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.
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?