New Ways to Take Control of Your Retirement

Congress finally got something right...

Longtime readers have heard our warnings about putting too much faith in politicians or the government to protect their retirements. In particular, I (Laura Bente) cringe whenever I hear someone tell me they're counting on Social Security for their retirement... which happens all too often.

This year, the average Social Security retirement benefit will be about $1,827 a month. That's not even $22,000 a year, and would barely cover basic living expenses – like rent, groceries, and utilities. That's not even taking into consideration medical expenses or unforeseen expenses, like your car breaking down.

So unless you've saved up a large nest egg on your own, your Social Security check won't allow you to enjoy your retirement. I recommend using it as supplemental income... with the knowledge that you'll need more – and that the program might even disappear entirely before you're ready to collect.

Fortunately, Congress just passed a new law with provisions that will make it easier for you to manage your finances for retirement and keep more of your money for yourself...

It's called the SECURE 2.0 Act, revising the Setting Every Community Up for Retirement Enhancement ("SECURE") Act that Congress passed in 2019.

You might not have heard about these measures, which are buried in the $1.7 trillion omnibus spending bill that President Joe Biden signed into law last Thursday.

So today, I'm going to walk you through what the SECURE 2.0 Act means for your personal finances – and why you need to take your retirement seriously.

Required Minimum Distributions

Most retirement savings plans, including traditional individual retirement accounts ("IRAs") and 401(k)s, force you to receive some amount of money from your account each year once you reach a certain age. This money is called a required minimum distribution ("RMD").

The first SECURE Act extended this age from 70 and a half to 72, depending on your birthday. This means that folks can keep that money growing in their retirement accounts for that much longer. And now, the latest act is going to push that to 75... eventually.

This year, the age you must start receiving your RMDs is changing to 73. Then, the next bump will happen in 2033 when the age will rise to 75. What that means is that folks born between 1951 and 1959 will be able to delay their RMDs until they are 73. And those born in 1960 or later won't need to start taking RMDs until age 75.

Note that these changes don't apply to anyone who turned 72 last year, and has already begun taking their RMDs or needs to take their first RMDs by April 1, 2023.

(The exception is a Roth IRA, which doesn't have an RMD. And starting in 2024, RMDs won't be required for other Roth plans, like Roth 401(k)s and Roth 403(b)s.)

I've seen too many people fail to understand when they need to start taking their RMDs or how much to withdraw. If you don't take your full minimum distribution, you're fined 50% of the amount you missed. Make sure you know how much to take out and when. Use the IRS worksheets for RMDs right here.

Employer-Sponsored Emergency Savings Plan

According to a phone survey from Bankrate, nearly 56% of Americans can't cover a $1,000 emergency expense.

Some of those folks just aren't able to make ends meet. But many others have plenty of income... and just fail to spend it responsibly.

Some employers help their staff by offering an emergency savings account. These accounts use post-tax dollars and therefore allow you to withdraw your money without penalties.

If you're managing your funds successfully on your own, great... You don't have to worry about setting up another account, unless your employer offers matching funds.

But some folks spend every penny they have within easy reach. Having an emergency savings account means that this money is less available for reckless spending... but always accessible if a need does come up. And if you're putting all your extra cash straight into a retirement account, this is an alternative that you can use without incurring an early-withdrawal penalty.

About 10% of employers already offer some sort of emergency savings account, according to a recent survey from the human-resources firm Buck, and some match their employees' contributions. Now, the SECURE 2.0 Act makes it easier for employers to automatically enroll their employees. In other words, they'd decide to opt out of an emergency savings account rather than having to opt in.

These employer-sponsored plans help people force themselves to save for an emergency – without being able to easily drain those savings for nonemergency expenses.

Other Changes

There are several other changes we'll see roll out over the next few years, thanks to the SECURE 2.0 Act...

  • Enrollment in retirement plans: Starting in 2025, most employers will be required to enroll eligible employees in 401(k) or 403(b) plans. And employees will see automatic contributions increase 1% a year until those total contributions hit at least 10%. This means workers will have to contribute to a retirement plan, although you are allowed to opt out of the plan. (There are some exceptions for small businesses, churches, and government plans.)
  • Catch-up contributions: Catch-up contributions allow people who didn't make more retirement-plan contributions at a younger age to literally "catch up" on some of those missed contribution dollars. Last year, folks over the age of 50 could put in $6,500 more than the typical annual contribution limit of $22,500. This year, that figure increases to $7,500... and the new act raises it to $10,000 in 2025. Contributing an extra $2,000 or $3,000 to your 401(k) lowers your taxable income and adds more heft to the ability to compound your investments.
  • Student loans: About 45 million Americans carry student loans from their college days... Starting in 2024, qualified loan payments will get a similar treatment to 401(k) contributions, which means employers can make matching contributions to a 401(k) plan for student-loan payments.

We'll keep track of the various changes over the coming years. But in the meantime, consider what you are doing to prepare for retirement... whether you're in your 20s, just starting out, or you're hoping to retire soon.

Is anything stopping you from saving for retirement? Let us know... [email protected].

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Here's to our health, wealth, and a great retirement,

Laura Bente, CFP®
January 5, 2023