3 trends that could change your retirement plans in 2020
The new year is upon us, and so are new retirement rules and plenty of new (or soon-to-be) retirees.
This year already began with major changes, now that the Secure Act is in effect as of Jan. 1. The bill passed shortly before Christmas, and will change the way workers save for retirement and retirees contribute, spend or give away their assets. Other trends have been in motion over the last few years, including the way people prepare for health expenses in retirement or if and how they earn more money during these later years in life.
Not all Americans find retirement to be a top priority. Some worry about current financial responsibilities, like student loans, child care costs and rising rents and home prices. Others simply haven’t gotten around to enrolling in their workplace retirement plan or increasing contributions. The U.S. retirement savings gap — which is what people have saved versus what they should have saved — is expected to swell to $137 trillion, up from $28 trillion in 2015, according to the World Economic Forum, a Cologny-Geneva, Switzerland-based nonprofit that researches international financial affairs.
Here’s what financial advisers predict will happen this year, regarding Americans’ retirement savings.
More love for Roth accounts
The passing of the Secure Act may result in an increase of Roth accounts, said Sean Williams, a financial adviser at Sojourn Wealth Advisory in Timonium, Md. Part of the law eliminates “stretch IRAs,” which allowed individuals who inherited qualified accounts, like individual retirement accounts and 401(k) plans, to take required distributions over their lifespans.
Under the Secure Act, non-spousal inheritors will need to withdraw all of an inherited accounts assets within 10 years, which could create higher tax consequences in a shorter time frame. Roth accounts are funded with after-tax dollars, and are therefore withdrawn tax-free. The Tax Cuts and Jobs Act, which was the largest tax law revamp in decades when it was passed in 2017, will also expire in 2025, which could potentially mean having higher tax brackets in the future. “If that assumption plays out, paying income taxes today and contributing to a Roth may be more beneficial,” he Williams said.
Using a Health Savings Account for the long haul
Health Savings Accounts, or HSAs, are tax-advantageous accounts that allow workers to save, invest and withdraw their money tax-free if used for qualified medical expenses. They’re also a beneficial tool for retirement savings, said Karen Van Voorhis, the director of financial planning at Daniel J. Galli & Associates in Norwell, Mass, who predicts more Americans will use them as such. “People are starting to pay more attention to these, and are thinking more of using them to save for the long-term,” she said.
HSAs are only available with a high deductible health plan, which aren’t available — or appealing — for some workers. High deductible health plans, as the name implies, requires patients to spend more upfront before the plan begins to cover medical expenses.
Still, contributing to an HSA, and not touching the money until retirement, by which time you’ve amassed a large stockpile of savings, can be a solid retirement planning strategy, considering many medical expenses arise in retirement. The average 65-year-old couple retiring in 2019 could expect to spend $285,000 in retirement for health care costs alone, which does not include long-term care, according to Fidelity Investments. That figure is expected to rise indefinitely.
Less of a ‘traditional’ retirement
The days of people working until they’re 65 and then moving to a sunny state are long gone for many Americans, who will likely work well into their late 60s and early 70s, if even just part time, some advisers predict. The labor market is tight, but wages have also not increased very much in the last decade, said Nate Wenner, a financial adviser and principal of WIPFLi Financial Advisors in Minneapolis. “Many people feel too vulnerable to stop working, especially with worries about health care costs,” he said. “Plus, many people have not saved enough for a full retirement at this point, and understand Social Security alone will not provide enough income to maintain their desired lifestyle.”
Older workers staying in the workforce is increasingly common, and will continue in the future, according to Bureau of Labor Statistics data. The number of workers 65 and older has tripled in the last 30 years, and those 75 and older has almost quadrupled during the same time. (Still, there were and are more younger workers than those 65 and up, which contributes to the high growth rate.)
Not all older workers will want to stay in the workforce full-time, but they may not want to retire fully either. A 2019 Merrill Lynch study found nearly half of retirees say they have or plan to work during their retirement, which could mean taking a consulting or teaching job or a short-term job such as driving a ride share or pet sitting.
“Folks are more comfortable having conversations with employers about easing into retirement by slowing down their workload, going part-time or even leaving their employer but consulting some before totally turning off the earned income spigot,” said Rob Greenman, an adviser and partner of Vista Capital Partners in Portland, Ore.
They may also start businesses or take up volunteering, so that they can engage with other people and partake in passion projects, said Jake Northrup, a financial adviser at Experience Your Wealth in Bristol, R.I. “The idea of retirement is flawed — it’s unhealthy for someone to work their whole life and then suddenly stop,” he said.