If having more money solved financial woes, then younger generations should be secure, right? In the next 30 years, $36 trillion is expected to pass from one generation to the next. However, squandered money has become so common that a term has been coined – sudden wealth syndrome (SWS) by psychologist Stephen Goldbart. The symptoms include persistent thoughts about money, anxiety and depression resulting from stock market volatility, feelings of extreme guilt and poor decision making when you feel undeserving of wealth and identity confusion.
The challenges are three-fold. One is that money can be emotional, and emotions can drive decision making. Second is financial literacy and complexity, and third is communication. Parents wrestle with telling their children about family wealth – the desire to prepare them versus concern of ruining them. Warren Buffett addresses balance when he says his children will inherit enough so they can do anything, but not so much they can do nothing. Yet a Charles Schwab survey says 69 percent of parents feel more prepared to talk to teens about sex than investing.
Will you break the money silence? Consider using your financial advisor to help you initiate and nurture the conversation. We’ll share some strategies to help save you money when inheriting retirement accounts.
Covid-19 and Retirement and Finances Survey
A TD Ameritrade, a financial services company, survey shows some positive trends as Americans adjust their finances and spending habits amid the pandemic.
- 70 percent of Americans regularly contributed to their savings and had an emergency fund.
- Boomers lead the emergency fund accumulation with 49 percent having more than six months socked away, Millennials and Gen X tied for four to six months’ worth at 16 percent, but 45 percent of all Americans had three months or less.
- 40 percent said their household budget was negatively impacted, while 20 percent of Millennials report positive impact (found a new side-hustle and spent less money – major purchases and trips, childcare, meals at home, shopping, hair and nails, and commuting).
- New obstacles for parents – Homeschooling children and working are too much to manage (57 percent), some saved money for childcare ($366 average) and others spent more on educational resources ($147) and entertainment ($104).
- Life got simpler with low or no budget activities – walks, games and puzzles, working out, learning new skills, and virtual events (happy hour and yoga).
- More financial levers being pulled – Track spending (66 percent), increase retirement savings (47 percent), open new accounts (29 percent), delay retirement (39 percent), and 23 percent of Boomers are considering early retirement.
Strategies for Inherited Retirement Accounts
Are you inheriting an individual retirement account (IRA) or 401(k) from your family? Certain non-spouse beneficiaries are now subject to a “10-year rule.” The main impact is potentially less after-tax proceeds from a shorter period (not “stretching” withdrawals over your lifetime). This applies to adult children, nieces and nephews, grandkids, etc. Old stretch rules continue to apply to spouses, minor children, disabled, and others. Refer to your tax expert for the specifics.
Here are some strategies to consider if you’re the beneficiary:
- Defer the withdraw as long as possible and take a single distribution. Disadvantage – could be more expensive and push you into higher tax brackets. Advantage – possibly for smaller pre-tax balances, Roths or you’re the highest tax brackets.
- Spread the distributions (and tax bill) over 10 or 11 years. How 11 years? You’re required to take full distribution by the tenth year following the account holder’s death. If you hustle and establish the inherited IRA, then the year of death might be Year 0 for distribution.
- “Chunk” the distributions. Strategically time and amount of distributions to lower tax years – job change, new business start-up, retirement, major tax deduction, etc. – student aid, or other planning opportunities.
Life can be complicated. However, communication, knowing your options and planning are key. Talk to your advisors as good decisions make for a good life. Secure your future wisely.
This article can also be viewed at the Reno Gazette Journal.