October 29, 2019
People Tap IRAs After the Penalty Ends
Workers are apparently very eager to get their hands on the money in their retirement savings plans.
The evidence is the spike in withdrawals from IRA accounts that occurs soon after people turn 59½, the age at which the IRS’ 10 percent penalty on early withdrawals vanishes and is no longer a deterrent, according to a research study.
Average annual withdrawals from IRA accounts surge by about $1,965 to $3,540 – an 80 percent increase – after people cross the age 59½ threshold, according to the study, which was conducted for NBER’s Retirement Research Center by researchers at Stanford University, the University of Chicago, and the Federal Reserve Bank of Chicago.
Early withdrawals from tax-deferred retirement accounts – IRAs and 401(k)s – usually are not for frivolous reasons. This money tends to be tapped to ease financial hardships, such as unemployment, a disability, or a large, unexpected medical expense. But when older workers withdraw retirement funds – even for important matters – they may be chipping away at their financial security in old age. Withdrawals by high-income workers, on the other hand, will likely have little impact on their security.
The researchers analyzed taxpayer data from the IRS, which requires withdrawals to be reported at tax time. They compared withdrawals by people in the dataset for the two years before they turned 59½ with their withdrawals between 59½ and 60½.
While the penalty was in place, daily withdrawals were largely flat. But soon after people crossed the age 59½ threshold, withdrawals spiked before declining “to a new higher level than that of prior ages,” the researchers found. …Learn More
June 27, 2019
Widows: Manage Your Grief, Finances
Kathleen Rehl’s husband died in February 2007, two months after his cancer diagnosis. She has taken on the mission of helping other widows process their grief, while they slowly assume the new financial responsibilities of widowhood. Rehl, who is 72, is a former financial planner, speaker, and author of “Moving Forward on Your Own: A Financial Guidebook for Widows.” She explains the three stages of widowhood – and advises women to take each stage at their own pace.
Question: Why focus on widows?
Rehl: After a husband dies, and whether it’s unexpected or a long-lingering death, there is a numb period. Some widows refer to it as “my jello brain” or “my widow’s brain.” It’s a result of how the body processes grief. The broken heart syndrome is actually real. After a death, the immune system is compromised, and chronic inflammation can happen. It’s hard to sleep at night and there can be digestive difficulties. Memory can be short, attention spans weakened, and thinking downright difficult. You’ve got this grief, and yet the widow might think, “What do I have to do?” The best thing she can do initially is nothing.
Q: Why nothing?
Rehl: I talk about the three stages of widowhood: grief, growth, grace. At first, she’s so vulnerable that if she’s making irrevocable decisions immediately, they may not be in her best interest. The only immediate things she might need to do are file for benefits like Social Security and life insurance and make sure the bills are still being paid. All widows need to take care of these essential financial matters. But major decisions should be delayed. I knew one widow whose son said, “Move in with us.” That would’ve been a really bad decision, because she didn’t get along with the daughter-in-law, and it would’ve introduced another type of grief – loss of place, loss of friends. Then her son got a job in Silicon Valley and moved away.
Or a widow deposits her life insurance in the bank, and a helpful teller says, “I think Fred in our wealth management department down the hall can see you because you need to do something with your money.” Fred sells her a financial product she doesn’t understand, and two or three months later, when she’s coming out of her grief, she thinks, “What did I buy?” One widow came to me who had locked her money into a deferred annuity that wasn’t going to pay out for years, and she needed the money now.
Q: With most women working today, aren’t they better equipped than previous generations of widows to handle the finances? …Learn More
June 25, 2019
Moms Help Jobless Sons and Daughters
“Families often serve as the first line of defense against adverse events,” a RAND study starts out.
In this case, the researchers are talking about a mother who protects her unemployed adult child by providing financial assistance, a request that’s not easy for a mother to resist.
RAND researchers Kathryn Edwards and Jeffrey Wenger find that women of all ages are very likely to help out and “significantly alter their behavior” when a son or daughter loses a job.
How much mothers’ sacrifices affect their standard of living are beyond the scope of this study. But although unemployment is at historic lows today, when a child does lose a job, a mother who provides assistance is potentially exposing herself and her husband to financial problems down the road.
The types of the assistance the women in the study provided varied for different groups. The youngest group, working-age mothers between 35 and 62, were the most willing to help an unemployed child, though women of all ages did to some extent.
Mothers employed full-time, and in some cases their partners or husbands, worked more to earn additional money, an option largely closed off to the retired women. Another way working mothers adjusted was to reduce their contributions to employer retirement funds. All of the women also cut their own food budgets for a year or more.
This study is a conservative take on their assistance, because it doesn’t include an indirect, but often costly, source of support that is an obvious solution for unemployed offspring: moving back home. Moving back in will, at minimum, increase their parents’ utility and grocery bills. …Learn More
April 16, 2019
Dementia is a Threat to Managing Money
The perils of aging generally escalate around 75, and they are becoming more pervasive as more Americans live to very old ages.
One of these perils – declining cognitive ability – often creates financial problems. A new study that summarized the research on this side of the retirement equation identified the financial fallout from dementia.
Currently, dementia afflicts roughly a quarter of seniors in their early 80s. And geriatricians and demographers have predicted for years that dementia will become a serious societal problem in the future as the tsunami of baby boomers reach older ages.
The first sign of deteriorating financial skills might be forgetting to pay a bill. But when severe dementia sets in, the vast majority completely lose their ability to manage their finances and risk making big mistakes, such as losing money in a fraudulent investment scheme.
Another concern is retirees’ growing reliance on 401(k)s for more of their income. Increasingly, they are grappling with the complicated question of how much money to withdraw each year from their 401(k) accounts – this is difficult for anyone but virtually impossible for people with dementia.
Fortunately, most of them get assistance managing their finances. But the seniors who don’t get help face potentially grave repercussions, such as having difficulty affording food, housing and medical care.
Managing money is not the only financial risk posed by dementia. A more serious issue is the potential need for a lengthy stay in a nursing home, which will be addressed in a future blog post. …Learn More