Susan Tompor: 4 retirement scenarios and how new legislation could help

May 31-- May 31--All across the spectrum, savers -- whether it's baby boomers or millennials -- are fretting about whether they'll really, truly ever afford to be able to retire.

So it should be no surprise that Washington is looking at some key changes as part of a bipartisan retirement bill called the SECURE Act -- or Setting Every Community Up for Retirement Enhancement. The bill passed the House in May and awaits action in the Senate.

Too often, of course, many people haven't saved up all that much.

It's estimated that about 48% of households age 55 and older had no retirement savings in 2016 (such as in a 401(k) plan or an IRA), according to a U.S. Government Accountability Office review.

When people are saving, many times their nest eggs won't go all that far especially if they end up living 10 or 20 years after they retire.

The average 401(k) balance was $103,700 in the first quarter of 2019, based on an analysis of nearly 17 million retirement accounts held through Fidelity Investments nationwide. After a fairly strong market early this year, that's up 8% from the end of 2018.

The average IRA balance was $107,100, a 9% gain from late 2018.

The averages don't take into account one's age. For example, the average for all millennial savers was $27,600 in the first quarter of 2019 and for all baby boomers was $192,800.

To be sure, some savers have gained ground ever since the financial fallout in 2009.

For example, the average 401(k) balance for baby boomers who have been in savings plans for the last 10 years straight is $357,200 -- up from $76,500 in 2009 for consistent savers, according to Fidelity's research.

By contrast, the average balance was $268,900 for Generation X savers who have been consistently investing for the past 10 years and it's $129,800 for millennials with longer-term savings habits.

But the bigger numbers apply to savers who are consistent. The averages are smaller overall when you include people who hadn't been saving in the account since the market hit bottom in 2009.

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Retirement nest eggs also fall short for people who may get sidetracked by job losses or big bills, perhaps even after borrowing from a 401(k) to cover emergency expenses.

Or others lose ground by working part-time or taking a job at a small company that doesn't even have access to a retirement savings plan on the job.

Here's a look at scenarios and ways that proposed legislation could address roadblocks for retirement:

1. Hey, there's no retirement plan where I work

Some smaller employers aren't offering retirement savings plans at all because they say it's too costly under current restrictions and rules.

As a result, the latest retirement bill attempts to create incentives and provide lower-cost solutions for small employers to address the retirement needs of their staff.

Small businesses would be able to band together to offer retirement plans to their workers through multiple employer 401(k) plans. The idea here is to "obtain more favorable pension investment results and more efficient and less expensive management services," according to the House Ways and Means Committee summary.

The bill would also offer increased tax credits for up to three years to help reduce startup costs for new plans.

And small employers could make it easier for workers to save.

Small employers would have a tax incentive to use automatic enrollment as part of the savings plans. Under auto enrollment plans, workers are automatically signed up to contribute a certain percentage of each paycheck unless they choose to opt out before money is taken out.

Depending on the plan, employees also may have a 90-day window after auto-enrollment begins to opt out by withdrawing contributions and earnings. They would owe income tax on those contributions and earnings, but would not be subject to a premature distribution penalty of 10%.

Of course, more people end up saving if they don't have to do anything to enroll. Automatic enrollment can nearly double participation rates among some groups of new hires, according to some studies. But in many cases, according to experts, the increases could be about 50% or lower.

And employers have a way to get you to save more over time, too.

As part of the SECURE Act, employers with auto enrollment could boost your savings rate over time to up to 15% of paychecks, instead of a maximum of 10%. If you won't take time to adjust your savings rate higher, the 401(k) could edge up your rate automatically to a max of 15%. (You can, of course, take action to opt out of the increase.)

Expanding coverage for smaller companies would help younger workers address some of their shortfalls in retirement savings, according to the Employee Benefit Research Institute.

In addition, a multiple employer type of plan could significantly shore up retirement savings shortfalls for people who work much of their lifetime for smaller companies that currently do not offer any retirement savings plans, EBRI noted.

Jack VanDerhei, research director at the Employee Benefits Research Institute, said employees who spend most of their careers at small companies that don't offer 401(k) plans are particularly vulnerable to seriously falling short on retirement savings.

Some could see at least a 25% increase in retirement savings after long-time careers if smaller companies offered 401(k) plans, he said.

2. I'm part-time and my 401(k) locks me out

Under current law, employers generally may exclude part-time workers -- those who work less than 1,000 hours per year -- from 401(k) plans.

For some women, this rule can be particularly troubling if they're trying to raise a family and limit their hours working outside the home.

Except in the case of collectively bargained plans, the bill would require employers maintaining a 401(k) plan to open it up to many long-term part-time workers who work at least 500 hours per year for three consecutive years.

3. I don't want to dip into savings after 70

Under current law, retirement savers typically must begin taking distributions from their retirement plan at age 70-and-a-half. The withdrawals are taxed based on your ordinary income tax rate if the contributions were made before taxes.

Retirement plans, after all, should be used to pay the bills in retirement -- not as a clever way to transfer savings to the next generation. But as many healthy people are living longer -- and many are working longer -- some argue it makes sense to have mandatory distributions begin to kick in later.

The bill would increase the required minimum distribution age for starting to withdraw some money to 72.

4. I'm afraid I will outlive my money

Employers could have an easier time and face fewer hurdles in offering annuities as an option in a 401(k) plan.

As a result, retirees could convert their savings into a steady stream of money each month for as long as the retiree lives.

"Guaranteed income helps protect retirees against running out of savings and helps those with 401(k)s and IRAs make optimal use of their benefits," said Mark Iwry, a nonresident senior fellow at the Brookings Institution. Iwry was responsible for national retirement policy and regulation of the private pension system while serving as senior advisor to the U.S. Secretary of the Treasury during the Obama Administration.

VanDerhei said longevity risk remains one of the great challenges for retirees.

Once people retire, they can run the risk of dipping too heavily into their retirement savings and running short of money as they age. Some could face living only on Social Security retirement benefits, if they have no other savings.

And the bill offers a new wake-up call: You'd get an idea on your 401(k) statement of how much money you might be able to get each month in retirement based on your balance. It's a number, of course, that could motivate you to save even more.

Contact Susan Tomporat 313-222-8876 or [email protected]. Follow her on Twitter @tompor. Read more on business and sign up for our business newsletter.

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