Retirement in the age of coronavirus isn't going to be easy.
True, seniors and pre-retirees can take advantage of some flexible and lenient new rules on retirement accounts. Some people also might see new opportunities for part-time employment, especially those who can work from home.
But in many other ways, things could get tougher, especially for people who already were behind on their retirement preparations. Here are some possible themes ahead:
More reliance on Social Security
As happened during prior recessions, many older workers will lose their jobs, possibly their businesses and perhaps a chunk of their retirement accounts due to stock-market declines. As a result, some will claim Social Security retirement benefits earlier than planned.
Many baby boomers in particular might try to stay employed a few years longer.
But if the economy remains in a prolonged funk and layoffs mount, "That may not be an option for many of the unemployed boomers, who will need to get income wherever they can find it," wrote Kim Blanton at the Center for Retirement Research at Boston College.
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Enter Social Security. People can claim retirement benefits as early as age 62. The drawback to claiming early is that recipients lock in lower monthly benefits."For those who can wait, the size of the monthly check increases an average 7% to 8% per year for each year claiming is delayed up until age 70," Blanton wrote.
Still, more people likely will claim early this time around, as in prior recessions. For example, in 2009, when the stock market bottomed and recession ended, 42.4% of 62-year-olds signed up for Social Security, up from 37.6% in 2008, according to the Center for Retirement Research.
Lower-income individuals and others hard hit by economic downturns are the ones most likely to claim Social Security early. The longer that coronavirus disruptions last, the more intense this reliance could be.
Debate over loans vs. withdrawals
People needing to tap into retirement accounts have a few choices. One option, for both Individual Retirement Accounts and 401(k)-style programs, is to withdraw money permanently. Another choice, in 401(k)-style plans, is to take out a loan.
Up until the past few weeks, permanent withdrawals (often called "hardship" distributions), were a much worse choice. The money would be permanently removed from your account, diminishing your retirement preparations. Worse, you would pay tax on the withdrawn amount and possibly an early withdrawal penalty. Loans, by contrast, could be taken, and repaid, without triggering taxes or penalties.
But changes under the coronavirus-relief CARES Act alter the scenario somewhat, primarily by removing that 10% penalty for withdrawals in 2020. The penalty normally would apply for people under age 59 1/2. Permanent withdrawals remain the poorer choice, but the gap has narrowed a bit.
One factor to help guide your decision is trying to estimate how long you might be in a cash-strapped position with bleak employment prospects.
Historically, the economy has needed about 30 months on average following a recession to surpass its previous peak in employment, noted Ben Ayers, a senior economist at Nationwide. This suggests a tough job market could endure for a while.
Then again, this coronavirus downturn came about so suddenly that it's not unreasonable to think a fairly swift rebound could follow.
If you permanently withdraw money today, it could mean taking it out when your account value is depressed, said Colleen Carcone, director of wealth-planning strategies at TIAA. "You wouldn't be giving your account time to rebound."
Roths possibly back in play
While Roth IRAs weren't altered by the CARES Act, more people could find them applicable now. With many individuals likely to generate lower income this year, from layoffs, furloughs or reduced hours, they might now fall under the income-eligibility limits for contributing to a Roth, Carcone noted. Full Roth contributions are available for singles earning less than $124,000 or married couples making under $196,000.
In addition, with the stock market down, converting money from a traditional IRA to a Roth becomes more enticing. Taxes are due on the amount you switch over, but lower balances would mean less in taxes.
One provision of the CARES Act has raised the following question. Because investors now can withdraw money from a traditional IRA and put it back into another retirement account, tax-free, within three years, does that mean they could switch the money into a Roth? Yes, but taxes would be due, as this move would constitute a traditional-to-Roth conversion.
"There's no magic wand that allows you to turn a traditional IRA into a Roth without recognizing the tax," Carcone said.
Increased confusion ahead
Even before the coronavirus outbreak hit, many Americans already were baffled by many of the rules affecting 401(k) plans and, especially, IRAs. Now that the hastily written CARES Act has become law, look for more uncertainty and befuddlement.
Among the new rules, 401(k) participants directly affected by coronavirus disruptions temporarily may be able to borrow up to $100,000 from their accounts, including the entire vested account balance, provided that their employers go along with these changes. That's up from $50,000 and 50% before. Disruptions cover several situations including people who have been laid off, furloughed or had their employment hours cut.
"Not all 401(k) plans have provisions for loans," said Dave Du Val, chief customer advocacy officer for Tax Audit. "But if your plan allows loans, you can take out a larger amount."
As noted, if you must take a permanent distribution from a 401(k)-style plan or IRA, that 10% early penalty could be waived, though regular taxes still would apply. If you suddenly find a new or better job or otherwise decide you don't need the money, you can put the distribution back into the same or another retirement plan, without paying tax, over a three-year window. This could be an area of confusion ahead.
The CARES Act also suspends required minimum distributions or RMDs for people ages 72 and up. These optional new RMD suspensions provide a unique opportunity not to tap into retirement accounts for seniors who have other sources of income to live on, Carcone said. Yet account holders still may take out the same amount, or even more, if they desire. "It's a (confusing) area where we're getting a lot of calls," she said.
Lingering confusion also will mark other retirement-plan changes ushered in by the CARES Act, especially as the IRS or other agencies issue further guidance. "It absolutely will complicate things," Du Val said.
Reach Wiles at russ.wiles@arizonarepublic.com.
