Question: T.M. in Milford: Are you at all worried the U.S. will lose its reserve currency status?
A: There’s been an uptick in chatter about this recently, especially when the credit agency Moody’s indicated back in November that it was placing the country’s credit rating on a ‘negative watch.’ But our analysis of the situation indicates concerns are overblown.
The U.S. dollar was chosen as the world’s reserve currency in 1944 and has retained that status due to its stability, dominance in global bank holdings, frequent use in currency transactions, and widespread use in international trade. Plus, most of the world’s oil conducts trades in U.S. dollars. This results in constant demand for dollars since everyone needs energy.
But, for argument’s sake, let’s take a look at the most probable contenders. While today’s data pegs the Euro as the most likely replacement, the challenge is that member nations of the European Union are quite often divided on key political and economic issues. Next possibility? The Chinese Renminbi. But this falls short as well because of overly tight controls on currency flows, an exchange rate that does not freely float, significantly underdeveloped financial markets, and concerns of political stability. And last but not least, cryptocurrency. But again, there are major drawbacks including no regulation, extreme volatility, too many variations (Bitcoin, Ethereum, etc.), and a lack of broad acceptance or even understanding about how it actually works.
This isn’t to say we’ll never be dethroned as the world’s reserve currency. But the Allworth Advice right now is that you shouldn’t lose any sleep over this. This U.S. dollar is currently way too influential in the global economy – and there isn’t a viable alternative.
Q: Kyle from Highland Heights: I’ll turn 55 next year and I might retire at that point as well. I’ve heard I can take money out of my 401(k) and not get penalized. Is this correct?
A: You are correct. Normally, someone must be at least age 59 ½ to take money out of their 401(k) penalty-free. However, there’s a special IRS rule (commonly called the ‘Rule of 55’) that is an exception.
Here’s how it works: If there’s a ‘separation of service’ from your current employer in the calendar year which you turn 55 or older (be it retirement, you’re laid off, fired, or you quit), you’re allowed to make withdrawals from your 401(k) (or 403(b)) without having to pay the 10% early withdrawal penalty (remember, you’ll still pay ordinary income taxes). If you’re a qualified public safety worker, you can typically take advantage of this rule in the year in which you turn 50.
And bear with us, but we want to repeat two points because they’re key. This rule only applies to your 401(k) (or 403(b)) that’s with the employer from which you’re leaving. It does not apply to old 401(k)s with previous employers. And it’s only possible in the calendar year which you turn 55 or older – you can’t, for example, leave at age 54 and try to make withdrawals the following year. It’s important to also note that this rule does not apply to IRAs.
Here’s The Allworth Advice: If the timing is right (and if your employer’s plan administrator allows it), the Rule of 55 can be a convenient way to access your retirement money before age 59 ½ without penalty. Of course, whether or not you should actually take advantage of this rule is another discussion. You need to ask yourself if you’re financially – and mentally – ready to retire early. A fiduciary financial advisor can help you with this decision.
We’re excited to announce a new addition to our Allworth Advice column! Allworth financial advisor Steve Hruby, CFP®, will now be joining Amy Wagner every week to answer your questions as Steve Sprovach says goodbye to enjoy retirement! If you, a friend, or someone in your family has a money issue or problem, feel free to send those questions to[email protected].
Responses are for informational purposes only and individuals should consider whether any general recommendation in these responses are suitable for their particular circumstances based on investment objectives, financial situation and needs. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing, including a tax advisor and/or attorney. Retirement planning services offered throughAllworth Financial a SEC Registered Investment Advisor. Securities offered through AW Securities, a Registered Broker/Dealer, member FINRA/SIPC. Visitallworthfinancial.com or call (513) 469-7500
