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The Carmel Foundation is a great place for seniors to make new friends, find activities and pick up new hobbies. On February 14, March 14, April 11 & May 9 the foundation will have a free orientation where staff members can explain the courses they have from music appreciation, bridge, chess, horticulture, Greek dancing and all kinds of other interesting topics.
The Wall Street Journal recently ran an article with the headline “How to retire during a scary stock market,†and indeed this market is very volatile. That, paired with soaring inflation, makes it very difficult to make sound investment decisions. The stock market performance during the first few years of retirement can have a disproportionate impact on your portfolio due to the impact of compounding. “The five years after retirement are a pivotal period for determining a sustainable lifestyle in retirement,†Wade Pfaua, author of “Retirement Planning Guidebook,†told the Wall Street Journal., A 2014 study found that those who start retirement by reducing their stockholdings to 20-30% of their portfolio and then gradually push it back up to 50-70% in stocks have the highest probability of making their money last 30 years. Those who take an opposite approach, tapering stock holdings from 60% to 30% of their portfolio are likely to run out of money in 28 years. Also, if you retire in a bear market, it is recommended to withdraw less than you normally would (take a 3% withdrawal rather than 4%), at least until the market recovers, can help boost the long-term value of your holdings.
The Internal Revenue Service has announced that it will delay enforcement new rules requiring withdrawals from some inherited retirement accounts until 2023. This follows a myriad of complaints that the changes were confusing. The relief applies to taxpayer complaining that the changes were confusing and applies to anyone who inherited retirement accounts in 2020 or 2021 who the IRS said had to take annual withdrawals right away instead of waiting until the end of a 10-year period to liquidate the accounts. This means that this group of taxpayers is not required to take RMDs for 2021 and 2022.
If you are thinking about taking early retirement, think again. With the stock market in a funk and inflation soaring, this is a painful time for everyone but especially those who are living on a fixed income. When thinking about retirement, don’t look at the average life expectancy as the most probable outcome. This is an average, and many people live much longer. Sharon Carson, executive director of retirement insights for J.P. Morgan Asset Management, told USA Today that you should plan for 35 years of retirement if you are a non-smoker in excellent health. She also says that the lower your expected long-term investment return (which is typical as you get older), the more it pays to wait longer before claiming Social Security. So, for instance, a woman who expects a long-term investment return of 5.5% and has a life expectancy of 88 should consider claiming at age 70.
With the stock market extremely volatile and interest rates low, many seniors are trying to figure out what to do with their nest egg. A nice safe investments are I bonds, which are U.S. treasury bonds which pays interest based on the consumer price index (CPI). They currently are paying 9.62%. Any I bond that you purchase from now through October will pay that rate for six months, at which point it resets. You can buy up to $10K in I Bonds per year.
One way to do this is to donate out of an IRA or other retirement account. However, Leonard Sloane of the Wall Street Journal cautions that you need to be careful when planning this. “So many people make mistakes with the rules,†says Andy Ives, an IRA analyst at Ed Slott & Company, a tax consulting firm. One mistake people make is making a gift to a donor-advised fund (such as the Community Foundation of the Monterey Peninsula), a private foundation or charitable-gift annuity. To obtain the tax benefit, there must be a full release of the funds directly to a charity. Another mistake is when the donor accepts something in return for the gift. You can’t even accept a tote bag, coffee mug or T-shirt as a gift! Make sure you talk to a tax advisor before implementing this strategy.
`The IRS will take public comments through May 25 on a controversial change to the Setting Every Community Up for Retirement Enhancement Act, which passed in 2019. Known as the SECURE Act, it allowed anyone who inherited an IRA to withdraw the money any way that they wanted, including skipping annual distributions, provided the account was drawn down to zero by the end of year 10. Now, the IRS is proposing that this option would only be available to non spouse beneficiaries who inherit an IRA if the original owner dies before having to take required minimum distributions. If the original owner dies after April 1 following the year of the person’s 72nd birthday, the date when RMDs are first required, non spouse beneficiaries must take RMDs in the first nine years and then empty the account in year 10 (Kiplinger’s Retirement Report, May 2022 page 14).
Even the inventor of the 4% rule (Bill Bengen), which theorizes that withdrawing 4% in year one and then adjusting each year for inflation your retirement savings will last you a lifetime, is agreeing that we may need to take a more conservative approach given stock market volatility and soaring inflation. “The problem is, there’s no precedent for today’s conditions,†Bengen told The Wall Street Journal. Given the challenges of making forecasts right now, Bengen recommends cutting spending, if possible.
Inflation in the U.S. hit a 40 year high of 7.9%, which is causing financial problems for many seniors. Economists say that this is forcing many retirees back into the workforce. Thankfully, this may ease staffing shortages which has hit a number of industries. “We’re beginning to see the migration of the older cohort who expected to live on fixed income in a low interest-rate and low-inflation environment, Joseph Brusuelas, chief economist at RSM US LLP, told The Wall Street Journal. “Really what you’re dealing with is an inflationary shock that has elicited a change in behavior,†he said.  The share of people over 55 either working or looking for a job rose to 38.9% in March from 38.4% in October. That translates to more than 480K people in that age group entering the labor force during the last six months.
A new study which was published by the Society of Actuaries Research Institute’s Aging and Retirement Strategic Research Program found that many retirees and pre-retirees aren’t prepared for a financial shock, and the likelihood of that happening is increasing. Many economists are saying that the odds are increasing that we will soon enter a recession, and Russia’s attack on Ukraine is likely to wreak havoc on the stock market. According to the study, about half of pre-retirees report that they already experienced a financial shock, along with 4 in 10 retirees. These shocks have reduced the assets of pre-retirees by 25% or more and their spending by 10% or more. Experts urge retirees to build a reserve fund. Half of pre-retirees could only afford to spend $10K or less on an emergency while retirees reported they could afford no more than $25K. There are plenty of great financial advisors on the Monterey Peninsula and you should consult with one yearly.