2022 Retirement Planning

If you have an IRA or 401 (k) retirement account and did nothing as the market went on a wild roller coaster ride, you probably did exactly the right thing. Despite wild swings in major market averages during the week, Wall Street is ending up about where it started.

But it took strong nerves for investors to hold the line. Stocks plunged during the week as major technology companies reported weaker-than-expected earnings. Amazon shares fell sharply on Thursday after the company reported lower earnings and tempered its outlook, dragging the market down with it.

Days earlier it was Meta, the parent company of Facebook, that tanked shares by reporting a second straight quarterly revenue decline and warned of another decline in the current quarter.

In particular, Meta’s Reality Labs division, which produces its VR headsets, lost over $9 billion in the first three quarters in its quest to build the metaverse.

The plunge prompted an emotional on-air mea culpa by CNBC’s stock-picking guru Jim Cramer, who told viewers in June to scoop up Meta shares saying it couldn’t go much lower. However, it did.

After all the carnage of the week stocks turned in a strong showing on Friday with the Dow Jones Industrial Average rallying over 800 points. It ended the week just about where it started.

Many market analysts say stocks have rallied lately because investors are becoming convinced that the Federal Reserve is preparing to “pivot” from its aggressive policy of raising interest rates, setting off a massive market rally.

Good news for retirement savers

For retirement savers, this week’s gut-wrenching market may have underscored the value of not making any sudden moves. Retirement savers with 401 (k) accounts actually got some good news during the week. Because of inflation, they can add more to their savings accounts.

The Internal Revenue Service is increasing contribution limits on 401(k)s and IRAs in 2023 to account for the rising cost of living. It coincides with the Social Security Administration’s previous announcement of an 8.7% cost-of-living adjustment for retirees next year.

In 2023, the annual contribution limit for 401(k)s, 403(b)s, most 457 plans, and Thrift Savings Plan is $22,500. That’s a $2,000 increase from the current year. If you are 50-years-old or older you’re eligible for “catch-up” contributions that exceed the $22,500 ceiling.

The amount of money Americans would like to have in their pocket before retiring has constantly gone up over the last couple of decades. In this era of high inflation, it’s taken a huge leap forward.

The Northwestern Mutual 2022 Planning & Progress Study found that when asked, Americans 18 years old and older estimated that needed to accumulate savings of $1.2 million before retiring. That’s a 20% increase over the 2021 study.

Yet despite that lofty goal, the study found Americans are actually now saving less for retirement. Americans' average retirement savings has dropped 11% – from $98,800 last year to $86,869 now. The age at which they expect to end their working days is now up to age 64, an increase from 62.6 last year.

Sign of the times

Christian Mitchell, executive vice president and chief customer officer at Northwestern Mutual, says the rising retirement savings goal is probably a sign of the times.

"It's a period of uncertainty for many people, driven largely by rising inflation and volatility in the markets," he said.  "We've also seen upticks in spending year-over-year not only as a result of inflation, but also as people have resumed a sense of normalcy in their lives following the earlier days of the pandemic. These factors are leading many people to recalibrate their thinking about how much they'll need to retire and how long it will take them to get there."

But if you’ve only saved an average of $86,869 for retirement can you really get to $1 million by retirement? Experts say you can if you start early enough and maintain discipline.

Many financial advisers suggest saving and investing up to 15% of your salary. According to CNBC, you can retire with $1 million if you invest about 9% of a salary of $70,000 before age 30 and the money earns an average of 6%. 

The longer you wait the more you will need to invest. If you are in your 40s you may need to sock away as much as 25% of your salary each year.

Other potential income

But the goal of $1.2 million in a retirement fund assumes that the retiree will no longer have any other income once they stop working. Today, many people who retire continue to work part-time at jobs they enjoy. Some even start second careers, earning a paycheck long after they’re “retired.”

"It's one of those questions on so many people's minds – how long should I expect to work in order to save enough for retirement?" said Mitchell. "It's really difficult to answer because there are all kinds of considerations to factor in. But too many people grapple with it in a bubble. With greater clarity you can make a more confident call and getting professional advice can provide that clarity."

Seniors will get some inflation relief in 2023 when monthly Social Security benefits will increase by 8.7%. The Social Security Administration estimates the average Social Security payment will increase by more than $140 per month starting in January.

The cost of living adjustment (COLA) will benefit more than 65 million Social Security retirement benefit recipients, as well as 7 million SSI beneficiaries. The increase was calculated based on inflation data for July, August, and September.

As an added benefit Social Security recipients won’t see an increase in the amount of money deducted from the monthly payment to cover Medicare premiums. Not only are premiums not going up in 2023, but they’re also falling by 3%.

“Medicare premiums are going down and Social Security benefits are going up in 2023, which will give seniors more peace of mind and breathing room,” said Kilolo Kijakazi, acting commissioner of the Social Security Administration. “This year’s substantial Social Security cost-of-living adjustment is the first time in over a decade that Medicare premiums are not rising and shows that we can provide more support to older Americans who count on the benefits they have earned.” 

How to calculate the new benefit

Kijakazi released the video below to explain how to sign up for a My Social Security account to calculate the amount of each individual’s new benefit.

Those who don’t register for an account will be informed of their new benefit in early December, with the first increased benefit payment occurring in January.

Another way to determine the new benefit amount is to multiply the current monthly benefit by 1.087%.

The August Consumer Price Index (CPI) may prove to be a double whammy for people on Social Security. Not only is inflation continuing to erode their buying power, but it might also produce a lower than expected Social Security cost of living adjustment (COLA) next year.

The Senior Citizens League (TSCL) has revised its estimate for the 2023 COLA and has reduced it from its earlier 9.6% to 8.7% – which would still be the largest increase in decades.

The problem, says Mary Johnson, TSCL’s Social Security and Medicare policy analyst, is that the Social Security COLA is not based on the CPI, but rather the CPI-W, which declined last month. CPI-W is a monthly measure of the average change over time in the prices paid by urban wage earners and clerical workers for a market basket of consumer goods and services.

“After evaluating the August consumer price data, what I’m finding clearly illustrates the weakness in our inflation adjustment system for Social Security,” Johnson said in an update to members.

CPI-W went down last month

She notes that while the Labor Department’s CPI went up 0.1% in August, the CPI-W decreased by 1.10 percentage point year over year to 8.7%. Johnson said that reduction will likely have a big impact on Social Security recipients. She offered a quote from a longtime reader of her newsletter.

“There’s a “progressive loss of buying power of 40%, despite the SS COLA, since 2000,” the retiree wrote. “(That’s) 10% from 2021-2022 alone. This means we have lost (almost) half our real income in face of COLAs.”

Another headwind for people who depend on Social Security is the rising cost of health care, which will rise even faster in an inflationary environment. Medicare premiums will undoubtedly increase in 2023 and are deducted from seniors’ Social Security payments.

Greater emphasis on gasoline prices

Johnson says one of the biggest issues in using the CPI-W to calculate the Social Security COLA is the fact that it does not track the spending of retired households aged 62 and up and gives greater weight to gasoline and transportation costs. 

“A significant drop in gasoline prices (in August) played an outsized role in why my COLA estimate has dropped,” Johnson said. “It’s important that the public understand that to fight inflation the administration temporarily lifted the 18.3 cents per gallon federal tax on gasoline for 90 days. That period started in July and ends in September, the same third quarter period that is used to calculate the COLA.”

Johnson said Social Security recipients don’t typically buy a lot of gasoline since they are no longer commuting the work. Rather, she says seniors are more likely to spend on healthcare, housing, and food – all of which went up a lot in August.

Fidelity’s announcement that it will allow investment in Bitcoin in its 401(k) retirement accounts has set off alarm bells at the U.S. Labor Department. Top officials there expressed their worries within hours of Fidelity’s announcement.

“We have grave concerns with what Fidelity has done,” Ali Khawar, acting assistant secretary of the Employee Benefits Security Administration, told the Wall Street Journal.

Khawar is the government official in charge of the Labor Department group that regulates 401(k) retirement plans provided through an employer. These plans, while conservative by nature, are designed to be stable and grow steadily over the employee’s career.

He told the Journal he’s concerned about Bitcoin’s speculative nature – the value can fluctuate by tens of thousands of dollars – but also about what he calls hype and the belief among some that you “have to get in now because you will be left behind otherwise.” 

In its announcement on Thursday, Fidelity said its digital asset accounts will limit Bitcoin investments to no more than 20% of a portfolio. Some Bitcoin enthusiasts hailed the move, saying it could persuade younger workers to invest for retirement.

Henry Yoshida, CEO of Rocket Dollar, a self-directed Roth IRA / Solo 401(k) platform, told ConsumerAffairs that he believes Fidelity's move “has essentially established Bitcoin and cryptocurrency as mainstream.” He says he is interested to see how many employers adopt the plan for their employees.

Looking out for workers

But in his interview with the Wall Street Journal, Khawar said the Labor Department has a responsibility to ensure employer-sponsored retirement plans are in the long-term best interests of participants.

“For the average American, the need for retirement savings in their old age is significant,” Khawar said. “We are not talking about millionaires and billionaires that have a ton of other assets to draw down.”

Fidelity, meanwhile, is defending its new offering. In a statement, the company said its new digital asset account “represents the firm’s continued commitment to evolving and broadening its digital assets offerings amidst steadily growing demand for digital assets across investor segments, and we believe that this technology and digital assets will represent a large part of the financial industry’s future.”

Fidelity Investments has launched what it calls the Fidelity workplace Digital Assets Account (DAA), which will allow people to invest a portion of their 401(k) retirement savings in Bitcoin. 

MicroStrategy immediately announced that it will be the first employer to offer the plan later this year. It will be available broadly to most employers by the middle of this year.

Under the plan, employers will be able to offer their employees access to Bitcoin through an investment option in their core 401(k) retirement plans on Fidelity’s platforms. Fidelity began exploring digital assets in 2014 and launched its first commercial offering four years later.

Adding Bitcoin to retirement accounts is another step toward embracing digital assets. Despite the digital currency’s recent volatility, many financial experts see it as a natural step in retirement planning.

"We believe that many investors are already using 'self-directed brokerage' features of their 401k plans to add Bitcoin and other crypto exposures through inefficient vehicles such as mining-focused ETFs and grantor trusts holding coins or futures contracts,” Dan Hoover, director at Castle Funds, told ConsumerAffairs. “The addition of an efficient option such as Fidelity’s is an important step in opening efficient access to Bitcoin and crypto to these investors." 

Investments could reduce Bitcoin volatility

Hoover says his company’s research suggests that small allocations to Bitcoin can greatly reduce overall portfolio volatility when added to traditional stock-and-bond portfolios.

Chris Kline, COO and co-founder of Bitcoin IRA, believes Fidelity is ushering in what he calls “one of the greatest adoption moves for digital assets that we’ve seen in its short history.” He says the action could have a major impact on the future of cryptocurrency.

“While this may not be having a direct effect on the price of Bitcoin and other crypto’s today, it can certainly act as the catalyst for a rally later this year,” Kline told us. “In addition to this exciting news, I think we’ll see Elon Musk make crypto more accessible across Twitter, which will also help with the widespread adoption of crypto.”

Digital assets gain value

Bitcoin moved higher on the news, rising 1.42% in Wednesday’s trading. Kline said “trillions of dollars” could flow into crypto markets as a result of Fidelity’s action, especially if it captures the attention of younger workers.

 “Ultimately, part of the retirement crisis we have in this country is due to lack of participation in 401(k)’s,” he said. “This move could be a way to get gen z and millennial workers engaged through their employer-sponsored plans.”

Fidelity said it did its homework before adding the investment options. The company cites research showing that 30% of U.S. institutional investors surveyed would prefer to buy an investment product containing digital assets.