The complexities involved in planning for retirement change every year depending on inflation, account contribution levels, living standards, and unforeseen expenses, among other factors. However, continuing to grow funds in your retirement account might be a little more difficult than usual in 2021 as a result of the economic effects brought about by the COVID-19 pandemic. Some may have to consider early retirement with significantly less money than anticipated, while others might be forced to suspend contributions to their 401(k) or Roth IRA for the foreseeable future. The following are five trends concerning retirement planning for 2021.
Possible Increase in Unplanned Retirements
While it’s vital for employees to set a target retirement date, they should also make considerations for the possibility of an earlier, unplanned retirement. Almost half of all retirees in the US left the workforce prior to reaching their target retirement age, according to a survey conducted by the Employee Benefit Research Institute in 2019. The figure is likely to increase due to COVID-19. Older workers who are more vulnerable to the coronavirus might choose not to return to work due to the risk of exposing themselves to the virus, while other workers may experience difficulty in finding jobs. Approximately 100,000 establishments had closed due to the pandemic, as of September 2020.
Consequently, employees—particularly those in their prime earning years—should consider adopting a comprehensive emergency strategy for early retirement. Beyond selecting appropriate accounts and setting savings goals, people should think about the life they want to live in retirement, as well as key considerations such as health insurance, housing, and whether or not they intend to earn supplemental income.
Health Savings Accounts Could Grow More Widespread
While Americans can begin receiving Medicare benefits at age 65, many still have to pay substantial out-of-pocket medical fees beyond those years. According to Fidelity, the average American couple spends nearly $300,000 on uncovered expenses, including co-pays and additional premiums, in their retirement years. The pandemic might also increase this figure. In order to cover rising health insurance premiums and other uncovered expenses, workers should consider starting and contributing to a health savings account.
“Health savings accounts offer a triple and sometimes quadruple benefit,” notes Liz Weston, CFP, the author of The 10 Commandments of Money. “Contributions are tax-deductible, the money grows tax-deferred from year to year, and withdrawals are tax-free if used for qualified medical expenses. Plus, many employers will contribute cash to the accounts as an inducement to sign up.”
Return of Required Minimum Distributions (RMDs)
The US government sought to help citizens affected by the COVID-19 pandemic through a variety of measures laid out in the Coronavirus Aid, Relief, and Economic Security (CARES) Act. One of those measures involved waiving RMDs for the duration of 2020. In years past, an 80-year-old retiree would have had to withdraw at least $2,673.80 from an IRA with a balance of $50,000. They would have also accrued taxes on that withdrawal. While retirees were given a break on RMDs in 2020, they will again have to take them in 2021. Please note that the SECURE ACT, passed in late 2019, increased the starting age for RMDs from 70 ½ to 72. This allows for more compounding for those people who can allow their IRAs to bake uninterrupted until age 72.
There are, however, some COVID-19 relief measures that will positively impact retirees in 2021. Income limits on contributing to a Roth IRA have increased, and those who collect Social Security received a 1.3 percent cost-of-living adjustment starting in January 2021.
Pooled Employer Plans (PEPs)
Another COVID-19 relief measure initiated by the US government is the SECURE Act. One of the primary benefits of this act for workers preparing for retirement is PEPs. These defined contribution plans allow employers to combine resources with other businesses and, in turn, provide a single retirement plan to both employers and employees. This particularly benefits small employers and their employees, as they can take advantage of pricing similar to larger plan sponsors.
In addition to lower fees and improved outcomes for retirement accounts, PEPs offer advantages such as better governance and streamlined administration. Some believe that PEPs could have as big an impact on the pension landscape as 401(k) plans did when they were initially introduced four decades ago.
More Opportunities to Save for Retirement
Since many businesses have shut down and people have been forced to spend more time at home as a result of the pandemic, discretionary spending has declined and the savings rate reached an all-time high in December 2020. Those who might have been behind on their retirement savings goals, then, had an opportunity to make up some ground in 2020 provided that they were still earning a regular income.
These workers should continue their frugal spending approach into 2021 as a means of continuing to boost their retirement savings and to get a better idea of how much they might need to spend per year in retirement. This can be achieved by tracking spending throughout the year and considering what costs can be cut out during retirement.