Boon for seniors’ retirement finances but understand the risks

COVID-19 and its far-reaching effects have dominated the news for months. Fears of illness and financial instability are both overwhelming stressors for seniors. A deep concern for many is expressed in a World Economic Forum prediction that the average 65-year-old will outlive his or her savings by a decade or more.

The SECURE Act

The SECURE Act of 2020 was designed to address this prediction. The House version passed back in July 2019 with a phenomenally bipartisan vote of 417 to 3. The Senate acted on a modified bill in the fall, which become law December 2019.

The SECURE Act (Setting Every Community Up for Retirement Enhancement) is designed to encourage and strengthen personal retirement accounts. While there are promising provisions, it pays to understand the details of the act. The financial industry spent millions of dollars in lobbying efforts—a strong indicator of who expects to benefit.

So, what’s in it for your average seniors? The act’s three main provisions call for:

• Helping to reduce small employer set-up costs for retirement plans.

• Increasing access to annuities options inside retirement accounts.

• Major changes to the rules governing retirement accounts and required minimum distributions.

Part-time benefits

For small businesses, SECURE aims to reduce the cost and administrative headaches of setting up employee 401(k) retirement accounts. It offers employers a $500 tax credit for starting such accounts. It also increases the cap from 10 to 15 percent of wages under which small businesses can set up automatic “safe harbor” retirement plans. Finally, it allows part-time workers to be included if they work a minimum of 1000 hours or 500 hours for three consecutive years.

An increasing number of seniors work part-time hours. This new provision allowing seniors to continue setting aside retirement money is a valuable asset. Depending on your circumstances, you may be better off saving outside of a small company plan, which may have higher costs than large companies can negotiate. But unless you are uber-disciplined to do it on your own, a company retirement plan is a great option. The main advantage is that it reduces your temptation to spend those funds.

The risks of annuities

Annuities are an even trickier issue. They are sound in theory—you can think of them as a private version of Social Security. You put down a sum of money (or a stream of money from each paycheck) and in return receive a monthly check for the rest of your life (or a specified period of time). The complexity emerges in the details. For retirement account holders, the fees paid can be both steep and obscure. Whether considering a purchase within or outside a retirement account, it’s imperative to understand the fees before you choose to invest in an annuity.

Moreover, private annuities aren’t backed by the federal government like Social Security. In the years or decades before a worker begins to collect on an annuity, the insurance company offering the product may go out of business. This can be catastrophic for the retiree as well as a liability for the employer offering the retirement account.

The annuities provision in the SECURE Act encourages employers to offer annuities in retirement plans. Before the Act, few companies offered annuities, partially because of the risk in choosing an insurance company that could go out of business in the years or decades before the retired employee begins to the payout. Annuities’ high fees have also made them an unpopular choice for workers even when offered.

The Act may increase annuities’ popularity to companies by reducing their liability if the insurer goes bankrupt. On the other hand, that could result in more insurance companies with dubious reputations offering annuities. The issue of annuities being laden with fees is also not addressed. It remains to be seen whether workers choose this option. 

Whether or not annuities are part of your IRA package, other provisions of SECURE make it highly relevant for upcoming seniors.

The Act brings about significant changes to IRA distribution rules. It allows seniors in the workforce to continue contributing to their IRAs after age 70-1/2 (the previous limit). It also pushes to 72 (from 70 ½) the age at which account owners need to take required minimum distributions (RMDs). Other new provisions involve rules around inherited IRAs.

Check with your accountant or tax advisor for details on which provisions apply to you. As with any part of your retirement plan, it pays to understand the details. We all hope to make it to the other side of COVID-19’s reaches. When we do, let’s arrive with our health—and our retirement plans—intact.