The importance of having savings certainly has been brought to the forefront during the COVID-19 pandemic, as many people found themselves living on, and often exhausting, their emergency savings due to illness or job loss.

For example, a study released in September (tinyurl.com/y6k52dkm) by SimplyWise, a technology company that offers resources related to retirement and Social Security, found that 45% of workers who were furloughed or unemployed due to the pandemic could not last a month living off their savings, with 26% saying they could not make it two weeks.

So the question is: Does having even a small amount of savings, say $250, make a difference? The answer is yes, according to “Savings: A Little Can Make a Big Difference.”

The study, which focused on lower-income families, was recently published by the FINRA (Financial Industry Regulatory Authority) Investor Education Foundation and SaverLife, a nonprofit company that seeks to build financial security for working families.

According to the study, “People who were unable to maintain a savings balance above $250 were 71% more likely to have moved in the past five years for financial reasons versus people who were able to sustain a balance above $250.”

When the results were controlled for factors like household income, gender, age, education, marital status and the presence of dependents, those who were “unable to maintain a balance above $250 were still 29% more likely to have moved for financial reasons.”

To create the study, which can be found at tinyurl.com/ybhl596j, researchers reviewed the three-month average daily savings balances for 687 participating SaverLife members, then combined the data with survey information that looked at the members’ attitudes and behaviors when it came to finances.

Eighty-three percent of those surveyed who were unable to keep a savings balance of more than $100 were more likely to use “high-cost borrowing,” such as pawn shops, auto—title loans, refund advances and payday loans, when compared with those having savings above $100. Adding in the control factors, those who could not maintain the $100 balance were 39% more likely to use high-cost borrowing.

As might be expected, those who were able to maintain a savings of more than $100 were 61% more likely to say they were financially satisfied (29% when using the control factors) than those who were unable to maintain the $100 balance.

“[T]his new study underscores the need for innovative, low-barrier savings products that help financially struggling households build and maintain savings,” FINRA Foundation President Gerri Walsh said. “We now know that even a very modest savings cushion correlates with significant life improvements.”

One of the recommendations included in the study urged “all organizations to encourage saving money even in the smallest of increments. Many financial education programs equate adequate emergency savings with three months of living expenses. That guidance may work for some people, but isn’t always achievable for low-income households. This study suggests that even a very modest savings cushion correlates with major life improvements.”

Indeed, creating and maintaining a “savings cushion” is an important financial goal for the new year. Just a few hundred dollars can make a difference.

Julie Jason, JD, LLM, a personal money manager (Jackson, Grant Investment Advisers Inc. of Stamford, Connecticut) and award-winning author, welcomes your questions/comments (readers@juliejason.com). Please visit www.juliejason.com.

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This follows my column from last week about required minimum distributions (RMDs) returning in 2021 after a waiver in 2020.

If you are wondering whether you are making the right decisions about your retirement account withdrawals, it may help to know what other people do.

A recent survey of members of the American Association of Individual Investors (tinyurl.com/y4l7fbxu) can be a guide. The AAII is a nonprofit that helps individuals manage their assets through research, information and education programs.

Keep in mind that retirement account withdrawals are mandated by law after a certain age (70 1/2 if you were born in the first half of 1949 or earlier; 72 if you were born in the second half of 1949 or later). The amount of the withdrawal is determined by a formula that sets the minimum you must withdraw each year to avoid a hefty penalty -- a 50% excise tax on the amount that should have been withdrawn but was not.

It's interesting to note that when AAII survey respondents were asked about their withdrawal strategy, the most popular answer (45%) was to “simply take the minimum amount required by the tax code.” Two out of five respondents gave their reason for their current strategy as being “a desire to limit withdrawals to what government requires.”

That’s not a surprise, since taking more than the RMD, which is always an option, increases the amount that is reported to the IRS on your Form 1099-R as taxable income. There are some exceptions. For example, Roth IRAs do not trigger an income tax when you withdraw money (nor is the Roth IRA owner subject to RMD requirements for the Roth IRA).

Forty-one percent of survey respondents withdrew only their RMDs, no more. That could be a good strategy, as long as the retiree realizes that he or she should think twice before relying on the RMD to cover living expenses over the years.

If you look at how RMDs are calculated, you’ll understand that the goal of the RMD tables that drive withdrawal calculations is to deplete the IRA over time. That is, the older you are, the higher the percentage withdrawal.

When you are age 75, the RMD divisor is 22.9 (which translates into 4.4%). When you are age 85, the divisor is 14.8 (6.8%); at age 95, the divisor is 8.6 (11.6%); and at age 105, the divisor is 4.5 (22.2%). Again, the older you are, the higher the percentage withdrawal.

These divisors are set out in an IRS worksheet at tinyurl.com/nby6fxh, which applies to most people for calculating RMDs. (There is another worksheet that you would use if your spouse is your sole beneficiary of your IRA and he or she is more than 10 years younger than you.)

Let’s see what the divisors might mean to you in dollars.

Say your value on Dec. 31, 2020, is $1 million, and you are age 75. Your 2021 RMD will be $1 million divided by 22.9, or $43,668 (4.4% of $1 million).

To see the impact of the divisors over time, assume your IRA 1) does not grow and 2) is reduced each year by the previous year’s RMD.

At age 85, your withdrawal would be just over $39,000, based on your previous year’s value of $579,634. At age 95, your RMD would be about $27,000. At age 105, the RMD would be about $9,400. Again, this shows how RMD percentages work when the IRA has no growth -- it also shows you how important it is to invest your IRAs wisely in order to keep the IRAs from depleting over time.

When the AAII survey’s respondents were asked how confident they were about keeping a comfortable lifestyle for the rest of their retirement, 75% said they were “very confident,” and 15% said “somewhat confident.”

Confidence is good, but make sure it is bolstered by a strong RMD strategy.

Write to me if you’d like to discuss RMDs at readers@juliejason.com.

Julie Jason, JD, LLM, a personal money manager (Jackson, Grant Investment Advisers Inc. of Stamford, Connecticut) and award-winning author, welcomes your questions/comments (readers@juliejason.com). Please visit www.juliejason.com.

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If it weren’t the year 2020, right around now, I would be cautioning IRA owners over 70 1/2 to make sure they withdrew their required minimum distributions (RMDs) from their individual retirement accounts.

But because it is 2020, let me remind you instead that RMDs are waived for this year. That waiver became law in March, thanks to the Coronavirus Aid, Relief, and Economic Security (CARES) Act. The CARES Act waived RMDs for 2020 for traditional IRA, SEP, SIMPLE, 401(k) and other defined contribution plans, but not for defined benefit plans.

In 2021, we’ll go back to “normal.”

The annual RMD is mandated by law, not optional, with serious financial penalties for not taking your RMD on time. As the IRS explains online at tinyurl.com/zn7ckor, “If you do not take any distributions, or if the distributions are not large enough, you may have to pay a 50% excise tax on the amount not distributed as required.”

If you are a regular reader of this column, you’ll recall that the law created some difficulties for those who took their 2020 RMDs before March. It took some time for the IRS to provide a mechanism for people to undo their RMDs if they wanted to do so. The relief come on June 23, with IRS Notice 2020-51 (tinyurl.com/y8o2zxjp), allowing people to redeposit their RMDs through a rollover, as long as it was accomplished by Aug. 31, 2020. (If you took a 2020 RMD later in the year and want to redeposit it before year-end, check with your accountant.)

There have been other changes in RMD rules that will take effect in 2021. The Setting Every Community Up for Retirement Enhancement (SECURE) Act, which was signed into law Dec. 20, 2019, moved the age for starting RMDs from age 70 1/2 to age 72. (Read my column on the subject at tinyurl.com/yxb95bh3). If you were born in the last half of 1949 (after June 30), you will turn 72 in 2021 and qualify under the new RMD rule. If you were born in the first half of 1949, you fall under the old 70 1/2 rule.

I should mention that more changes might be coming. A bill was introduced by House Ways and Means Committee Chairman Richard E. Neal, D-Mass., and ranking member Kevin Brady, R-Texas, in October called the Securing a Strong Retirement Act of 2020 (tinyurl.com/yywwgy7v). Among the many proposed measures in the bill is one increasing the age for taking your first RMD to 75 years old.

From my perspective, that’s a good move, and in fact, I’d like to see RMDs suspended to age 90.

For now, expect RMDs to go back to “normal” in 2021, meaning no waivers. Keep in mind that the age 70 1/2 rule still applies to QCDs (qualified charitable distributions). I wrote on that subject in October; let me know if you would like a copy of that column.

On another note, last week’s column triggered a question about the new “above-the-line” $300 tax-deductible charitable contribution for 2020: Is the $300 doubled for married couples filing jointly? According to the IRS draft for the 2020 instructions for forms 1040 and 1040-SR (tinyurl.com/jlzynap), on Page 29 it states, “$300 is the most you can enter on your return even if your filing status is married filing jointly.” As of this writing, a finalized version of the instructions has not been posted. Check with your accountant for more information.

Julie Jason, JD, LLM, a personal money manager (Jackson, Grant Investment Advisers Inc. of Stamford, Connecticut) and award-winning author, welcomes your questions/comments (readers@juliejason.com). Please visit www.juliejason.com.

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