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Ponderings For the Week of March 30 to April 5, 2020

Dow Jones Industrial Average Posts Biggest Weekly Gain Since 1938

Stocks gained mightily in three of five trading sessions last week thanks to the largest economic relief package in U.S. history. For the week, the average U.S. stock rose over 10%. International equities weren’t far behind. While lawmakers work to cushion the pandemic’s blow to the economy, it’s much too early to conclude that the worst is behind us.

Pesky questions predominate. Will stricter quarantine measures be imposed and how long until the quarantine is eased? When will the economy begin to thrive once again? How soon will the millions of unemployed workers return to work? (Last week’s startling unemployment report was just the beginning.) Will business ever return to normal or will bankruptcies sap the workforce? How much more will Congress need to spend to sustain the economy? There are a lot of questions, indeed.

 

Gradual Retirement: An Idea Well Worth Considering

One of the biggest trends in the 21st century is the preference for many to retire gradually. Gradual retirement (also called “phased retirement”) has a lot of appeal for both lifestyle and financial reasons. When the customary retirement age of 65 was initiated over a century ago, it was a reward for those few workers who managed to survive to 65. Now, a lot of workers simply can’t imagine retiring cold turkey at that age. Moreover, gradual retirement can make a big difference in your retirement income.

The following table shows how much your annual income will increase if you don’t retire outright but instead gradually retire by reducing your work income to a level where you simply earn enough to meet living expenses – you don’t add anything more to your retirement funds. The table also shows how much your Social Security income increases by delaying the date you begin collecting Social Security.  

Delaying retirement for just a few years can transform a merely okay retirement into a really nice retirement. For example, someone who works enough to cover living expenses for three extra years and doesn’t tap into retirement savings nor begins collecting Social Security will increase her annual Social Security income by 19% to 26% (depending on age) and her annual lifetime income from retirement plan withdrawals by about 25%. What a difference! There are two reasons why gradual retirement results in more retirement income. First, your nest egg has more time to grow before you begin tapping into it. Second, each year you continue working is one less year your money will be needed to fund your retirement. 

 

                                 The Benefits of Gradual Retirement

Increased Annual Lifetime Income
by Delaying Retirement

 

     1 Year    3 Years    5 Years

Increase in withdrawals from
retirement nest egg                               10%          25%         40%

Increase in Social Security                       6-8%     19-26%    36-44%

 

Smart Money Tips

  • Saddled with a lousy 529 plan? Consider a rollover. There are some excellent 529 plans and there are some stinkers. Some that are sold by brokers, insurance agents, and investment advisors are chockablock with extra fees. But, unlike most deferred annuities (another investment that can be loaded with fees), you can move a 529 plan to greener pastures without penalty. A withdrawal from a 529 college savings plan is not treated as a distribution if it is rolled over within 60 days to another 529 plan for the same beneficiary or a member of the beneficiary’s family. Only one rollover is allowed in any 12-month period, however. A rollover from one child to another is not subject to the federal gift tax rules so long as the new beneficiary is in the same generation as or a higher generation than the old beneficiary and is a member of the family of the old beneficiary.
  • Career advice.  I don’t have any expertise on career selection, but I do know that a lot of careers that appear to be secure now may not be in the future, more so due to the terrible workforce disruption we have just begun to endure. Since your career is arguably your best investment, whether you are a student or a mid-career individual contemplating a career change, here’s my advice. Take an objective look at where your career will stand in the near future, a decade from now, and several decades from now. The question you need to answer is whether your chosen career will be flourishing throughout your work life or does it risk falling victim to such threats as advances in technology or outsourcing overseas? It’s a shame to have to look so dispassionately at a field in which you are very passionate, but this is a real threat – one that could have real implications on your financial future.

 

 

Correction: Last week we erroneously reported that the deadline for IRA contributions this year was April 15. After publication, the IRS indicated that the deadline for retirement plan contributions will conform to the deadline for filing returns which, in 2020, is July 15.

 

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