The government is responding to statistics showing that current generations are not saving for retirement. Unlike their thrifty parents, many baby boomers are alarmingly ill-prepared for retirement. Many other employees are more focused on present financial needs than future ones. The implications of generations of people who are unable to work–but without resources to live–present a potentially overwhelming burden on the government. Finding ways to help people prepare for retirement is in everyone’s best interest.
The recession gave birth to entrepreneurs and consultants
Remember the recession? Those who couldn’t get jobs started their own businesses. They learned they couldn’t depend on someone else for a job. This was especially true for older workers. Companies were looking for a younger, cheaper workforce. There’s a good chance those companies are not providing retirement plans, that they’re outsourcing work rather than hiring employees and having to pay for benefits.
A study shows that only 51% of Americans are employed by companies withretirement plans.
Of those employees, only 40% actually participate.
In addition, experts say one in three Americans has less than $5,000 in retirement savings and 21% have none.
Financial planners recommend seniors save $1M before retiring
Because life expectancies are much longer than they were for previous generations, financial planners recommend that seniors save a minimum of $1 million before retirement. Clearly, many are falling short of that goal. In an effort to change this gloomy retirement forecast, the U.S. House of Representatives passed The Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019. The bipartisan bill attempts to address the financial readiness of seniors for retirement.
The SECURE Act:
Encourages small businesses to offer employee retirement plans.The bill lets small businesses cut through administrative red tape and ignore certain legislative mandates to tailor retirement plansto their needs. It also permits multiple small employers to band together and create 401k plans. Under the bill, some part-time employees may also have access to employer retirement plans.
Permits retirees to accumulate more retirement savings over a longer period of time. The bill raises the required minimum distribution age for retirement plans from 70.5 to 72. In addition to permitting retirement plans to earn more over an extended period of time, the bill will also make retirement savings last longer. The year-and-a-half delay in distributions will result in a larger retirement account and prevent seniors from spending their savings sooner.
Removes the age limits on contributions to IRAs.Previously, no contributions were permitted after age 70.5. The bill removes that restriction.
Creates more payout options for annuities purchased through employer retirement plans.The SECURE Act would permit lifetime-income investments, such as annuities, to be paid out in monthly installments as well as in a one-time lump sum.
Changes payout options for beneficiaries of retirement plans. Currently, beneficiaries of retirement plans can stretch out distributions over their expected lifetimes, permitting the funds to continue to grow tax-free. The SECURE Act eliminates this stretch-out option, requiring that nondesignated beneficiaries, such as Trusts, receive all retirement benefits within five years of the retirement fund owner’s death.
Expands the use of 529 account funds.The House Ways and Means Committee removed a provision that would permit beneficiaries of 529 college saving plans to use such plans to pay for homeschooling, special needs students, and private education. However, the new bill does authorize penalty-free withdrawals of not more than $10,000 to pay for certain student loans and apprenticeships.
The U.S. Senate is considering its own financial retirement measure—The Retirement Enhancement and Savings Act (RESA similar to SECURE). The differences lie in proposed changes to the stretch-out rules. There is bipartisan support for the SECURE Act; it passed by 417 to 3 votes in the House and has the greatest chance of being enacted. The act must pass a vote in the Senate to become law.
Creating a Living Trust is an important part of financial planning