2023 Retirement Planning

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.

If you are in your 40s or 50s and looking forward to retiring in a few years and drawing Social Security, there’s something you should know. Unless Congress acts to add to the Social Security trust fund, benefits will be slashed by 25% or more as early as 2035.

Estimates vary but at its current pace, the Social Security trust fund will run short of money at some point in the early 2030s. According to the Social Security Administration (SSA), the Social Security Board of Trustees projects program costs to rise by 2035 to the point that taxes will be enough to pay for only 75% of projected benefits.

If Congress doesn’t address the issue before then – which would almost certainly require some type of tax increase – benefits for everyone receiving Social Security would be cut, probably by at least 25%.

“This increase in cost results from population aging, not because we are living longer, but because birth rates dropped from three to two children per woman,” SSA explains on its website. “Importantly, this shortfall is basically stable after 2035; adjustments to taxes or benefits that offset the effects of the lower birth rate may restore solvency for the Social Security program on a sustainable basis for the foreseeable future.”

That’s reassuring for many people, but it depends on lawmakers in both parties coming to some kind of agreement. In this hyper-partisan atmosphere, how likely is that?

‘No choice’

“My political calculus tells me that Congress has no choice but to enact the necessary provisions to increase the trust,” Terrell Finner, director of fundraising at Sole Strategies, a political action group, told ConsumerAffairs. “A reduction in Social Security benefits would burden our most vulnerable citizens and send the economy into a downward tailspin.”

In fact, there is evidence that some key members of Congress have quietly begun work on finding a solution. President Biden has also backed proposals to raise revenue by making more of taxpayers’ income subject to the FICA tax, which supports Social Security and Medicare.

Currently, the government stops taking out the FICA tax after a wage-earner has earned $162,000 in one year. Biden has proposed expanding that to $400,000. Treasury Secretary Janet Yellen has said she supports increasing revenue for Social Security but believes cuts in entitlements will also be part of the formula.

According to The Hill, Sen. Bill Cassidy (R-La.) and Angus King (I-Maine) are trying to craft a compromise that could win votes from both sides of the aisle in a narrowly-divided Congress. One of the proposals reportedly includes establishing an investment fund to contribute to the trust fund.

It’s been done before

As recently as 1982 Republicans and Democrats successfully worked together on a compromise to shore up the retirement fund. In 1983 President Reagan signed legislation that increased the Social Security and Medicare tax rate while also delaying when annual cost of living adjustments (COLA) kicked in.

So it’s possible that over the next decade, Congress can find a way to maintain Social Security in its present form. As a hedge, Finner suggests people approaching retirement maximize their savings.

“It could take months or years to come to an agreement on Capitol Hill,” Dinner said. “I would highly advise folks in their 50s should start taking precautions to position themselves to holdover in the face of a potential fallout over a limited benefit.”

Finner says socking away as little as 3% of their current income each year could guarantee financial safety “in the unlikely event of a cliff.”