Wharton professor Olivia Mitchell on America's post-COVID retirement outlook

“The outlook for retirement is worse than a year ago,” Wharton Professor Olivia Mitchell said in an interview recently. “We’re now in a different world.”

In a Q&A, The Inquirer asked her to elaborate on what the post-COVID world means for America’s retirement savers and those who have already retired. Mitchell is professor of Insurance & Risk Management, Business Economics & Public Policy and executive director of Wharton’s Pension Research Council.

What's changed for American savers? Prior to the coronavirus, private savings weren’t that high anyway, and many investors’ portfolios were shocked by market volatility. … But in addition, we are seeing a new era of low (capital markets) returns. That should have a dampening effect on people’s hopes for retirement.

What is your forecast for stock and bond markets over the next several years? In our “old normal” scenario, we used a 1% risk-free rate of return for bonds, and the expected return on stocks of 5%, on a pretax basis. In the “new normal,” we reduced the expected risk-free interest rate from 1% to 0%, and the expected return on stocks is reduced to 4%.

Your colleague Jeremy Siegel at Wharton is shifting his allocation to 75% to 25% stocks and bonds from 60% to 40%, and says he now owns a small slice of gold/precious metals. Siegel is quite a bull. But economically, we’re in a different world. China is having troubles. The IMF (International Monetary Fund) published its forecast for global 2020 GDP showing an expected decline of 5% for the full year, a decline of 8% for U.S. GDP and the E.U. GDP, and Russia faces a decline of 7% for 2020. There’s great instability right now.

Whas has changed for those with workplace pensions? Only half the American workforce had pensions, either defined contribution or defined benefit. What’s changed now is that those pensions are much more underfunded than prior to COVID. Also, if companies previously were matching contributions to 401(k)s, many firms are now pulling back. Hopefully, this is temporary, as was also seen during the 2008-2009 Great Financial Crisis. State and local pensions suffered, and with payrolls falling, (the underfunding) is getting more serious. It was already serious.

Congress' CARES Act helps Americans take money from their retirement plans [see below], but should we be borrowing or cashing out IRAs and 401(k) funds? The government has given permission to people affected by COVID to take a loan, as long as your employer plan allows it. If you’ve lost your job, you can cash out up to $100,000. and pay that back in three years with no taxes. If Americans don’t take money out, this, in turn, could drive folks to claim Social Security early. We won’t know the full effects until August and September … when we’ll have a better picture of government benefits and how many people are still claiming unemployment benefits. That’s a big unknown.

Will Social Security feel the effects of COVID? Sure. It means the exhaustion of Social Security. The insolvency may move up to 2029, instead of later, because of the pandemic. Medicare also faces shortfalls. I haven’t seen new projections but it stands to reason Medicare costs are rising. … We have huge deficits now in the trillions of dollars, not counting Social Security and Medicare.

Will high infection rates scare off new people from moving into long-term care facilities? Some now view them as death traps. There’s going to be a lot more pressure on families to take care of elderly relatives themselves, or in their mom and dad’s home. Nursing homes are dangerous until we have a vaccine.

What's a retiree to do if there's very little income in the bond market? Annuities. They’re more expensive now, but you still are able to buy an income stream. I’ve not yet retired, so I haven’t bought any, but I like deferred annuities.

Post-COVID legislation

Here’s an update on some of the post-coronavirus legislative changes affecting saving for retirement.

In general, if you’re still working, or are recently unemployed, it’s easier to withdraw emergency funds or take a loan from your retirement accounts in 2020. First, the federal income tax deadline for filing 2019 tax returns was moved from April 15 to July 15, 2020. The deadline for making 2019 IRA contributions was also moved to July 15.

Second, for retirees: If you normally have to take your annual withdrawal and pay taxes, you don’t have to this year. This year, Congress’ CARES Act waived required minimum distributions for calendar 2020, including from 401(k), 403(b) and governmental 457(b) plans as well as SEP IRAs, SIMPLE IRAs, and traditional IRAs.

Third, if you need money and you’re not yet old enough to take an RMD, the 10% early withdrawal penalty is waived. You can withdraw up to $100,000 from workplace retirement plans and retirement accounts, up from $50,000 previously. Pay the federal income tax on the money over three years or repay the loan within three years.

Loan rules relaxed

Loan amounts increased to $100,000 within 180 days of March 27, 2020. Repayments due by Dec. 31, 2020, can be delayed a year, according to Philadelphia accounting firm Drucker & Scaccetti.

There are a couple of ways to qualify for a CARES Act coronavirus distribution, according to Drucker & Scaccetti: If an IRA owner, spouse or dependent is diagnosed with COVID-19. Or, if you experience “adverse financial consequences” from coronavirus, including, but not limited to, quarantine, furlough, layoffs, reduced work hours, no available child care, business closing or reduced business hours.

Return that RMD

You can return the money — as long as you do so by Aug. 31. The IRS announced blanket relief for those who’ve already taken 2020 RMDs, according to Ed Slott of IRAHelp.com. In calendar years after 2020, however, RMDs will still be due, according to Drucker & Scaccetti (IRS Notice 2020-51).