But for the millions of people who have lost their jobs in the coronavirus recession, they are probably not focused on retirement but on day-to-day financial survival. And that makes sense. When money is tight, you have no choice but to take care of your short-term financial needs.
Yet we should be concerned about how a long spell of unemployment will affect people’s ability to save for retirement. Related to coronavirus job losses continue to put people out of work.
Even before the spread of the new coronavirus led to mass layoffs, many households were at risk of below retirement savings. Unsurprisingly, there are fears that the longer people remain unemployed, the harder it will be for them to return to life or even start saving for retirement.
A recent analysis of household retirement readiness by Boston College’s Center for Retirement Research found that widespread unemployment would increase the risk that people would be unprepared for retirement. The dissertation was written by Alicia Munnell, Center Director and Peter F. Drucker Professor of Management Science at Boston College; Anqi Chen, Deputy Director of Savings Research; and Wenliang Hou, research economist at the center.
“The country has been leveled by the COVID-19 pandemic,” the researchers wrote. “Therefore, the most pressing question at the moment is how pension security has been affected by the virus and the shutdown of the economy. This crisis will affect pension security in a very different way from the Great Recession, as destruction occurs more through widespread unemployment and less through a collapse in the value of financial assets and housing.
The center measures the share of working-age households that are at risk of not being able to maintain their standard of living before retirement. The latest figures from the National Retirement Risk Index show an increase of nearly five percentage points in retirement insecurity. The coronavirus-related unemployment spike has likely increased the share of at-risk households to 55%, from 50% previously.
Simply put, the pandemic has widened the retirement savings gap.
“Unemployment has not only had an immediate impact in terms of lost earnings, but also a longer-term negative effect on future wages, making it harder to save for retirement,” Munnell said of the reports. results.
Munnell said unemployment is far more damaging than just lost wages. When people finally return to work, they often have to take a pay cut in the period following their unemployment.
“The pandemic has worsened an already bleak outlook for retirement security,” the researchers concluded. “Providing retirement security for an aging population was one of the most compelling challenges facing the country before the onslaught of COVID-19. Unemployment associated with the pandemic has worsened the situation in all areas. »
So what should be done to alleviate the problem?
More needs to be done to get people back to work.
“These findings underscore the need for policies that provide well-targeted assistance to employers and individuals aimed at preventing more people from becoming unemployed and quickly getting the unemployed back to work as the pandemic abates,” the report said. memory. “The shorter the spell of unemployment, the less people will suffer damage to their long-term retirement prospects.”
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Readers’ question of the week
Q: If I withdraw $100,000 from my 401(k), do I have to pay the money back? I will be 59 and a half next year. I’m willing to pay taxes on the money. I’m just not ready to pay it back.
A: The Coronavirus Aid, Relief, and Economic Security (Cares) Act includes several provisions that cover retirement accounts. The law temporarily increases the amount you can borrow on your retirement and waives the penalty for early withdrawal.
If you’re under 59½, you’re generally subject to a 10% early withdrawal penalty if you withdraw money from an IRA, 401(k), or 403(b) retirement account. Additionally, you must pay income tax on the distribution. But if you’ve experienced pandemic-related financial hardship, the 10% penalty is waived for distributions up to $100,000.
The Cares Act also allows tax liability to be spread over three years. Plus, under the stimulus package rule, if you change your mind and don’t need the money, the distribution can be repaid within three years tax-free.
However, if the withdrawal is unrelated to the coronavirus, you will have to pay the 10% penalty and you won’t have the three-year window to pay the tax bill.
Finally, whether your withdrawal is related to the coronavirus or not, you are not obligated to repay the money withdrawn from your retirement account.
Retirement speeches and eulogies
I am interested in your experiences or concerns regarding retirement or aging. You can declaim or rave. Send your comments to [email protected] Please include your name, city and state. In the subject line, put “Retirement Rants and Raves”.
“Every time you turn around there’s someone offering free advice on how to save for retirement, but nothing on how to plan to live off those savings in retirement,” wrote Shannon Beatty of Frederick, MD. “It’s scary. If you have an unexpected expense and take money out of your tax-deferred savings to pay for it – or earn a little too much ‘retirement income’ – the taxman gets a lot more. than what you expected.
Houston’s Allan Scardina wrote: “I read with interest your recent update on the concept of a ‘book of death.’ I prepared something similar a few years ago but of course now it’s hopelessly outdated. A major challenge with such a document is how to allow online access to key accounts and documents while maintaining confidentiality and keeping the document up to date with changing access details. Using a password manager is useful, especially if there is a way to share access with trusted people. That said, the emergence of two-factor authentication complicates even this approach, as the person accessing your information will not only need your account information and password, but also your mobile phone to receive the single-use code. Any suggestions for overcoming such an obstacle? »
No one needs access to your accounts. The person to whom you have entrusted the management of your final affairs does not need to take a look at what you have until your death. You just need to make sure they know where to find the information, including the passcode for your mobile device.