Baby Boomers and Retirement Savings

If you’ve ever asked yourself why the money game has to be so darn complicated, you’re not alone.

In addition to recent revelations that millennials aren’t in sync with estate planning and questions about the pluses and minuses of bond yields and CD rates, a new survey of 2,000 Americans reveals that 43% of us have no clue what a 401(k) is and 70% saying they had no shot of winning a game of personal finance trivia.

The study, commissioned by Beyond Finance for Financial Practice Week and conducted by OnePoll, found that four in 10 Americans (39%) are guilty of procrastinating when implementing healthy financial habits. Gen Z are most likely to procrastinate (49%) while baby boomers are least likely to procrastinate (22%).

The top reasons respondents cited for postponing personal finance tasks include stress (25%), feeling their financial health is already poor and can’t get any worse (16%) and forgetfulness (13%).

“Unfortunately, avoiding looking at your finances and making healthy changes is incredibly common,” said Dr. Erika Rasure, chief financial wellness advisor of Beyond Finance.

"Some people tend to neglect taking stock of their financial situation, and others can become nervously consumed by it. There’s a middle ground to take when improving your financial health — learn healthy money habits, pay attention and make small, achievable adjustments to your spending and habits.”

So what is a 401(k)?

An employer-sponsored 401(k) is a retirement savings plan that offers significant tax benefits. As a result of these tax benefits, you are limited in how much you can contribute. The annual contribution limit for 2024 is $23,000 for those under 50. The limit is $30,500 for those over 50.

In her breakdown of how 401(k)’s work, ConsumerAffairs financial writer Cassidy Horton explains that the best place to start a 401(k) is when you start working at a new company.

“You typically decide what portion of your income you want to put into your 401(k)," she said. "These contributions are taken directly from your paycheck and invested on your behalf, so you don’t need to do it yourself. Depending on the type of 401(k) you choose, you’ll either receive tax benefits when you deposit the money or when you withdraw it.”

That last part – tax benefits – probably got your attention. But, as Horton explains, the type of 401(k) you choose – a traditional or Roth – needs to be considered and not just drawing a name out of a hat.

The traditional 401(k) works by deducting a percentage of your salary before taxes and depositing it into the account before taxes. The upside with that option is that your taxable income will be lower and you'll be able to save for retirement.

“Say you make $50,000 a year and you contribute 3% of your income to a traditional 401(k). Since $1,500 is taken out of your salary and put into a 401(k), you’ll be taxed only on $48,500, which can help lower your tax bill,” Horton said.

“The money in your traditional 401(k) grows tax-deferred. This means the IRS won’t tax your contributions or growth until you begin payouts in retirement. Even then, you’ll pay taxes only on the money you withdraw.”

And the Roth 401(k)s? They’re similar to traditional 401(k)s but with a couple of caveats.

“Similar to a traditional 401(k), as long as the money remains in your account, you don’t pay taxes on the investment growth. When you begin taking distributions after retirement, they’re tax-free since you’ve already paid the tax upfront,” Horton advises, but cautions consumers to pay attention to what type of “Roth” you sign up for.

“Unlike Roth IRAs (which are different from Roth 401(k)s), there are no income limits on a Roth 401(k). So, you can contribute even if you’re a high earner. But the downside is that not all employers offer this kind of account.

“If you’re young and know you’ll likely be in a higher tax bracket come retirement, it may be smart to use a Roth 401(k) and pay those taxes upfront. But if your employer offers a great matching program, it may make more sense to invest your money in a traditional 401(k) so you defer taxes on that money until retirement.”

401(k): Scam-prone or scam-free?

At the moment, ConsumerAffairs isn’t aware of any current 401(k) scams, but the possibilities always exist as scammers try to milk every possible investment fraud angle they can. And a 401(k) scam is likely in the works already.

Over the past year, investment fraud was again the costliest type of crime tracked by the FBI’s Internet Complaint Center (IC3). Losses to investment scams rose nearly 40% – from $3.31 billion in 2022 to $4.57 billion. The most vulnerable of those are consumers 30-49 years old.

Just so you know what to expect if a 401(k) scam is unleashed, some common 401(k) scams and risks you need to be aware of include:

Phishing attacks: Scammers will pose as a 401(k) provider or the HR department where you work (or did work). Their usual tactic is sending emails or texts designed to trick you into giving up your login credentials. If they gain your confidence, then they’ll try and steal funds or personal data.

Unauthorized distributions: In this trickery, fraudsters hack into your account and initiate unauthorized withdrawals or transfers of funds. This often goes unnoticed for a while, but if you have account alerts set up with your investment company, you might be able to monitor those changes more closely.

Beware of doubtful investment schemes: When it comes down to how much you’ll gain from a 401(k), many retirement advisers say that it’s typical for a 401(k) portfolio to produce an average annual return of 5% to 8%. If someone comes knocking, pitching you on an investment within your 401(k) that will produce more than that, it could be a scam, so be careful.

If you have a retirement savings plan, such as a 401(k) or IRA, you may be unaware of the vast changes that have been made to the rules governing these accounts.

The Secure Act 2.0, passed by Congress at the end of last year, contains at least 90 changes to retirement savings plans. Only a few will go into effect this year but more will take effect in 2024 and still more will become operative over the following three years.

Here are a few examples:

• In 2025, people of a certain age will be allowed to contribute more to their plans in the form of “catch-up” contributions.

• In 2026, the ABLE plans for the disabled will increase the age of disability onset from 26 to 46.

• In 2027, low-income savers will be eligible for a government match to their retirement plans.

Most significant changes

What changes are the most important for consumers to understand? Taylor Kovar, a certified financial planner and CEO of Kovar Wealth Management, says one of the most important changes is the increase of the Required Minimum Distribution (RMD) age from 72 to 75. 

“Simply put, this provides more time for your retirement savings to mature, which should result in a boost to your nest egg,” he told ConsumerAffairs.

The new law also introduces an automatic enrollment feature for 401(k) plans aimed at ensuring more employees contribute to their retirement savings right from the start. 

“While this is not required, and employees can choose to opt out, it's big a step towards fostering a more universal culture of saving,” Kovar said.

A lighter penalty

Another positive change is a reduction in the penalty for not taking the correct RMD. Currently, the penalty is 50% of the shortfall. The new law reduces it to 25% – just 10% if made up in a “timely manner.”

Retirement savers should consider one of the changes taking effect this year. In 2023, you can contribute an extra $7,500 per year if you are at least 50-years-old.

If you are between the ages of 60 and 63, you can make an additional catch-up contribution of $10,000 – or 50% more than your regular catch-up contribution, whichever is greater. 

Just getting started on a retirement savings path? Check out ConsumerAffairs resources here, here and here.

Though optimism is increasing that Republicans and Democrats will be able to agree on legislation to raise the debt ceiling, there is still the possibility they won’t. In that case, the U.S. government will be in default, unable to pay all of its bills.

While we’ve pointed out the impact that could have on Social Security recipients, economists say the ramifications for consumers in general and the U.S. economy would extend into many other areas. Consumers would be negatively affected on a number of fronts.

For example, people who have investment portfolios could see the value of their holdings drop sharply. As the early June deadline approaches, yields on Treasury bonds are already rising. That negatively affects current bondholders.

If you have money in a 10-year Treasury bond paying 2.5% and a default increases the rate to 5%, those 2.5% bonds are worth less, at least until maturity. Market analysts say stock prices would almost certainly go down significantly. In fact, an analysis by Moody’s Analytics says stocks could lose 33% of their value.

Housing would take a hit

The housing market, which has avoided a steep correction so far in the face of higher mortgage rates, might also be a casualty. A new report from Zillow predicts a government default could send the typical cost of a mortgage soaring by 22%. Yes, home prices might go down but mortgage rates would likely surge to 8% or higher.

"Home buyers and sellers finally have been adjusting to mortgage rates over 6% this spring, but a debt default could potentially raise borrowing costs even higher and send the market into a deep freeze," said Zillow Senior Economist Jeff Tucker. "Home values might not see a notable drop, but higher mortgage rates would severely impair affordability, for first-time buyers especially. It is critically important to find a solution and not put more strain on Americans who are striving to achieve their homeownership dreams."

Current homeowners might suddenly find it difficult to sell their homes. The Zillow analysis projects mortgage interest rates could peak at 8.4% in September in a default scenario. As a result, the housing market could freeze.

More layoffs

With the economic chaos unleashed by a default, the U.S. economy would slide into a steep recession. The wave of layoffs that has already hit a number of industries would only get bigger. 

So why would Congress play this kind of brinksmanship with so much at stake? Good question.

Pointing to the $31 trillion national debt, Republicans in the House have passed a bill that would raise the debt ceiling but would return government spending to its level at the end of December.

Democrats have rejected that, saying the debt ceiling should be raised with no conditions and with spending decisions addressed in separate legislation.