(Refiles to add headline category tag. The opinions expressed
here are those of the author, a columnist for Reuters.)
By Mark Miller
CHICAGO, April 10 We reached a milestone last
week when the government reported that the U.S. economy has
regained all the jobs lost during the Great Recession. Yet for
many older workers the recession never ended; long-term
joblessness has morphed into de facto premature retirement. Now,
millions are performing financial triage on retirement plans
that had been based on assumptions of working longer.
The overall job market does look promising. Although the
national unemployment rate was unchanged in March at 6.7
percent, 192,000 jobs were added. And the Bureau of Labor
Statistics reported that the private sector has gained 8.9
million jobs since the employment low in February 2010, just
over the 8.8 million jobs lost during the economic meltdown.
On the surface, the outlook for older workers doesn't look
bad. The jobless rate for workers over 55 was 4.7 percent last
month, well below the national rate. But older workers who lose
their jobs still face a much longer search for work; the average
duration of unemployment was 49.4 weeks in March, compared with
36.2 weeks for all workers. And the number of unemployed people
over 55 rose more than any other age group during the recession,
according to an AARP analysis - 1.5 million in January this
year compared with 832,000 in 2007.
Nothing hits a retirement plan harder than job loss in the
last years of work. These are the years of peak earnings and -
one hopes - peak contributions to retirement accounts. Yet the
Employee Benefit Research Institute reports that 49 percent of
retirees leave the workforce earlier than planned. The most
frequent reasons include health problems or disability (61
percent), job loss (18 percent) or needing to care for another
family member (18 percent).
Repairing a retirement plan is difficult for premature
retirees, but there are ways to mitigate the damage. Here's what
to consider if you find yourself among the involuntarily
- Create a detailed spending projection. Retirement spending
forecasts often use back-of-the-envelope assumptions about the
amount of pre-retirement income that needs to be replaced,
typically 80 percent. Yet research by Morningstar shows that
needed replacement rates vary from under 54 percent to over 87
percent - and that spending declines over time, especially as
people reach advanced ages when they have less interest in and
ability to spend on travel, entertainment and clothes.
Many financial services websites offer online calculators
that can help with this task; an excellent resource is former
New York Times retirement columnist Fred Brock's book "Retire on
Less Thank You Think" (Times Books, 2007).
- Be strategic about meeting short-term income needs. You'll
want to minimize early withdrawal penalties and taxes, so if you
have a liquid emergency fund, that's the first place to go.
Taxable accounts are a good second choice, since there are no
early withdrawal penalties, and stocks you've held for more than
a year are taxed at the low long-term capital gain tax of 15
A Roth IRA drawdown is less desirable because you want to
benefit from that account's tax-free growth as long as possible.
But it's a reasonable choice if you've reached 59 1/2 and can
make withdrawals without generating the 10 percent early
withdrawal penalty. That's because Roth withdrawals don't
generate income tax liability, since contributions are made with
Tapping a traditional IRA or 401(k) would come next. Keep in
mind that withdrawals are taxed as ordinary income, and you may
owe a 10 percent early-withdrawal penalty if you are under 59
1/2. However, if you are at least 55 and retire, quit or get
fired, you can make penalty-free withdrawals from the 401(k)
plan of your last employer under section 72(t) of the IRS code.
This is done by moving the funds to a rollover IRA, and
taking distributions on a schedule of equal distributions over
time. (The 72(t) payments must continue for five years or until
an individual reaches 59 1/2, whichever is longer.) These
distributions can also be made from regular IRA accounts.
Consult a tax expert; 72(t) distributions done incorrectly can
generate sizable penalties.
-Avoid taking Social Security early if possible. This is a
tempting source of cash, and many Americans file before the full
retirement age of 66. But most retirees can generate greater
lifetime income from Social Security by waiting at least to 66 -
especially married couples, who can take advantage of valuable
spousal and survivor benefit rules. That's because claimers
receive about 8 percent in additional payments for each year
they delay filing, up to age 70.
Delayed filing also can stretch your retirement savings,
since the higher Social Security income reduces pressure to use
savings to meet living expenses.
- Manage health insurance expenses carefully. Retirees 65 or
older are covered by Medicare. Younger retirees may be able to
get coverage through a working spouse's insurance, or they can
buy a policy through the Affordable Care Act (ACA) insurance
exchanges. Although open enrollment for this year has ended, you
can qualify for a special enrollment for 60 days following loss
of health coverage from a former employer.
The ACA offers a huge improvement in economic security for
retirees not yet eligible for Medicare. Insurers can't turn down
enrollees due to preexisting conditions, and overall premium
costs will be held down for many by the law's cost-sharing
subsidies and advanceable, refundable tax credits on premiums.
This year the subsidies are available for individuals with
annual income of $11,490 to $45,960, and from $23,550 to $94,320
for a family of four. The definition of income is modified
adjusted gross income, which includes wages, salary, foreign
income, interest, dividends and Social Security benefits.
For more from Mark Miller, see link.reuters.com/qyk97s
(Follow us @ReutersMoney or here.
Editing by Douglas Royalty)