The “pink slip” risk in retirement planning
I’ve mentioned in several previous posts that the anxiety about 401(k) balances has been largely overstated, in part because of the beneficial effects of ongoing contributions and diversified portfolios. This point has come across as Pollyanna-ish to some of you, a point that I can sympathize with, even though I largely disagree with it.
However, I am no Pollyanna about retirement risks, and want to spend a moment discussing what I view as the most important real risk embedded in your retirement savings account: the possible toxic combination of unemployment and market losses.
I have six family members or friends who have lost their jobs in the current recession. (By the way, I started the prior sentence by writing “three” people with lost jobs. But then I kept editing it—first three, then four, and then on to five and finally six, where I’ve decided to stop for the moment.)
Anyway, in this group, all have made draconian cuts in their standard of living. And in the current environment, where jobs are scarce, they are spending down retirement savings to pay for necessities. Housing, food, transportation expenses. And, for at least three people, the costs of continuing health insurance. (For three others, health benefits are lapsing or never were available—a different but related topic.)
Being unemployed, encountering a market decline, and spending down from retirement accounts is a worst-case outcome for your retirement plan. Not only are asset values declining, your spending from the account accelerates the decline, there’s no chance of restoring values through ongoing contributions, and on top of it all, you’ll owe a 10% penalty tax (plus any regular income taxes) if you’re under age 59½. Depending on how long your unemployment endures, a lifetime of savings can be quickly depleted.
In the United States, 401(k) savings have become an informal social insurance system (at least for those households with 401(k)s). They provide a financial backstop and in some sense allow for relatively low unemployment benefits. The solution to this dilemma is, of course, expensive—higher unemployment benefits, plus restrictions on your ability to tap retirement savings. The former seems not on the horizon, as Congress struggled with the latest extension of unemployment benefits. And as for the latter, it would be positively Scrooge-like to disallow withdrawals to the unemployed at this point.
So by no means am I Pollyanna-ish about 401(k) risks. It’s worth recalling that for those of us still working, and saving, our perceived risks pale in comparison to the unemployed forced to spend down their savings. Call it the “pink slip” risk—the pink layoff slip that stands between your carefully crafted retirements plan and crisis.
Excellent post. For once, discussion of a realistic scenario impacting average working Americans. It is hard to worry about asset allocation, diversification, and 401K maximums, when you out-of-work and need to pay the rent and health insurance premium.
I would like this to be carried further with discussions on how best to utilize your savings when confronted with unemployment.
Reading this drives home the importance of having an emergency set-aside savings account (providing cash for six to eight months of essential living expense to protect against short-term financial problems like a job loss). For my own sanity, and to not have to resort to drawing down retirement savings in pre-retirement years, I’ve been building up an eight-month emergency set-aside account by stashing money each month in a money market fund (even though the current interest earned on the money is low).
Oddly enough, by regularly saving up towards this goal which feels like a protective insurance policy of sorts, I seem to perform better at work. My on-the-job work ethic behavior is seemingly propped up a bit from the simple confidence of knowing there’s cash in the bank in case I might lose the job. I guess that confidence leads, in part, to better performance.
I can’t imagine how gut-wrenching it must be for people in their pre-retirement years to have to pull from retirement savings in order to pay bills, when that might be largely prevented by the preemptive saving up of a safety net of cash.
Certainly agree that these assets should be a last resort.
However, taxes may be modest in certain situations. For example, if these were Roth 401(k) contributions, the taxation of a return of principal may only have a minimal impact. If there is a lifetime of savings, perhaps another option would be a 72(t) installment payout based on life expectancy - say to cover the mortgage. Or, if unemployment is for an extended period of time, perhaps there is a calendar year where there is no other income; if so, if income is low enough so that it is only subject to the 10% penalty tax, there may be less loss due to taxation than holding the money in the account until retirement.
Yes, unemployment, disability … there are many risks where some, perhaps many Americans have not sufficiently prepared. However, at least these folks had the discipline to save while employed, and, that habit is likely to trigger similar behavior upon re-employment.
Although gloomy, I think we all need to accept the truth of these troubling issues and proceed accordingly. The government bailed out some major players in the markets but those who have been laid off are left holding the bag for the irresponsible actions made possible by deregulation, greed, and short-sighted incentives. The culprits are given a ‘get out of jail free’ card. It’s a tough reality and an unfair one, but there you have it. What should we do about it?
You’re exactly right, Mr. Utkus. And those of us with grown “children” in the work force lie awake at night wondering will they find their way through the Great Recession–the likes of which I have not seen in my 67 years of life.
NOT SURE WHY YOUR FRIENDS LOST THEIR POSTIONS, BUT THE FACT THAT THEY HAVE AND THE NEED TO TAP THEIR 401,BEGS THE QUESTION, WHERE THEY LIVING UP TO OR BEYOND THEIR MEANS. WERE THEY DRIVING AN EXPENSIVE CAR AS OPPOSED TO A MODERATE PRICED CAR, OR LIVING IN A LARGE HOME AS OPPOSED TO MODERATE HOUSE. I GUESS WHAT I AM GETTING AT, DEPENDING ON THE BUSINEES THAT YOUR IN, YOU NEED TO TAKE A HARD LOOK AT THE DOWNTURNS IN THAT INDUSTRY AND THE NEED TO INCORPORATE YOUR FINACIAL
PLANNING IN ACCORDANCE WITH THE BUSINEES CYCLES IMPACTING THE INDUSTRY.
THIS MAY HELP MINIMIZE THE IMPACT ON YOUR 401.
Yes, a “real world” discussion for once! I don’t know how the people over 55 can cope if they can’t afford the COBRA extension (if even available), and it is certainly steep. On the other hand, one accident or serious illness can easily wipe out a couple’s retirement savings.
You can make the Draconian cuts in other areas, but health care for a loved is not one of them.
Can someone please explain the “substantially equal payments” exception to the 401k withdrawal penalty? All I ever hear is that it is there but the IRS is very touchy on the subject and a mortal human cannot figure an acceptable way of doing it. Surely someone knows how you can figure it without hiring a lawyer or accountant. It sounds like a much better option for the “pink slip” people.
Part of the problem is the way the U.S. has almost completely pushed the risk of retirement onto individual workers. I think the 401K has been completely hyped and oversold in this country with lip service paid to its attendent risks. I would much prefer to see the retirement system include, as a secondary component, a traditional pension plan like the way the Federal Employee Retirement System is structured. The first component is a 401K type plan that will be the bulk of a workers retirement assets, but there is smaller defined benefit plan that is to some degree indexed for inflation and ensures some level of retirement income no matter what happens to the 401K. It is also very unfair of one of the posters to place the blame for misfortune on the shoulders of individuals who probably were doing all that they were supposed to do, until the rug got pulled out from under them. The people I know who are in this position were hard working middle class savers NOT dual income Yuppies living above their means.
It is easy for some to judge people whom they do not know and cast blame for supposedly excessive lifestyles. Perhaps they do not realize that real (inflation adjusted ) incomes in the United States have been stagnant for the past 30 years and actually declined during the last decade. The easy, upward mobility your parents and grandparents may have enjoyed (often without needing much formal education) is a thing of the past for many.
The American work force is finally waking up to the fact that they lost a valuable retirement tool when 401(k) plans replaced defined benefit pensions starting in the 1980s. These plans shifted all the risk of future inflation and market losses from employers and insurers to individual workers and are a significant cause (along with out of control medical costs) of the erosion in the living standards of the American middle class, particularly in their so-called golden years.
My opinions may not match the experience and expectations of others, because after 10 years of working in private industry, I worked for 30 years as a state government employee, my wife worked, we were thrifty and always had opportunities to choose other work. Our advantage was that we were born just ahead of or at the leading edge of the Baby Boom and there were usually more jobs calling for our level of experience and education than there were people to fill them. It is distressing to see younger siblings and family members who didn’t choose to complete their education, or worked in industries that have gone through major contractions, suffer in this, and prior economic downturns. My 401(k) has pretty much recovered from 2007-8, though not from 1999-2001, but I was never in a situation where I needed to withdraw from it to cover living expenses. I hope I never do, but hope is not a strategy. So I keep working part-time, keep investing and stay healthy. I wish others were so fortunate.
I have discussed this with my daughter who luckily is still employed at 51 yrs of age. We came to the conclusion that she would escape the 10% tax penalty by setting up a plan to take periodic equal payments from one of her plans, Roth, traditional IRA or 401K, the smallest plan first. This would give her $4000 to $9000 per year to assist her from either her IRA or her Roth or $18,000 from both depending on the periodic plan she selected. If she selected #1 at $4000 per year she could put $6000 per year back into her trad IRA once she was re-employed and thus avoid taxes on the continuing $4000 coming from periodic payments, etc Depending on how much she gets in payments for the future if she is re-employed she manages to avoid both the 10% tax penalty and the added income penalty. I understand you can do this with the 401K also. You can do this at any age below 55 it the plans are more than 5 years old. Any comments?
Interesting that you suggested, however briefly, higher unemployment benefits. I know communities, like my old hometown Buffalo vicinity, where increased benefits would like encourage a greater and unhealthy reliance on government. You can become unemployed, and perhaps work under the table, and collect a lot. Don’t think this doesn’t happen just because the “rationale” person would never want to be unemployed.
How about leaving more money of the wage earners to decide how to invest? That might encourage more job creation and better financial planning. It is hard to do when government claims 30-40-50% of marginal wages. Perhaps create a self-direct unemployment insurance that you can only tap when unemployed or when you retire. 401Ks and 403Bs are discussed here because wage earners saved when they have tax incentives to do so. Try that with unemployment insurance too.
I’ve been out of work since Oct 08 but am lucky because my husband is fully employed. We have always lived on as close to half our income as we could manage, saving the rest. We are doubly blessed because my husband’s health insurance covers us from now through his retirement to Social Security when it becomes a secondary payer, and we both will have defined benefit pensions. 401Ks (or 403b in my case) are okay as supplemental but don’t have enough in them for most people to live on unless they start saving the max at age 20 uninterrupted for 40-50 years, and how many can afford that? Everyone should have portable defined benefit pensions as a base on which to build.
Requiring the unemployed who are forced to tap their 401K savings to make ends meet pay a 10% early withdrawal penalty is cruel and the unemployed should be exempt from this penalty.
The market crashed just when I retired. As I have little faith in the “markets” for short term worries, I had resolved to have ONE YEAR’s worth of cash saved from many years before, and made periodic adjustments as I went along. With draconian reductions in spending, this would (and has) lasted at least two years. I have not had to touch my savings/retirement, and now they are recovering. If you can get one, get an HSA high deductible health insurance plan (unless you have ongoing or chronic health problems) as the premiums are radically lower.
“I would much prefer to see the retirement system include, as a secondary component, a traditional pension plan like the way the Federal Employee Retirement System is structured. The first component is a 401K type plan that will be the bulk of a workers retirement assets, but there is smaller defined benefit plan that is to some degree indexed for inflation and ensures some level of retirement income no matter what happens to the 401K.”
Isn’t that a description of the Social Security System?
Dont forget the next biggest scam after the 401k plan…..the HSA accounts….to me, this is the beginning of where each person will have to pay for all their medical needs……right now, every tom dick and jones is selling the public on the tax benifits of these accounts (sound familiar to 401k plan???)…..eventually, like with pensions disappearing due to 401k plans, these HSA accounts will take over employer paid medical insurance……watch and see…..its going to happen in a matter of couple of years.
And a solution to the pink slip risk is….? One that is acceptable to the IRS? Where is part 2 to this subject?
In response the the comment about adding a “secondary component” in the form of a defined benefit plan with a cost of living adjustment, I suggest we already have that in Social Security (which is terribly under-funded by the way).
Taking an early distribution from my husband’s IRA (rolled over from a 401k) was never part of a backup plan, but we always knew it was there as a safety net. Yes this means we not only will work long into our golden years to make up for the lack of potential income, it also means we’ve just spent our safety net. We put the maximum allowed into the account while we were at our highest earnings level and held six months income as cash reserve, we thought we would be protected in case of catastrophe. We (and many others ) didn’t realize how long or hard this recession was going to be, especially for an older worker at the top of the company’s pay scale.The income we had earned won’t come along again easily or ever. The upside is we get to practice being poor while we are still young enough to enjoy it.
Good post. It hits close to home being unemployed for the past 9 months. I have now depleted my emergency savings and must look at either my IRA or 401(k) to meet expenses such as health insurance and mortgage. How should I evaluate weather I should cash in my IRA or use credit?
“substantially equal payments” exception to 401k’s - You can withdraw the balance in your 401k out over your expected remaining lifetime (a 50yr male with avg life expectancy of 78 can withdraw in equal monthly or annual payments over 28 yrs, with no IRS penalty)… but I’m not sure if you can stop once to select that option….
We planned carefully for early retirement and had a health insurance plan at the ready. Unfortunately, we have just been informed that the insurance company is raising my individual rate by 60% in 2010. I have had no claims this past year. I believe it is in anticipation of the HealthCare Reform Act. The insurance industry has to be heavily regulated. We will see more and more people such as myself going without coverage. I am seriously considering it!
Great post. Most writings always pretend nothing has happened to folks other than the shock of 401K’s dissipating. Yes, there are a good many people who were pushed out of businesses who are in their fifies with few life lines open to them. Many people will not be making contributions because they are not working any longer. More needs to be written about this situation.
At 77 years of age my wife and I are enjoying our retirement from a lifetime of production agriculture
as our occupation. Happiness at any stage of your life
is knowing you have more income than you need for the lifestile you have chosen. This comes about with the simple process of always living below your means. Frugality in spending gives one a great sense of satisfaction and also makes saving for retirement very
easy if you follow this plan.
This is a timely article relative to my ( and many of my colleagues). I am a real estate broker who has been out of work for two years! As an independent contractor to a large construction company, I don’t have access to unemployment. My 401K has been reduced by half. I don’t have any means of increasing it and I am 55 years old. While I am frugal, have cut back on expenses and have some savings to get by on for awhile, my potential for recovering what I have lost and increasing my 401K to an amount that will allow me to retire comfortably is limited. I’m very, very concerned…not just for me but for MANY folks like me. We aren’t even considered in the government statistics that analyze job losses and there is no help for us. There should be NO PENALTY applied to withdrawls from 401K’s for people in this circumstance.
Being in California, with nearly 18% unemployment (including people who gave up looking), and being “retired” not by choice, but by downsizing — highest paid, oldes & first to go! My retirement in 401K
and other funds went down by half. Slowly, they are coming back.
What I am grateful for is that I put lots of money (not just 8months worth, but 5years worth) into CD’s getting guaranteed 5%.
That is what has saved us from being “homeless.”
My retirement funds are where we left them, but still worth only 1/3 of what they were two years ago. Hopefully they will reagain their value before we have all the cash spent.
We’d planned on retiring at age 70…getting full social security…
but didn’t expect this mess!
Totally feel for others like us having to pay our entire unemployment on health insurance — COBRA is very expensive!
Just grateful to be alive and own a house no one can take away from us — unless, of course, we can’t pay the property taxes!
Wish someone out there had a magic bullet to teach us the RIGHT WAY to guarantee a future.
This was a great and timely topic; one that I think many of us are facing right now. While I did plan for 6 months of emergency monies, what I find is it is taking substantially longer to find the job. After 8 months of searching and applying to those few jobs out there, I’m still at risk of loosing my home and other items. I’m mostly debt free except for the house (I was making extra principal payments). However, now the question is do I start with the 401K, the Roth, refinance a house I cannot afford? What is next? These are the real nail biting questions I face and need assistance on. Perhaps there can be a followup discussion. I’ve also heard that I should move my 401K into my own IRA to control it….thoughts on this topic?
Steve,
Poignant, very insightful piece. Enjoyed the posts that followed almost as much!
Knowledgeable crowd.
Regarding the 72t series of “substantially equal payments,” I would recommend picking up a copy of Ed Slott’s book, “The Retirement Savings Time Bomb.” Besides explaining how these calculations were made, you will pick up a wealth of information about IRAs, 401(k)s, etc. Anyone with retirement savings needs to read this and the other books by Mr. Slott. They are outstanding.
Like the author of this article I too know a number a friends / family members that are going threw this. I myself have had hours cut at work and have been planning for the worst. One case that comes to mind is a friend at work that got laid off, he said “Why does the government charge you a 10% penalty when your back is against the wall? I’m not looking for a bail out I just need to use my own money for this emergency!”
I told him “I don’t think the government is your friend, just think of all the money they are making off of people like you in your position. Especially when they are spending money they don’t have!” I find it amusing that the government has encourage out sourcing and say it is good for our economy and is so concern about our health care plan that they won’t go on the plan they are giving us! I think we should out source our government. We can get some one in there cheaper, not have to give them lifetime benefits. Everything now is so out of wack. I know it is just a matter of time when the other shoe drops for me at work. I will have to change careers again. That is why I took all my money out of the market & put it in a fix fund. I’m like a lot of other people that do not trust the market, and cannot afford to gamble any more. Let’s hope the government opens the boarders because we need more people to tax to help us out of this jamb. Think about it.
worthless
What happens to those with defined benefit plans when the companies that are funding them go under? An individual’s retirement planning is not the responsibility of the companies that hire them - although it is a benefit that some choose to offer to their employees. Planning for ones retirement has always been the responsibility of the individual. And they should be free to fulfill that goal with more or less risk as they choose. If a 401k account is too risky for some, there are always Certificats of Deposit at the local bank.
WE NOW NEED TO WORRY ABOUT SOON TO BE RETIRED SENATOR DODD…IMAGINE HAVING TO SURVIVE ON PROBALBY A 250000+ RETIREMENT PAY…TOO BAD……TO PURCHASE THIS AMOUNT OF INCOME IT WOULD TAKE A ANNUITY DEPOSIT OF SOME$3000000. NOT BAD FOR A POOR SENATOR WHO RECEIVED SWEET LOANS WHILE A SENATOR….I HAVE A SOLUTION…..ANY ONE RECEIVING A GOVERNMENT RETIREMENT CHECK -THAT INCOME SHOULD BE SUBJECTED TO A 50% TAX…PERIOD..WE CAN’T CHANGE THE RET PLAN OF GOVERNMENT EMPLOYEES , BUT WE COULD TAX THE UNEQUAL BENEFITS…..
Hurrah for bringing this perspective. One of the touted solutions to market losses or inadequate savings is to work longer. There is failure to recognize this is often a difficult solution as work may not be available despite best efforts and intentions, especially for older workers. There needs to be more recognition of the point you have made.
I find this topic overdue. Several million Americans , myself included, have been unemployed or underemployed for some time now. Investing regularly in 401K or IRA plans becomes nearly
impossible if you don’t have a job or if your new job is part time and pays only a fraction of what
you once earned. The best folks like me can achieve is to avoid tapping their savings unless
absolutely necessary. Investing in low cost mutual funds with a proven track record along with
diversification goes a long way to maintaining what savings you do have.
If the governments (Federal, State, and Local), wished for the workers to save more through regular savings, just exclude from income a sum of $10,000 on regular bank dividends, stock dividends including long and short term capitol gains. For the 401k double the individuals contribution and make it easier to convert to the Roth 401k by allowing for an exemption of $50,000 per year from all taxes. Another idea is to allow Private Enterprise to mirror the Retirement system of the Federal Government, as an adjuct to Retirement Income. In Retirement Exclude from all taxes the first 20 to 30 thousand of income, which does not include withdrawals from the Roth 401k. If the Federal Government really wanted to phase out the Ponzi scheme called Social Security and Medicare it would allow the Private Sector to Increase the percentage contribution into 401ks as the Government is Decreasing it’s percentage contribution into SS and Medicare. After a certain time limit the phase out would be complete, the 401k would be the Primary Income for Retirement and Augmented by the Mirror of the Federal Retirement system. Include indexing for inflation and I believe this would be a cure for our future generations economic health and gets the Governments Yoke of Burden off the back of the hardest working people in the world. At least it would increase the partipation of the people in their financial health and rid the governments handeling of “SS locked boxes” (which is really an additional…
Also, you can add to the list of unemployed the under employed. I am fifty five years old and work for a major air carrier. We received a 20% cut in pay and have not had a raise in eight years. On top of this, half our work force was converted to part time and many are half time. Over time was almost eliminated. Under these brutal conditions, it takes a massive amount of will power to say anything. But remember the power of dollar cost averaging and the effects of saving over time and just “do it.” You will be glad in your golden years.
A previous poster said “NOT SURE WHY YOUR FRIENDS LOST THEIR POSTIONS, BUT THE FACT THAT THEY HAVE AND THE NEED TO TAP THEIR 401,BEGS THE QUESTION, WHERE THEY LIVING UP TO OR BEYOND THEIR MEANS.”
People have been losing their jobs since 2007. One of the scariest things about this recession has been that many of the unemployed have been that way a very long time. I saw a graph on a blog that showed the recent downtick in the unemployment rate was mainly the result of people running out of benefits and being shifted to an emergency unemployment program whose enrollees are not counted in the official unemployment-rate statistic.
I have also noticed, among those I know who make hiring decisions, there is a natural tendency to hire people personally known to them, followed by people recommended to them by people they know, and only as a last resort people they don’t know. This tendency can be overcome when there is a need to hire a lot of people quickly - but that is a situation that rarely comes up during recessions.
That observation makes it believable to me that the unemployed tend to stay that way until a recession is over.
Sure, a lot of Americans do seem to live from paycheck to paycheck. But even those that have saved 6 or 8 months of living expenses may have to dip into retirement funds if their joblessness lasts a year or more.
Fluff
You commiserate and re-state the obvious
Any perspective? Advice?
Stop phoning it in
Death and Taxes … it’s nothing new. I was laid off December 1, 2008, and haven’t been able to find a professional job. Fortunately, I seem to be able to live at my means, except for my mortgage and health insurance (COBRA) which is another matter. I’ve been saving every year, however, putting 100% of my severance package into my IRA.
The time to plan for the pink slip is when the economy is booming. I know it’s counter-intuitive, but do you really need that vacation in Europe (or house, or car…) ? Do you need them more thana secure financial backstop when the economy goes bust? And you know it *will* go bust.
Take some personal responsibility for your future. The story of the ant and the grasshopper comes to mind. If you don’t know how to be frugal when it’s summer, winter will come and you won’t learn to be frugal quickly enough. I was laid off in the dot-com bust and was able to radically alter my spending patterns nearly instantaneously because I was ready. That dry spell lasted for 13 months, and I was at least another 12 months away from eating into my retirement stash.
Tapping your 401K or not contributing may be the only alternative for the unemployed. How can we plan for the future when we need the money today. And the longer we leave the money in the 401K fund, we see it losing value daily. the idea of the 401K was a great idea and sold to the American public, what they didn’t tell us is what will happen if the economy heads south as it is now. Who would have thought that companies like GM, Chrysler would file Chapter 11. And the banking industry would tank. There are some that think the 401K was a plan put together by the financial industry and the Government to get their hands on large sums of money. Lets not forget the greed of individuals like Bernie Madohf and other who ripped off the American workers.
For all of you that have been laid off. Dont panic yet.Cut your expenses as much as possible. Food: Eat a lot of rice and beans. talk with your family about this.Reduce eating out. Autos: Park the cars if they are not contributing to income for the family.If you have savings,
spread it out on monthly budget plans, use coupons and buy your meats and costly items on sale. You can find them.Shop at different grocery chains. Cut back on utilities as much as possible. Wear heavier clothing in cold weather in the house. Turn the thermostat back.Talk to your children. They are part of the team,Let them share in the reduction. If they are old enough, help them to get employed.It is time for a reality check. Take a job of any kind to keep something coming in. Search feverently for a job. If your Spouse doesnt work,encourage them to get a job.Plan your shopping to reduce trips in the car.You might be surprised on the differences between neccessities and wants. eleminate the wants to get the neccessities.I have been there. You are not alone. Many are in this sitiuation.Keep healthy and exercise. It can relieve stress and help to reduce medical expenses. Pray about this genuinely and you will be able to come through this.
Please review your investments closley. educate yourself on tax laws to take advantage of them. Use money from after tax accounts wisely.If your spouse is planning to retire but retirement is not mandatory discuss the loss of income if it is critical. If possible contribute the max you can on a spouse IRA if you can get a tax deduction.Down size your home and reduce debt. Dont use credit cards and take them away from your kids unless you can pay off the monthly bill without paying interest. Take the kids out of college if necessary. Do what you have to do to eleminate expenses on entertainment.At this point,eleminating every expense possible is critical.
As a non-Yuppy thrown to the wolves in 1996, I have learned to survive.
I have had 4 short time jobs to get by. My 1 year safety fund is part of how I have survived. I have had to drop my full plan health coverage, and have a discount plan only. I don’t consider my retirement funds as usable cash. Cobra is a joke, I don’t know any non-working adult who can afford it. I have to agree that this is a rough time, but we will survive it.
If you quit or retire from a company where you have a 401(k) in or after the year in which you turn 55, the 10% early withdrawal penalty does not apply. Check out IRS Publication 575. This fact is often omitted in discussions about utilizing retirement assets, but it only applies to qualified retirement plans through your employer. This is one good reason not to roll 401(k) assets to an IRA if you change jobs and are approaching 55 years of age.
An excellent evaluation of the current situation. Steve is right on the money … literally.
Regarding substantially equal periodic payments from your IRA. This is known as IRS rule 72T. It is not difficult to determine and in fact there are three different ways to compute payments. Vanguard has information on rule 72T withdrawls on the website, I’d suggest that you search for it or call them as they can asist you.
As a young retiree in my early 50’s I’d like to add this to the discussion.
1. Started saving young (early 20’s) and discovered mutual funds in early 80’s. Saved at least 10% and as much as 25% of my income yearly. Saved ALL bonus payments from my former employer which added lot’s to my assets.
2. Lived “below my means”. This doesn’t mean living poor. I took less expensive vacations than my friends and drove Chevrolets and Nissans while many of them leased Mercedes and BMW. Live in a nice neighborhood but don’t have one of the larger homes.
3. Always, always stay out of debt. With the exception of a home mortgage. As far as the mortgage, keep expenses manageable (see above).
4. Watch your asset allocation BUT keep in mind that there are periods where it’s fairly clear that the economic environment is positive or negative (as it is now). I’m usually a balanced investor but of late have shunned equities as I don’t see a positive outlook. This is unusual but for me a valid point of view for now.
5. Keep in mind that Wall Street is not your friend.
6. Follow the advise of John Bogle and you won’t go far wrong.
I wonder, even its “Hardship withdraw” charges 10% penalty?
How it recognized as Hardship withdraw, anyway?
Is there any proposal to waive the 10% premature withdrawal penalty for retirement account owners who are under 59 1/2? The seniors were cut a break on RMD last year. What about the younger unemployed?
What we need = Less whining, more personal responsibility.
What about health care costs ? How do you plan for them? My monthly costs have gone from $89 to $500 per month for the same plan in 8 years
Good article, but not informative. We already know this. Pink slip risk is real - too young to retire, too old to seek another job (age discrimination is real and evident) I’m on a time bomb with a wife that’s uninsurable, a special needs son permanently on the dependent list, medical bills will wipe away a life-time of savings in the few short years before I make it to medicare. (a FRUGAL lifetime of savings). My generation was forced to blunder into the stock market with our savings when the banks became Too Big to Offer Savings Rates. My grandmother lived with us as I grew up thankful to avoid “the poor house”. Deja Vu. One day, I’ll show up at my son’s house with my toolbox and convert his garage into our new living quarters. Our reps in DC (both parties) are addressing the wrong problems.
To the poster January 7, 2010 at 6:45 pm
I like your tongue-in-cheek comments!
“I think we should out source our government. We can get some one in there cheaper,and not have to give them benefits.”
“Let’s hope the government opens the boarders because we need more people to tax, to help us out of this jamb. Think about it.”
Encouraged early retirement affects many people, like our family. This is essentially another form of unemployment. Companies have leverage with the threat of loss of present health benefits with worker contract renewals. But this acceptance of retirement decreases the years you can continue to save. It’s a juggling act, especially when shouldering high tuition costs for 2. And with a recession, opportunities for their employment may leave them asking for help with their share of college expenses. My health care is part of my husband’s retirement package until he reaches 65. I am 5 years younger and as a writer above mentioned, contemplate 5 years of no health insurance if the price would be a budget breaker. Our best efforts have a combination of defined benefit plans and personal savings and we are frugal but still worry. If we would physically reduce the size of government, the whole country would benefit financially.
I was surprised at the number of people wishing for a “portable defined benefit plan.” What do they think Social Security is? And as for those who say HSA’s will lead to everyone paying for their own health care, who do they expect to pay? The only question is “will people pay directly for health care, or will government or insurance companies take their 20% off the top and then redistribute the proceeds according to political power instead of earning power?”
Right now young people pay for old people, whether it be pensions or health. And rich pay for poor. The only questions are “to what extent?” And the answer seems always to be “More.”
Thank you for at least acknowledging what the usual financial journalists do not–what does one do when the emergency you saved for just goes on and on, long after your emergency funds are gone and you have cut lifestyle and health care and …
I am 55 and finished grad school in 2002 (with a lot of student loan debt, taken on to change careers) and had 3 years of regular employment, followed by 2 years of part-time scrabbling, then 11 months of full time employment which was cut to part time for 5 more months; now completely unemployed for 6 months. My last full time job was with a small employer so I was not even eligible to spend more than my unemployment benefits on COBRA–I have been without health insurance for 14 months. I have a family doctor who does not charge me for once-a-year visits and I get cheap prescriptions at COSTCO.
I live in half a rented duplex and drive a 15 year old vehicle. Haven’t had a vacation since 2005. Savings are gone. I am going to sell off belongings next but don’t expect to get much, since so many of us are doing so badly now. I get 5 more months of emergency unemployment benefits. After that, I don’t know.
No one is writing articles about how I should plan for my future!
The comment referring to Social Security as a “portable defined program” completely misses the mark. SS was never intended as the primary source of retirement income, but as a social safety net. Likewise misleading is the statement that current generation is paying for the SS and Medicare benefits of the retired. Though true, the fact is that retiring boomers have paid more into the system during their working years than they will ever recoup. The real problem was that SS was set up as a “pay it forward” system rather than an endowed fund, and that boomer surpluses were raided to cover the federal deficit. Likewise, the move of employers to 401(k) or 403(b) forms of pensions was one of the biggest “shell games” perpetrated on workers, especially boomers, who as the article relates, have now experienced both huge reductions in their portfolios, and bleak employment and health care coverage possibilities if they lose their job or health. There is no doubt that younger generations are facing a difficult future, but don’t blame it on the boomers. Blame it on the “greatest generation”, who got SS benefits without paying much into the system, the GI bill, defined benefit plans, Medicare expansion without additional taxes, and so on.
Just a point of clarification on one item. It is actually possible to tap into retirement funds to a certain extent without the 10% penalty using IRS Section 72t, which allows you to take “substantialy equal payments”. It amounts to taking a withdrawal equal to about the balance of an account divided by your life expectancy per IRS tables. It can get pretty complicated, but it’s worth checking into to avoid the penalty. A good CPA or CFP would know about it.
No, what we is need is for the Feds to step back and get out of the way!
Less whining? You may not be so quick to judge if your company folds when you’re 59 or 60, you pay $1000 for Cobra health insurance (somewhat less now, I gather) for you and your family each month so that some unexpected diagnosis won’t totally wipe out everything you’ve worked for for the last 40 years. If you’re lucky enough to find a new job chances are it’s at least a 25 or 30 percent pay cut. So much for trying to max out your IRA contributions. If we had a decent health care program in this country like so many enlightened nations do, our financial stress and psychological stress would be cut in half. Sadly, that also now seems as far out of reach as it has ever been–big business interests ruling again.
I too am under age 59 1/2 and found myself worse than unemployed- making a living at real estate! As the real estate market got worse, I continued to OWE- fees to keep working under my broker and in the industry.
My minor child (now 17) became seriously ill in early 2009 leaving me no choice but to dip into my retirement reserves. Now, that she is no better, and the medical issues continue to mount, I will be faced with paying a 10% penalty, plus taxes, on the money I needed to provide basic necessities for her and I last year. Much less how we will go forward with her having 3 chronic health problems. . .
How can you possibly seek any employment with a child who has had in one year- 40+ doctors appts, more than 10 scans and other tests,3 trips to emergency room, 6 days overnight in hospital,shortened school days,etc, etc.?
And there is no provision for using your funds in this scenario???????
There is no other civilized/Western country in which people lose everything if they lose their job or if they or a family member gets sick. This is not whining. Only in the USA is one personally responsible for saving hundreds of thousands or even a million dollars for that “just in case” scenario. The ones who make these sorts of comments never apply it to themselves. This reminds me of Rush Limbaugh who wanted all illegal drug users to go to prison until he himself got caught and then he made all sorts of excuses about being in pain, as though he were the only one.
Look. A lot of people, my self included started living over our means for many years. I was very fortunate, I almost lost my home about 20 years ago when I lost my job and came down with a disorder that required me to take jobs well below my training and previous earnings. What that taught me is to live within my means, spend money when I could aford to pay for my purchase and save, save , save. No fancy investment tricks. I am now 66. I retired, or should I say quit my last job of 11 years because I could not make a living on only commissions. The companies, my customers, moved out of my state to foreign countries…that you Washington for your deals with China and others. My point is that because of living within my means and not spending it I have the option to retire with no debt. Just my monthly expenses. My heart goes out to you folks. I learned my lesson 25 years ago and it served me well.
I am really sorry for all of the people in the stories above. However, I watched with horror as people spent money and charged items they possibly could not afford.Then the housing comments “all we need is your signature as people purchased houses they could never afford to carry. I came from a family where my father was sick for many years and I had to postpone my wedding until my mother could land a decent job, and she was successful in this by pounding the streets and working six days a week for several years. In those days there was no SSI or any other type of help. She workded into her late seventies and eventually retired on S.S. and a very small pension. However, she did it herself. Then people did not think “they were owed anything.” You had to earn it yourself. Why did all this change.????
There are ways around the 10% penalty…..but you have to play by the rules.
look at IRS 72t rule distributions for non-roth IRAs. Min - 5 yrs structured withdrawal w/”substantially” (i.e, equal) equal payments. You rarely see it mentioned by the financial advisor gurus but it is there.
re:401K - You need to check your 401k plan. You won’t necessarily have to pay the 10% penalty depending on how your plan is structured. Various factors come into play. For example I am just 59 but I can get my money w/o the penalty. There may still be the mandatory 20% withholding depending on how I withdraw it. But I can avoid the 10% penalty. Of course if you roll it to an IRA the 10% penalty could apply (but, again, check that 72t rule.
Check with your advisors about all this first.
Forgot about the 72t rule - 5 yrs or 59 1/2 which ever is greater.
I have serious misgivings about the balance sheets of some of the companies in the equity income fund. Seems to me that, unless revenue and earnings growth improves, these companies may only meet dividend payouts by issuing debt in vast quantities. Why would anyone choose to invest in the equivalent of a balanced fund when the prime directive is to enjoy dividend growth from earnings? I fear that corporations are being led down a path of destruction.
Does anyone have first hand experience with using the Rule 72T?