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.
Got a question about the mechanics of investing, how it fits into your overall financial plan and what strategies can help you make the most out of your money? You can write me at email@example.com.
When the COVID-19 pandemic first hit, most of us had little clue just how much everything was about to change.
In early March 2020, the World Health Organization and the U.S. government declared a health emergency. Within days, masks, toilet paper and disinfectants were in short supply. Businesses emptied out as former office dwellers traded in commutes and desk jobs for sweatpants and video conferencing.
Meanwhile, workers in grocery stores, public transit, trucking and janitorial positions found themselves on the “front line” of a war they never volunteered for. Students lost time in school while teachers and parents burned out at home. Those in the medical field faced dwindling supplies, exhaustion, trauma and illness while treating sick patients.
In the days, months and years since those initial lockdowns, millions of people fell ill with COVID. Most recovered, but Centers for Disease Control data show more than a million and counting lost their lives in the U.S., and almost 7 million globally. With medical interventions and the development of vaccines, we slowly learned to live with the virus, establishing a “new normal.”
Come May, the White House is expected to end its pandemic emergency. But COVID-19 still lurks in ever-shifting form, and some of the societal changes it spawned are likely here to stay. Here are just some of the ways the pandemic has altered how we work, spend, save, travel and live.
More: How did COVID-19 affect household finances?
It changed the way we work
Office workers don’t want to go back. As offices shuttered, employers figured out all their employees needed was an internet connection and a laptop to keep their businesses running.
City centers that were once bustling with commuters looked like ghost towns. From 2019 to 2021, the share of people working from home tripled, according to the Census Bureau’s American Community Survey. The data also showed the lowest percentage of workers commuting by public transportation ever. Postings for remote positions increased 457% from 2020 to 2021, according to LinkedIn data.
What was once a unicorn job perk had become the norm — at least for a little while. As lockdown restrictions lifted, some employers shuttered offices for good, while others began pulling employees back full-time or adopted a hybrid model.
Still, there are still more job seekers looking for remote work than employers will supply, according to October 2022 data from LinkedIn. It’s unclear who will win, but with unemployment at record lows, employers may need to bend to worker demand for flexibility.
It’s never been a better time to switch jobs. Countrywide shutdowns prompted unprecedented unemployment, which peaked at 14.7% in April 2020, according to Bureau of Labor Statistics data — the highest level it had ever reached since the U.S. began tracking.
As the nation began the arduous process of reopening over the next couple of years, employers had difficulty finding workers to fill spots, with the biggest challenges in the hospitality sector, Bureau of Labor Statistics data shows. Suddenly there were more than enough jobs to go around and that trend has persisted.
Today federal data shows unemployment is at a more than 50-year low. Meanwhile, quit rates have remained steady — a sign that workers feel safe switching jobs.
Women dropped out of the workforce, then made a comeback. As of the fourth quarter of 2022, 54.6% of women ages 16 and older were employed as compared with 55.7% in the same quarter of 2019 before the pandemic began, according to the Bureau of Labor Statistics. The percentage of women in the workforce dropped to its lowest point, 47.5%, in the second quarter of 2020. Even with rebounding employment, a gender gap lingers in the latest figures: Women lag roughly 11 points behind their male counterparts.
While not employed, women lost out on income, retirement savings and other crucial benefits that affected their personal finances. But, as they have reentered workplaces, women — especially those with young children — have benefited from a strong labor market, the reopening of schools and child care facilities, and vaccine availability.
See: Why women need different financial strategies than men: ‘Do not think this is an old white man’s game’
Workers retired early, then some un-retired. At the start of the pandemic, millions of U.S. workers were either homebound for the foreseeable future or forced to continue their jobs in challenging conditions. Many of those workers who were already nearing retirement decided to pull the trigger, leading to a boom in retirees — but not all of them remained out of the workforce for long.
By August 2021, an estimated 2.4 million workers had retired early or unexpectedly since the pandemic began, according to research from the Federal Reserve Bank of St. Louis. People retired for myriad reasons: Some workers had been able to shore up their savings during the pandemic and were able to stop working, while others simply fast-forwarded a decision they’d been planning to make in the next few years. Some opted to bow out instead of returning to unsafe or risky work conditions.
Retirement didn’t last long for some. Among those who retired during the pandemic, 27% of people returned to work because they simply needed a bigger nest egg to get them through their golden years, according to a report from Joblist, an employment listings and research site; 21% said they specifically returned to the workforce in response to inflation and the rising cost of goods.
More: How did COVID-19 affect household finances?
We stopped going places (for a while)
Travel tanked, then the world reopened and demand shot up. Airfares and hotel prices tanked in spring 2020 as folks paused travel. Travel sector workers lost jobs, revenues declined and some destinations shuttered completely, including Disneyland, which remained closed for 412 days.
Upon reopening, experiences changed. Hotels and airlines emphasized cleaning. Rewards programs extended elite status. Formerly strict cancellation policies eased. Prices stayed low throughout 2021.
But in 2022, travel roared back. By May 2022, travel prices hit record highs given inflation plus surging demand, according to Bureau of Labor Statistics data.
While costs have eased, they’re still higher than before the pandemic, consumer price index data show. But that’s not stopping travelers, as many tourism destinations reported record visitors in 2022 — and experts are predicting more travel records being broken in 2023, according to the Transportation Security Administration.
Also see: ‘An out-of-body experience’: The 2024 North American eclipse is shaping up to be the biggest 4-minute show of the decade
Credit cards adapted to a stay-at-home world as we turned to home projects, kitchen experiments and TV binges. Incentives were added or expanded to include online shopping, home improvement, streaming services or grocery deliveries. Dining rewards on credit cards specified takeout and delivery purchases as eligible. And, travel credit cards added nontravel options for earning and redeeming points.
Prices went up …
Everything got more expensive. Consumers armed with fatter paychecks and bolstered savings shopped for goods and renovated their homes. When lockdowns were lifted and travel reopened, they spent on restaurants, airline tickets and other services.
Global supply chain disruptions had trouble keeping up with demand, which led to higher prices for goods and services. Supply chains were snarled further by the war in Ukraine, beginning in February 2022, particularly when it came to energy prices.
Oil and fuel prices jumped worldwide, leading to peak high prices in June 2022. Oh, and all along there’s been an ongoing avian flu blowing up the price of eggs and poultry.
Inflation peaked at 9.1% in June 2022 — the highest rate in 40 years, according to Bureau of Labor Statistics data.
But that high didn’t persist for long. Slowly but surely, the inflation rate inched lower, and according to the most recent consumer price index (a proxy for inflation) the annual rate is now at 6.4%.
The car market turned upside down. Supply chain problems caused new car production to plummet, pushing more car shoppers to buy used vehicles. Because of sparse dealer inventory, car buyers ordered directly from manufacturers or shopped online. Vehicle shortages drove prices to historical highs. Three years later, the average new car price remains at nearly $50,000, and $26,000 for used, according to data company Cox Automotive.
While vehicle inventory is improving, car buyers now face auto loan interest rates at a 20-year high. In an attempt to find the best deal, more car buyers expect at least part of their car shopping and financing journey to be online.
See: Used car values are dropping. Here’s when forecasters expect prices to normalize
… so the Fed raised interest rates
Rates were raised. And raised again. And again. As inflation ballooned, the Federal Reserve began to take action in one of the only ways it could, by raising the federal funds rate. The intent behind raising interest rates is to increase the price of credit, which makes it more expensive for consumers to borrow money. As spending declines, demand lowers and prices deflate.
In September, Federal Reserve Chair Jerome Powell remarked that there was no “painless way” to lower inflation, and he meant it. The Fed raised the funds rate a whopping seven times in 2022 and once so far in 2023.
Inflation has started declining, with the current rate at 6.4%. But the Fed has a 2% target, so additional hikes are likely.
It changed the way we bought homes
The market was hot, then not so much. Spring 2020 saw the U.S. housing market at a virtual standstill, as many states deemed home buying and selling a nonessential service. But stay-at-home orders had many Americans itching to move, especially as mortgage rates headed downward thanks to the Fed’s emergency rate cut in March 2020.
As quarantines lifted and interest rates fell, investors and new buyers made big moves, even snapping up properties sight unseen. Many homeowners opted to refinance to historically low rates instead of putting their homes on the market. Competition for limited inventory heated up, and bidding wars, waived contingencies and cash offers became commonplace. Though mortgage interest rates went to record lows, skyrocketing home prices hammered affordability. Exhausted buyers began to experience burnout.
But it wasn’t dropping demand, lack of inventory or high prices that finally turned down the heat on the housing market — it was the Federal Reserve. Mortgage interest rates that were already trending upward rose quickly once the Fed began hiking rates in March 2022. By October 2022, rates for 30-year fixed-rate home loans had shot to 7.08% — more than four percentage points higher than the low they hit in January 2021.
See: Bad news for home buyers: Housing inventory remains low in America’s cities and towns.
It changed the way we save
Savings bulked up, leveled off and declined. While stuck at home, consumers weren’t spending the way they used to, and those who qualified received an infusion of cash via government stimulus checks. Those factors, combined with higher wage growth, led to historic levels of personal savings. Households accumulated $2.3 trillion in savings from 2020 through summer 2021, Federal Reserve data show.
Then inflation started eating away at the gains households had made. The current savings rates are closer to where they were in March 2008, according to Bureau of Economic Analysis data. And a February report from Vanguard Group shows an increase in 401(k) account holders dipping into their retirement savings in 2022 to cope with financial challenges.
But there are signs that personal savings could come back again: The rate of personal savings began a steady incline after hitting a 2.7% low in June 2022.
Credit scores improved. People were allowed to self-report positive rent and utility payments and medical debt got wiped out. Overall, credit scores increased.
Decreased consumer spending early in the pandemic and emergency financial measures gave people more breathing room to pay off debts. Mortgages and student loans went into forbearance, rental assistance programs were put in place and the government issued three rounds of stimulus checks.
In April 2020, the three major credit bureaus, Equifax
made free credit reports available to consumers weekly instead of annually. Weekly credit reports from AnnualCreditReport.com remain free through 2023. The bureaus started removing paid medical collections from credit reports in July 2022 and will exclude medical debt in collections under $500 beginning in the first half of 2023.
Related: ‘Americans are angry’: Consumer complaints about credit-reporting issues rose by 96% in one year
Rates on savings accounts and CDs skyrocketed. The inflation partly caused by pandemic-related supply chain disruptions has led the Federal Reserve to increase its federal funds rate multiple times in the last year. Banks and credit unions took their cue to raise rates, particularly online banks, which compete with some of the highest yields. The best rates on savings accounts and CDs are above 4% annual percentage yields as of February 2023.
Banks merged and closed branch locations. From March 2020 to September 2022, the number of FDIC-insured banks dropped by 370, according to Federal Deposit Insurance Corp. data. This decline coincided with a record number of bank mergers in 2021, continuing a decades-long trend of consolidation within the banking industry. In addition, from 2020 to 2021, banks closed more than 2,700 branches. The pandemic accelerated a trend toward more digital banking and less reliance on in-person banking, though branches remain important for certain segments of the population, including many small-business owners.
And it changed the way we spend
“Buy now, pay later” exploded as more people started shopping online. These payment plans, which typically divide a purchase into four equal installments with zero interest, became available virtually everywhere thanks to popular providers like Afterpay, Affirm and Klarna.
But government watchdogs have their doubts. In September 2022, the Consumer Financial Protection Bureau released a report on BNPL and hinted at impending regulation, citing the ease of overspending and a lack of consumer protections as top concerns.
Student loans became a political football
Borrowers are still in limbo. In March 2020, then-President Donald Trump froze federal student loan payments as an emergency pandemic measure. In the three years since, the White House has extended this pause — known as forbearance — no less than eight times. The reprieve is currently set to expire in the summer of 2023.
Meanwhile, the Supreme Court is evaluating the legal merits of President Joe Biden’s plan to cancel up to $20,000 in student debt per borrower. A final decision is expected by this summer. It’s unclear how the justices will rule, but it’s possible that borrowers will have to start repaying their student loans, with interest, without any cancellation.
Don’t miss: GoFundMe fundraisers for college tuition are up by more than 50% over last year
Stocks went on a wild ride
Retail stock trading soared. In 2020, we were stuck at home, scrolling on our phones, wondering what to do with our stimulus checks during a period of historic market volatility.
Many of us downloaded a brokerage app and started trading stocks. One of these apps, Robinhood, saw an increase in accounts of more than 120% between the end of 2019 and the end of 2021. Larger, more established brokerages also saw increases. Schwab, for example, saw a 140% increase in accounts in 2020.
Many people bought meme stocks, companies with a dedicated social media following among investors. Shares of GameStop rose from less than $1 in April 2020, to more than $80 in January 2021.
That party didn’t last forever — GameStop
shares are now below $20. But even though the growth in brokerage accounts slowed in 2022, it wasn’t reversed. So the meme stock craze may be over, but widespread retail trading appears to be here to stay.
The market had a two-year bull run. From the low of March 2020 to the high of December 2021, the S&P 500 index rose about 75%, led by tech companies.
But the rally didn’t last too far into 2022. High inflation prompted the Federal Reserve to start raising interest rates in March 2022, putting downward pressure on the stock market.
This, combined with supply disruptions due to the Russia-Ukraine war and fears about a looming recession, pushed the S&P 500 index down about 20% over the course of 2022. It has regained some ground in 2023, but it’s still too early to say whether the worst is over yet.
NerdWallet writers Amanda Barroso, Shannon Bradley, Sally French, Eliza Haverstock, Anna Helhoski, Randa Kriss, Melissa Lambarena, Alex Rosenberg, Lauren Schwahn, Cara Smith, Sam Taube, Spencer Tierney, Jackie Veling and Kate Wood contributed to this article. Email: firstname.lastname@example.org.
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