With 1 in 3 Americans considering delaying their retirement date by three years, the retirement environment for Americans has changed as a result of the pandemic. While seniors must choose between providing for their families and protecting their nest egg, some millennial savers have succeeded.
Cashay.com In the most recent episode of the Money, Honestly podcast, editor Janna Heron sits down with retirement writer Dhara Singh to talk about how the retirement landscape has changed for various adult demographics.
The podcast is based on upcoming and previous reporting Dhara performed for Yahoo Money, including the following: “America’s Social Security issue is worsening amid the coronavirus outbreak.”
Janna: USAA is the sponsor of this episode of Money, Honestly, by Cashay. They have your back through every stage of life, whether you are serving in the military right now, a veteran who rendered honorable service, or an eligible family member. Visit usaa.com to find out more.
Sincerely, this is Money. Dhara Singh, a reporter on my team at Yahoo Finance and Cashay, is joining us today. I’m Janna Herron. We’ll speak about how the epidemic has altered the retirement scene.
Thank you for coming, Dhara.
Dhara: I appreciate being here.
Janna: Let’s begin, then. Now that the pandemic has been going on for many, many months, the stock market has gone insane, and people are losing their jobs. But how are many people currently doing with their retirement savings?
The interesting thing is that, according to Fidelity, balances have actually increased this quarter despite the rollercoaster with the stock market we experienced earlier this year and just everything else that’s going on with more than 55 million people unemployed and filing for unemployment benefits.
picture of a cheerful woman
picture of a cheerful woman
Dhara: Even the number of millionaires increased. Therefore, if we’re talking about millionaires, specifically this quarter, Fidelity reported 224,000 401(k) millionaires, compared to just 150,000 last quarter. In spite of the fact that 224,000 is not a record high, it is nevertheless quite close to the record high of 233,000 set at the end of last year. So, there was unquestionably a rebound.
Then, even with IRAs… Just for context, IRAs are your employer-unsponsored pretax retirement accounts. In the second quarter of 2020, we saw that figure rise to 204,000 from the first quarter’s 157,000. As a result, we really witnessed a fantastic turnaround in this area, which is unexpected considering that April, May, and June were very difficult months for many Americans in terms of finding work.
Janna: So when you refer to “millionaires,” do you mean those who have accounts with at least $1,000,000 in them, meaning a 401(k) or an IRA account?
Dhara: Definitely. That’s the situation. Just to be clear, this is a sample size and only applies to Fidelity.
Janna: True. They do manage a large number of those retirement accounts, so it probably gives a good idea of what’s going on.
What about general equities? Because you mentioned that only a small percentage of people actually have a million dollars in retirement accounts, but how did balances in general fare?
Dhara: They grew as well. Since we were just discussing IRA balances, if we take a look at them, we find that they are generally approximately 111,500. The increase from the previous quarter is 13%. Even though there has only been a 0.9% gain from a year ago, it has improved from the previous quarter. Additionally, your 401(k) plans increased to 104,400, a 14% increase. And yes, the news is excellent. Something unexpected, especially during the pandemic.
Janna: That’s accurate. I mean, a significant portion of this is undoubtedly due to the stock market, which while it crashed in March, also experienced a significant bounce.
Asian senior couple with laptop seriously considering their debts. Financial planning, monthly expenses, and retirement.
You are entitled to up to $100,000 under the CARES Act, which was first passed earlier this year, for a hardship brought on by the coronavirus. (Reference: Getty Images)
Dhara: Yeah. So yes, just a few basic things… When we examined the S&P’s growth, we noticed that it rose by 21% in the second quarter of this year. Additionally, some experts made valid comments. A large portion of your 401(k) savings may be in FAANG stocks, which include Facebook, Apple, Amazon, Netflix, Google, and Microsoft. The fact that these equities have been rather robust has greatly improved the balances.
Janna: Right on cue. Because people use Netflix, Amazon, Google, and Google Classroom throughout this pandemic, especially when people are quarantined or their businesses are shut down, tech stocks have been rather good. Thus, it all makes sense.
Janna: But as you pointed out, because the economy hasn’t fully recovered, as we’ve seen, many people have lost their jobs, been furloughed, or have had their incomes slashed. Are there individuals who, despite the possibility that their balances are increasing, withdraw from their retirement funds because they require the funds?
Dhara: Yes. Even other financial institutions, including Charles Schwab, have noted an increase in withdrawals generally, even though it’s still less than 10% in their eyes, if we just step back from only looking at Fidelity’s eyes and do so. Yes, these are loans as well as payouts tied to COVID.
Janna: Could you please review whether the CARES Act didn’t make it slightly simpler for consumers to withdraw money or take a loan from their 401(k)?
Dhara: Yes. The CARES Act, which was first approved earlier this year, is fantastic because it allows you to withdraw up to $100,000 from your 401(k) if you’re having financial difficulties as a result of a coronavirus-related difficulty (k). And the 10% penalty will be waived, which is fantastic news for a lot of individuals. Is it exempt from taxes? No. You do, however, have a grace period of up to three years in which to repay the tax.
Right, right, Janna Additionally, you can completely avoid that tax if you truly repay the amount you borrowed within those three years, is I correct?
Dhara: Indeed. That’s accurate. That is unquestionably true.
Janna: I don’t know if everyone is aware, but if you withdraw before the age of, what, 59 and a half, you will be subject to the 10% penalty that you mentioned.
Dhara: Exactly, I agree. 60 and a half.
Janna: It is hence an early withdrawal. It exists to prevent people from using their retirement funds. However, because lawmakers were aware that people were having a really difficult time, the CARES Act made things easier in this particular circumstance.
At home, a woman is using her smartphone.
According to a Fidelity survey, the pandemic increased millennial savings rates in the second quarter, with IRA accounts growing more than year over year. (Reference: Getty Images)
Dhara: Yeah. If you due back a 401(k) loan this year as well, you have an additional year to repay it thanks to this. There is thus undeniably some room there as well.
Wow, Janna said. I was unaware of that. That’s fascinating.
Dhara: Agreed.
Janna: Okay, then. In order to get through this period, some people—about 10%, as you mentioned—are taking money out of their retirement accounts. But are there any folks out there who are truly putting more money away or who are making the most of the fact that they could still be employed but aren’t spending as much because they can’t go out as frequently?
Dhara: Agreed. The story has always been that the millennial generation, having had the Great Recession and now this, might be their double punch, which is what makes what we just discussed so important.
Janna: True.
Dhara: However, they’re really… Actually, a lot of positive things are taking place in this generation. According to the Fidelity report, the pandemic increased millennial savings rates in the second quarter, with IRA accounts growing more than year over year.
IRAs are pretax, as we previously discussed, but Roth IRAs are after-tax, and experts believe they’re a fantastic tool since you can withdraw money from a Roth IRA after five years without incurring penalties. Roth IRAs, which are post-tax retirement accounts, showed the biggest increase, with millennial donations increasing by 50% and year-over-year growth of 36%. Therefore, it’s probably safe to conclude that millennials are making the most of this opportunity to emphasis on their finances.
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Janna: Right. And what about the other employees? Did Fidelity, Schwab, or the persons you spoke to find that consumers are actually increasing the amount they’re contributing to their 401(k)s from each paycheck?
Dhara: Agreed. What’s intriguing is that 9% of investors at Fidelity increased their contribution rates overall. It is, albeit not a significant amount, in my opinion. In general, it appears that individuals—outside of millennials—are making the effort.
Additionally, this is fascinating. Although there are those like us who aren’t necessarily fighting the pandemic on the front lines, 96% of workers in the healthcare sector boosted their contribution rate in the second quarter of 2020. So it was just a fascinating fact to notice.
Janna: That’s fascinating. The question of retirees is relevant. How are their savings, which they are currently relying on, for example, my parents, who are retired and are witnessing all this fallout?
Dhara: In that sense, it’s almost dual, because in one sense, this generation has done very well in terms of owning a property and not having to make mortgage payments. We observed that 78% of retirees own homes, 60% of which have no mortgage payments at all, according to an Edward Jones research. That’s excellent, then.
In the hospital hallway, a smiling female healthcare practitioner turns to face the camera. Her arms are folded as she stands.
According to Fidelity, a whopping 96% of healthcare professionals upped their contribution rate in the second quarter of 2020. (Reference: Getty Images)
But even if they are in that situation, many retirees are now worrying about their adult children at this time. Almost one in two people feel the outbreak has increased their concern for their children. Unbelievably, the majority of pensioners, or 71% of them, claim that they would risk their remaining years and financial security for their kids if it meant helping them out.
Janna: Well, that is undoubtedly the case. Although I could understand how my parents may feel that way, I wouldn’t want them to act that way. However, generally speaking, they are doing fairly well financially, compared to perhaps some, which is why they are concerned about their children who could, for instance, lose their jobs or be furloughed.
Dhara: Agreed. That is absolutely accurate. It’s also fascinating to note that 24 million Americans, or 1/4 of parents with adult children, have already helped out financially during the pandemic. Therefore, I believe the rest of the year will be spent waiting to see if that figure rises.
Janna: Since we’re talking about pensioners, it stands to reason that many of them rely on Social Security. However, you discovered that many of these layoffs and other current employment-related events may have an influence on Social Security in the future. Can you elaborate on that a little bit?
Dhara: Indeed. In other words, the trustees’ initial assessment was that Social Security and the Old-Age & Survivor’s Insurance Trust Fund would be exhausted by 2035. That should be a problem, but it’s always put on the back burner, is nothing new. I was really interested to learn that fewer individuals will be contributing to the system given that at this time, 55 million people or more are filing for jobless benefits. Although I was able to learn about other aspects from other experts, when I consider this one alone, I can’t help but think, “Well, that means less money flowing to the system, and that means that that 2035 date may be pushed early.”
According to experts, that time could come as soon as 2032, according to Peter Earle, an economist at The American Institute for Economic Research. That’s why it’s a little… Pensions are different; perhaps a story for another day; you always think of the three-legged stool when you’re retired. However, Social Security is one of the other pegs, so if it’s in danger, folks had better start saving immediately.
Janna: True. You might therefore be receiving less from Social Security than you may have believed, which would… That might alter your calculations, particularly if retirement is not far away.
Yes, but how do you calculate how much you’ll need to retire?
Dhara: You can in fact… So, without getting too particular, you can actually access a worksheet on the Social Security page. You can thus check those resources out. You can also consult a trustworthy financial advisor who works on a fee-only fiduciary basis. Therefore, as soon as feasible, that would be beneficial.
There is actually more to the tale regarding Social Security at the moment, during the pandemic, which I believe is interesting and could be worth discussing. One of the economists I spoke with, Dean Baker, argued that it’s also the fact that we’re investing… With all the stimulation, the stimulus bill that was passed, the value of the dollar will decrease the more money is pumped out of the system. As a result, the Social Security Fund’s current worth can decline. Therefore, people may eventually receive dividends that are worth less.
Janna: Okay, I see. That’s quite fascinating.
Additionally, this past weekend saw the issuing of an executive order or memorandum by President Trump regarding the postponement of payroll taxes. Thus, you and your employer each pay a portion of the Social Security tax. I actually discussed this with a few authorities. Who knows if it will be carried out, A. B, or if there would be a delay, which would mean that you don’t have to pay it now but do have to pay it later. Or whether the debt is genuinely forgiven. But if it’s reduced to a forgiving sum, there’s another way we’re not contributing as much as you’re saying.
Seniors
About $945 billion is raised annually for Social Security through the payroll tax. (Reference: Getty Images)
Dhara:
Yeah. That is what the president’s… I believe he said that to be the case, however it is important to note that the payroll tax contributes roughly $945 billion to Social Security each year. President Trump and even Joe Biden have hinted that they don’t necessarily want to eliminate Social Security, but if we eliminate the payroll tax, we might have to… I’m merely interested in the solution for the next step.
Janna:
Right. It doesn’t really improve the way Social Security is funded as a whole. It worsens as a result. Right?
Dhara:
Exactly.
The discussion on Social Security is already concluded, but I thought that was a pretty intriguing issue. Janna
What advise would you give to those who are currently saving for retirement, given everything you’ve heard about the pandemic and the statistics as they come in?
Dhara: I would advise against taking money out of your retirement account unless it is absolutely necessary. I believe, I believe… If I’m able to One instant. We previously noticed that.
It was basically pointing out that so many Americans pre-pandemic couldn’t even, didn’t even have enough for something like a $400 emergency. There was a recent Bankrate research, I believe a few months ago. Therefore, I advise you to start saving money and creating an emergency fund. Set aside funds for three to six months’ worth of spending. To be perfectly honest, it would even make sense to extend it to a year at this point in the pandemic. That’s it, then.
It would be beneficial, in my opinion, to see if you can… Try negotiating in other areas of your life, such as if you are paying rent, to see if you can reduce your rent with your landlord so you can put more money toward your future. If you want to save for retirement and you’re attempting to stretch your dollars as far as you can, do so.
That is sound advice, Janna. Additionally, a lot of individuals believe that if they are still working and are not going to the movies or taking large vacations, they may save their money if they are still employed.
Dhara: Agreed. You may raise… Yes, August has passed, but there are still September, October, November, and December to come. Your 401(k) allows for up to 9500 in contributions (k). It will cost you an additional $6500 if you are above 50. $6000 more if you have an IRA. $6000 more if you have a Roth IRA. And if you’re 50 or older, an additional 1000. Therefore, even if you feel as though you are saving and are perhaps wondering, “Hey, what do I do next,” you can always add more.
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That’s accurate, Janna. Additionally, there is another area to keep the second round of stimulus checks if we ever receive them and you do not need to utilize them right away.
Dhara: Agreed. You’re all set. According to all the experts I’ve spoken with on the state of retirement and just that subject, the greatest advise would be to take care of yourself and save money while we wait for a solution to Social Security to gain greater public attention.
Janna: You can’t always wait for someone to help you, but you can take steps to improve your situation, so that is actually extremely sound counsel.
We appreciate your participation on Money, Honestly today, Dhara. And thanks to all who have listened. Please give us a five-star rating and review on Apple Podcasts. Next week, we’ll see you.
Janna: We appreciate you listening to this USAA-sponsored episode of Money, Honestly, by Cashay. They have your back through every stage of life, whether you are serving in the military right now, a veteran who rendered honorable service, or an eligible family member. Visit usaa.com to find out more.
