portfolio withdrawals within an acceptable range is critical. Keep in mind the return assumptions baked into any income calculator you use. McElheny has trimmed assumptions on her moderate portfolios to 5.73% annually, far lower than many calculators typically assume.
2. Minimize taxes. Previously, experts recommended pulling retirement income first from taxable accounts, then from traditional IRAs and, finally, from Roth IRAs. Today, the goal is to pull just enough income from IRAs to stay within your lowest possible income bracket, then fill in the remainder of needed income from taxable accounts and, lastly, Roth accounts. But if that’s not possible, don’t worry too much about accelerating IRA withdrawals now, McElheny said. With tax rates almost certainly heading higher, making withdrawals now that have a lower tax bite might turn out to be a good strategy anyway.
3. Understand the CARES Act. Under the new law, the 10% early withdrawal penalty for taking up to $100,000 in distributions before age 59 1⁄2 from qualified retirement plans, including IRAs and 401(k)s, is waived for people affected by the pandemic. The law allows for the taxes on the money to be stretched over three years. If you’ve been thrust into early retirement, this could be a lifesaver. But you should realize it comes at the cost of a higher risk of portfolio failure down the road.
4. Delay Social Security if you can. Older workers also may be tempted to file for Social Security benefits early now, but the bonus for delaying to age 70 is hard to beat. For every year beyond your full retirement age that you delay taking Social Security, your benefit grows 8% per year until age 70.
5. Consider buffer assets. Home equity lines of credit and cash value in a life insurance policy can be tapped for income when stocks are down, said Michael Finke, a professor at The American College of Financial Services.
Janet Kidd Stewart is a contributing writer to Kiplinger’s Personal Finance magazine. For more on this and similar money topics, visit Kiplinger.com.