Passage of the Secure Act 2.0 brings retirement crisis into focus

While the concept of retirement has evolved over the decades, one thing that has not seemed to improve is the lack of preparation. Recent statistics and surveys paint a scary picture of an aging American population that does not understand the financial realities of retirement and lives with a lack of urgency for saving and investing for the future.

Adding to the dilemma is a disconnect from reality when it comes to the eventuality of declining health and a need for very expensive long-term care that can wipe out a retirement in a matter of months.

For example:

• People are not saving close to enough for retirement. 30% of people aged 55 or older have less than $50,000 saved for retirement, 55% have less than $10,000, and 33% have nothing saved for retirement.
• Social Security alone is not enough for retirement. More than half of people on Social Security rely on their monthly check for 50%-100% of their retirement income, but the average monthly benefit is $1,600. 74% of people expect to continuing working while in retirement.
• 70% of people aged 65 or older will need some form of long-term care in their lifetime, but 84% of people don’t believe the need for long-term care will happen to them – and if it does it will just be taken care of without any real understanding of the types of care and how to pay for any of it.

Unprepared America

American savings rates spiked in 2020 during the lockdown and stimulus period, but rates are returning to historic levels and people are feeling the crunch from inflation further eroding their ability to save and invest for the future.

The earlier people start to save for retirement, the longer they will have to benefit from tax-deferred compound growth in accounts such as 401(k)’s and IRA’s. For example, assuming an annual growth rate of 7%, money in a retirement account will double about every 10 years so someone who starts putting as much as possible in these accounts in their 20s has a huge advantage over someone who doesn’t start until they are in their 40s.

But not enough workers are taking advantage of employer sponsored retirement plans and too many that do are dipping into their retirement savings to help make ends meet. Almost half of Baby Boomers have now reached retirement age, and by 2025 the first of the Baby Boomers will start turning 80.

Secure Act 2.0

Understanding the growing retirement planning crisis in this country, Congress and the White House passed one of the most impactful laws a number of shortcomings for American’s addressing later-life financial security since the enactment of Social Security. The Secure Act 2.0 was signed into law on December 29,2022 and contains 92 new or modified provisions addressing retirement.

Among the key provisions of the Secure Act to help people better plan for retirement are:

• Automatically enroll employees in a 401(k) plan contributing 3% of their salaries and growing up to a minimum of 10% or a maximum of 15% (employees can opt-out). Companies with 401(k) plans pre-dating December 31, 2024 are grandfathered out.
• Catch up contributions for 401(k) and 403(b) retirement plans would increase for people age 50 and above and with an even higher level for anyone ages 62, 63, and 64.
• Age to start taking required minimum distributions (RMD) would increase to 73 in 2023 for anyone born between 1951-1959 and to 75 for anyone born from 1960 and after.
• People with student loans could receive employee matching contributions for their loan payments.
• Expanded access to LTCi and Annuities through retirement plans.

The annual 401(k) and 403(b) contribution limit is $22,500. The good news for workers in their 50s is that the Secure Act catch-up contributions increase allows them to contribute an extra $7,500 a year to their 401(k) or 403(b).

Workers between ages 60-63 can take advantage of an expanded catch-up contribution level of $10,000 starting in 2025. Workers 64 and older are not eligible for this expanded level but would be able to make catch-up contributions at the regular levels.

By increasing the amount for catchup contributions to $7,500 starting at age 50, this gives people who take full advantage of the higher limit a chance to save an additional $112,500 of pre-tax money by age 65.

Based on 2023 numbers, that means a person maxing out their 401(k) starting at age 50 until age 65 would put away $450,000 of pre-tax money over 15 years. If a person could get to around $500,000 saved in retirement accounts by age 65, that would put them well above the national average.

Combine that with Social Security and Medicare benefits, possible other income from assets such as home equity, and the ability to continue to generate income into retirement, a person could live at a reasonable level of financial security.

The Secure Act also increases the importance of Roth IRAs as a retirement savings vehicle by requiring these catch-up contributions to be made on an after-tax basis to Roth retirement account with any RMD requirements for these funds waived for the lifetime of the account owner. If a person owns a 529 College Savings Plan, that has been open for 15 years or more and has any excess funds in the account, they are now able to rollover up to $35,000 into a Roth IRA.

The Secure Act also encourages people to plan for long-term care with an annual $2,500 allowance from their retirement plans to pay for LTC insurance premiums that would not be subject to the 10% early distribution penalty tax, but this would be considered taxable income.

The rules for allowing use of annuities in retirement plans have been expanded to include deferred annuity options allowing individual and joint lifetime income riders, qualified longevity annuity contracts, and changes to how retirement plan distributions through annuities for individuals, spouses and family members is governed.

The provisions of the Secure Act go a long way towards addressing shortfalls in preparing for retirement for most workers because the best and most readily available way to save for retirement is with tax-deferred 401(k) and IRA retirement accounts. Every American should take full advantage of these enhanced retirement savings and investment vehicles to make sure they are able to build a secure retirement.

Chris Orestis, CSA President of Retirement Genius, is a nationally recognized financial, health/LTC, and retirement issues expert. He has over 25 years’ experience in the insurance and long-term care industries. Known as a political insider and senior issues advocate, In 2007 he founded Life Care Funding, in 2017 he founded the LifeCare Xchange, and in 2020 he founded RetirementGenius.com. He is author of the books Help on the Way and A Survival Guide to Aging. He has appeared in The New York Times, The Wall Street Journal, CNBC, and many other leading media outlets.