You have to make a lot of decisions when you retire, and among the biggest is what to do with your workplace retirement savings. No matter how much money you have or how you intend to invest it, you have to first choose where your nest egg will live.
You have four basic choices.
Remain in your employer’s plan and just let the money grow until you have to start taking the required minimum distributions (RMDs).
Remain in your employer’s plan while taking installment payments.
Roll over the assets to an IRA at an institution of your choosing.
Take the account balance in cash and pay tax on the distribution to either spend it or roll it into a Roth IRA.
The good news, according to recent research from Vanguard, is that most people faced with this decision over 10 years, from 2011 to 2021, were able to preserve their retirement dollars. Seven out of 10 kept their assets in a tax-deferred environment, and 90% of the money stayed invested, and presumably, grew a bit. Average balances ranged from $239,300 to $418,900.
“More and more investors are on the right road to having a good experience with accumulations. We’re seeing improvements,” says Matt Brancato, chief client officer for Vanguard Institutional.
But, Brancato adds, “the average doesn’t tell you about individual experience.”
And for that, you have to look at some of the less good news, which is that Vanguard found that 30% cashed out their savings at age 60 or later, most with smaller balances. The average amount of these accounts was $39,700. Some had likely simply saved less, and some had been with the company plan for a short time, so had not accumulated a large amount.
The peril of cashing out
Cashing out a small balance might seem inconsequential to you at the time. The account could be one of many that you have, and the tax burden might not seem too much for you to bear. Or you could be intending to pay the income tax due on the distribution and roll the money into a Roth IRA in a conversion. Or the cash might be enticing – and then it’s gone.
“First of all, ‘small’ is a relative term,” says Brancato. “The dollar amount has to be proportionate to the intent. It’s a highly individualized decision.”
One important step if you’re thinking of cashing out is to consider how the amount involved could possibly grow over time and add to your retirement income later on. If your balance is $39,700 now and you think that isn’t much, it could be $78,000 in 10 years, if it grows at 7%.
At Ascensus, another large retirement plan administrator, they display those numbers to people when they initiate a decision that would impact their retirement savings, like reducing their 401(k) contribution. “We serve up a very quick estimate to connect the dots between what seems like a small amount to a much larger amount of money you’d forgo in retirement as a result,” says David Musto, CEO of Ascensus. After seeing that information, “30% of people ultimately choose not to reduce 401(k),” he adds.
That same kind of information may also help people make a decision between staying in their workplace plan after retiring or moving the money to a rollover IRA. While most eventually move money over to their own account within five years, Vanguard’s study shows that the numbers are shifting up for those staying in their workplace plan even after they retire.
Brancato sees the driver of that being flexible plan design, advice and financial-wellness tools that may be part of an employer package. If you want to tap into your money before you have to take RMDs, for instance, your plan would have to allow it, and Vanguard notes that the number of plans offering this nearly doubled in the past five years.
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As the Supreme Court debates President Joe Biden’s student-loan forgiveness plan, Americans’ consumer debt continues to rise — and more of it is past due.
For Shanna Hayes, 34, who was recently laid off from a tech-sector job, it might mean incurring more debts along her roughly $150,000 in undergraduate and graduate school loans. “Something would have to not be paid, or we would have to use credit cards to cover groceries,” she told MarketWatch.
Hayes and her wife have planned a budget — including the $430 monthly payments to private student loans she never stopped paying — as she searches for work. Resumed payments without a job could push that spending plan to the breaking point, especially without slightly smaller loan balances.
“It likely would mean there’s not enough money to pay all of those things because there’s barely enough money to pay them all right now. And so it would likely mean something would have to give,” she said.
Hayes was the first person in her family to get a college degree, and her graduate degree was an effort to boost her pay from her then-job when she earned roughly $29,000 salary as a high school math teacher.
Loan forgiveness would bring her closer to her original outstanding loan before interest accrued. It would also give her hope to pay down the debt. “It would give me the ability to say this is possible, and one day I will be able to get there.”
“Now we are just in the waiting game, which I think is difficult for folks like me and student-loan borrowers,” Hayes said a day after court arguments.
Supreme Court justices this week heard two challenges to Biden’s loan forgiveness plan that would cancel up to $10,000 for many eligible borrowers and up to $20,000 for Pell grant recipients. Questions from the bench hinted that the court’s conservative-leaning majority could be ready to strike down the plan.
If it chose to vote in favor of the plan, it would be “the largest mass discharge of consumer debt in modern history,” according to researchers at the Federal Reserve Bank of New York, who estimate that $441 billion loans could be eligible for relief and the eligible debts of almost 40% of federal borrowers would be wiped clean.
“Supreme Court justices this week heard two challenges to President Biden’s plan that would forgive up to $10,000 for many eligible borrowers and up to $20,000 for Pell grant recipients.”
When measuring the ratio of forgiven debt to the underlying balance, the people who stood to gain the most tended to be younger, have lower credit scores and live in lower-income areas, they noted in a January report.
There’s a lot at stake. More than 43 million borrowers have $1.6 trillion in student-loan debt, with payment obligations on hold since March 2020. After eight extensions, payments are scheduled to resume as late as August, the administration says.
By the end of last year, Americans amassed $16.9 trillion in household debt, which includes mortgage debt, according to New York Fed numbers. What’s more, Americans’ $986 billion in credit-card debt has now surpassed pre-pandemic levels.
There are signs that rising prices and interest rates are squeezing American pocketbooks. Serious delinquencies — counted as at least 90 days behind — increased for almost all forms of household debt compared to a year ago. The share of debt that’s now becoming seriously behind is bouncing off “historically low” levels.
However, student-loan debt stayed essentially flat in the fourth quarter.
During the fourth quarter of last year, New York Fed statistics show 1% of student-loan debt was at least 90 days behind. During 2019’s fourth quarter, more than 9% of student-loan debt was in the same bucket.
Without loan forgiveness, supporters and critics differ on how bad Americans’ debts and delinquencies could get. Other observers say any lack of debt relief will likely foreshadow deepening consumer indebtedness.
The administration has maintained that it has the legal authority to introduce a student-loan forgiveness plan, using a 2003 law entitled the HEROES Act. That law gives the Secretary of Education power to waive or modify provisions related to student aid in national emergencies — in this case, the COVID-19 pandemic — so that borrowers won’t be left worse off by the situation.
“If that forbearance ends without further relief, it’s undisputed that defaults and delinquencies will surge above pre-pandemic levels,” Solicitor General Elizabeth Prelogar told the Supreme Court judges on Tuesday, according to a transcript of the arguments.
“Opponents of the loan forgiveness say Biden is wrongly stretching statutes and government coffers in order to fulfill a campaign pledge he made when he was the Democratic nominee for president. ”
But opponents of the loan forgiveness say Biden is wrongly stretching statutes and government coffers in order to fulfill a campaign pledge he made when he was the Democratic nominee for president. That includes six, Republican-led states, Nebraska, Missouri, Iowa, Arkansas, Kansas and South Carolina.
Given that worst days of the coronavirus pandemic appeared to have passed, the justification for the HEROES Act is “even more tenuous,” Nebraska Solicitor General James Campbell said in court. The Biden administration and its education secretary, Miguel Cardona, “asserts a breathtaking power, to do anything that he thinks might reduce the risk of borrowers defaulting, even years after a national emergency arises,” he said.
Arguments focused on questions surrounding standing and interpretations of the 2003 law, but the economic backdrop occasionally surfaced.
At one point, Justice Sonia Sotomayor, part of the court’s liberal wing, pressed Campbell on why judges should intervene.
Many borrowers were in a tight spot, she said. “Their financial situation will be even worse because once you default, the hardship on you is exponentially greater. You can’t get credit. You’re going to pay higher prices for things. They are going to continue to suffer from this pandemic in a way that the general population doesn’t,” she said, according to a transcript.
So why should judges make this decision instead of education department officials who are closer to issue, she wondered. Campbell responded there are “statutory clues showing that Congress didn’t intend the creation of new loan discharge programs.”
How bad could it get?
Last year, approximately three-quarters of borrowers making regular payments said they could resume paying in full whenever the pause stopped, according to one study from researchers at the Federal Reserve Bank of Philadelphia. Even in this group, 20% said those payments were unaffordable, according to researchers working with survey data from more than 13,000 borrowers.
Half of the loan holders said they had steady jobs with one employer for at least a year. The other half said they went through some job switching or disruption amid the pandemic.
More recently, early delinquency from credit-card debt and car loans offer clues, according to New York Fed researchers. After dipping early in the pandemic, transitions into delinquencies over 30 days have been increasing since early 2022 — especially for borrowers eligible for debt relief.
It’s an open question how many more people will tip into debt and past-due bills, but credit-reporting agency TransUnion
figures offer more context into the health of consumers’ finances.
Working with 2022 first-quarter data, 18% of borrowers who also had a mortgage would see a projected $500 monthly increase in their student-loan payments whenever they resume. Meanwhile, a projected 15% of borrowers without a mortgage would see a $500 increase, according to Michele Raneri, vice president of research and consulting.
There’s a “substantial chance” more consumers could fall behind without loan forgiveness, said Ankit Kalda, a professor at Indiana University’s Kelley School of Business, where he focuses on household finances and behavioral economics.
But it’s tricky determining how bad it will get because of the economy’s mixed signals.
Employment and debt delinquency are closely tied, Kalda noted. The 3.4% jobless rate for January marked a five-decade low. At the same time, however, wages have had a tough time keeping up with inflation.
Now mix in three years of spending habits formed while student-loan payments were sidelined, Kalda said. Then bring on “this added layer of expectation” of debt relief that might make some people mentally mark the money elsewhere. “Moving out of that habit of consumption is always difficult,” he said. “If those expectations are way off, you might see more defaults.”
It’s “ridiculous” for the administration to contend that cancellation is needed to get borrowers in a better spot, said Marc Goldwein, senior vice president at the Committee for a Responsible Federal Budget, a think tank that’s argued against student-loan cancellation.
“The kernel of truth here is that it will be a tough adjustment to go from three years of not making payments to making payments again. But that’s the fault of the pause itself.”
The pandemic has been rough on households, but the think tank’s researchers are skeptical that people are actually worse off after rounds of pandemic-era cash payments like stimulus checks and child tax credit advances — in addition to a favorable job market.
In the last three years, “we have been focusing on just trying to rebuild some of the basic necessities of our life,” said Ayana Clark, 28. But the costs continue for Clark, a single mother of two young boys.
With approximately $76,000 in student loans, Clark’s payments were just about to start coming due before the pause. There’s a possible $763 payment she will have to make on her student loans when they resume.
She worked as a community advocate and executive assistant for Rep. Bobby Rush, a Democrat from Illinois before he retired at the end of last year. Clark ran for a seat in Chicago’s City Council but came up short in Tuesday’s elections.
Now she’s looking for her next career move, aiming to find something in government or community-based work. If the Supreme Court strikes down Biden’s student-loan forgiveness plan, Clark hopes that changes in income-based repayment rules can lighten her monthly debt obligations.
“If not, I’m nervous about where I will be financially,” Clark said. “This decision will impact myself and my children for years so I’m holding my breath to see what happens.”
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