Evans Wealth Management Blog

Articles written by Evans Wealth Management are designed to educate clients & potential clients on concepts important to their financial future.

The Impact of the Coronavirus on Current and Future of Social Security Recipients

In October, the Trustees of the Social Security fund will release the Cost of Living Adjustment (COLA) for 2021. The COLA increases Social Security benefits to offset the general rise in prices experienced over the last year. With an economy still suffering from the effects of the pandemic, the COLA is predicted to be flat (0%). The following is the rationale.

The Coronavirus lockdowns have caused widespread unemployment and lower wages for many that are working. Because few left their homes over the past few months, aggregate spending decreased. To encourage consumers to spend during the early phase of the recovery, many firms are relying on discounts to attract consumers to their businesses. The falling prices will likely lead to a decrease in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W).

To calculate the COLA, the trustees will average the rate of change between the third quarters of 2019 and 2020 based off the CPI-W. As you may recall, 2019 was a year of tremendous economic growth for our country. While the economy appears to be on track for a reasonably paced recovery, many economists expect pricing relative to last year to be weak.

A low COLA for the next year would result in little to no increase in current retiree social security checks and lessen the full retirement benefit (PIA) calculation for retirees in the future. The latter happens because their AIMEs would not be multiplied by rates as high as normal, resulting in a lower PIA. Those nearing or in retirement should factor this into their planning for 2021 to avoid an unexpected surprise.

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6 Factors Anyone Out-of-Work and Over 62 Should Consider Regarding Social Security

To many who are out-of-work and over 62, claiming retirement seems like a viable solution to financial problems amid Covid-19. However, a rushed decision to do so may limit Social security benefits and sacrifice long-term goals for retirement and beyond. Here are six factors to consider when making this decision:

  1. Communicating with the Social Security Administration. Much of the process for applying for Social Security can be done online, despite the closing of the Social Security offices. The phone lines are open; however, there are long wait lines for the phone service and SSA workers may be calling from a private cell phone at home. Therefore, be careful of scammers. No SSA worker will ever make threats or demand payment.
  2. The Decision for the Higher Earning Spouse. The higher earning spouse is frequently advised to claim benefits at age 70 in order to maximize the income they will receive. A maximum earner who lives to age 85 would earn approximately $238,000 more in lifetime benefits waiting to age 70 as compared to claiming at age 62. However, this does not suggest the lower-earning spouse should not claim early. The early-claiming reductions to the benefit are not significant, and it may be a good strategy to combat current financial needs.
  3. The Earnings Test. The Earnings Test does not impact those who have lost their job, but those under the full retirement age who are working will lose $1 in benefits for every $2 of annual income made over $18,240. However, those who make less than $1,520 each month after starting benefits will receive no reduction in benefits.
  4. Going Back to Work. Those who are laid off and begin the application process are able to withdraw their Social Security application during the first 12 months if they go back to work. This would allow them to start the process over when reaching full retirement age to maximize benefits. However, another strategy would be to not withdraw the application and suspend benefits until full retirement age. This will allow you to build 8% in annual delayed credits to age 70.
  5. Primary Insurance Account (PIA). On the Social Security statement, the benefit amounts assume constant earnings until claiming age. A decrease in earnings from a job loss or other factor will cause one’s actual PIA to be lower than the PIA on the statement, causing a slight reduction in earnings.
  6. Medicare. Those over age 65 who receive Social Security are automatically enrolled in Medicare Part A. This may be beneficial during the pandemic as the first 60 days of hospitalization and a $1,408 deductible is covered. The downside is that one would be unable to contribute to a Health Savings Account (HSA). If you return to work where a HSA is in the health plan after enrolling in Social Security and Medicare Part A, they would need to disenroll from Medicare.
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Effects of the Virus on Spending Patterns

Significant changes in lifestyle have materialized as a result of the Coronavirus. One large change you may not have been aware of is a change in spending patterns. Here are the winners and losers resulting from the Coronavirus-influenced spending patterns:

Winners:

Sales in food and beverage stores increased an astounding 25%, achieving one of its highest sales gains on record. General merchandise and health and personal care sales were also close to historical records, but the gains were much more modest. Online shopping sales increased slightly.

Losers:

Clothing sales have been hit the hardest out of all retail sales, decreasing by 50 percent, the worst decline in decades. Furniture sales and bars and restaurants observed a 26 percent decrease in sales, also the worst in decades. Even autos and parts dealers and sporting good sales have declined by over 20 percent. Gas stations are seeing their second worst sale decline on record.

With spending patterns disrupted, it is an opportune time to reassess existing habits. What have you missed during this period of being inside? What have you been able to do without? Your answers to the former question are likely to lead you toward what you truly value. As life begins to normalize, the latter group of items and activities make good targets for permanent postponement.

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The CARES Act and Your Retirement Accounts

Last month, the Coronavirus Aid, Relief, and Economic Security (CARES) Act was signed into law. It was designed to provide liquidity to those impacted by the current economic decline as a result of the coronavirus. If you have been impacted, rules have been relaxed for your benefit. Here’s a breakdown of some of the provisions related to retirement accounts.

  • All required minimum distributions (RMD) for retirement savings accounts have been suspended for 2020. It means, for those over 70 ½ years old by the start of 2020, you are not required to withdraw from your accounts. This includes all defined contribution plans such as IRA, 401K, 403(a), 403(b), and 457(b) accounts. This rule is designed to allow your account value to recover before withdrawing from it.
  • If you have already taken RMDs for the year, you are able to roll some of them back into the account. Previously, RMDs were not eligible for rollover. However, with the CARES Act changes, amounts withdrawn can be rolled back into the account within 60 days of receipt. With that said, the account holder must comply with the one-per-12 month limitation applying to IRA rollovers. Non-Spouse IRA beneficiaries are not eligible to take advantage of this change.
  • For IRA beneficiaries who opted for the 5-year rule, a one-year extension has been granted effectively making it a 6-year rule.

The above provisions apply to all retirement account owners whether impacted by the virus or not. However, for those who had the coronavirus, depend on someone with it or in some other way experienced adverse economic consequences due to it, the following are specific provisions for you.

  • Coronavirus Related Distribution. For those under 59.5 years, the 10% early distribution penalty has been waived. You can withdraw up to $100,000. While your distribution will be taxable, you can spread the income over a three-year period after the first taxable year for the distribution. The distribution can be rolled back into the account over three years, also.
  • Employer Plan Loans. Those with employer-sponsored retirement plans have always been able to borrow fifty percent of your vested balance or $50K from the account (whichever is less). The CARES Act allows borrowing of up to $100K for loans made up to 180 days after March 27, 2020.

The hope is you are only being inconvenienced by the virus. However, for those experiencing hardship due to it, the above and other CARES Act provisions should bring a level of stability to your situation. You are encouraged to consult your financial or tax professional before taking advantage of any of the above provisions as many involve complexity.

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From March Madness to Market Madness

Each year, basketball fans look forward to the NCAA Basketball tournament and the time of year affectionately called, March Madness. However, this year it was cancelled and replaced by market and economic madness brought on by the coronavirus. In short-order, millions have lost their jobs, businesses are on the cusp of distress and investors are experiencing the fastest peak-to-bear market decline in history. While the virus is disrupting our daily life in many ways, there is hope.

  • The Fed has cut the Fed Funds Rate by 100 basis points to 0.25%. Additionally, they plan to reintroduce quantitative easing (QE) by buying $500 million in Treasury bonds and $200 billion in mortgage-backed securities. These actions are meant to ease the strains on the global funding markets.
  • Congress has also acted by passing a fiscal stimulus bill worth an estimated $2.2 trillion. It includes loan guarantees to small businesses, checks to consumers, suspension of federal loan payments and many other forms of aid to those most impacted. These steps and more will likely limit the damage and set the stage for the recovery.

Until then, keep in mind this isn’t the first time our country has experienced economic distress. The average bear market decline from 1956 to the present is 37% and each was followed by a strong market rally. This bear market is likely no worse than the others seen throughout history, and the economy will rebound just as it has in the past.  

The number of virus cases in China and South Korea is declining. It is a little more challenging here at the moment, but if we all do our part in staying quarantined, the return to our normal lives will undoubtedly trigger the beginning of a new market rally.

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