They asked some good questions I couldn’t fully answer — even though I’m a “smart money person.”
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Rich Dad Poor Dad author Robert Kiyosaki has explained what he will do if the price of bitcoin crashes. The famous author has been recommending bitcoin alongside gold and silver for quite some time, and he recently increased his bitcoin holdings following the approval of U.S. spot bitcoin exchange-traded funds (ETFs). Robert Kiyosaki: ‘Sale’ Is […]
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Hershey‘s (HSY 0.54%) stock has fallen on hard times of late thanks, in part, to investor concerns about a new breed of weight loss drugs. The concerns helped push the stock down roughly 30% from its 52-week high. The stock drop, in turn, increased the dividend yield to 2.4%, which is actually fairly attractive for the stock.
If you think the worries about weight loss drugs affecting Hershey’s sales are overblown, you might want to take a look. As you do, you might notice one more little oddity about the company that makes me extra happy to have had the opportunity to add Hershey to my own portfolio.
I’m partnering with one big owner
Shareholders effectively own Hershey, as with all public companies. Shareholders hire a board of directors. The board of directors then hires a CEO. And the CEO hires the company’s employees. The board helps to guide the CEO on an ongoing basis. There’s nothing abnormal about this structure at all, but there is one small problem for small investors: Individually, and even collectively in many cases, we don’t really have a large enough voice to sway the board.
Image source: Getty Images.
But there’s a unique, subtle, and strange twist when it comes to Hershey. There is one investor that owns nearly 40,000 shares of common stock and over 57 million shares of the company’s class B shares. While the common share ownership here is relatively modest, this entity owns 99.9% of the class B shares. Here’s the key fact: “Stockholders are entitled to cast one vote for each share of Common Stock held as of the Record Date and 10 votes for each share of Class B Common Stock held as of the Record Date.”
That basically means that the class B shares control the outcome of any shareholder vote. Let’s put some math to that. At the end of 2022, there were 146,922,179 common shares, each of which was entitled to a single vote. There were 57,113,777 shares of class B stock, each of which was entitled to 10 votes, adding up to 571,137,770 votes. So the total votes that could be cast was just over 718 million, with the B shares accounting for nearly 80% of the total. So whatever the class B shareholder says goes.
The owner of all that voting power is the Hershey Trust. This is actually kind of similar to the setup at Hormel (HRL 0.43%), where the Hormel Foundation controls around 46.8% of that company’s shares.
What does this mean for me?
There are a couple of important takeaways here. First, a buyer would have to convince the Hershey Trust to vote for a sale in a takeover situation. That’s probably not likely to happen without a huge premium. Notably, one of the Hormel Foundation’s explicit goals is to ensure that Hormel remains a stand-alone company.
Second, the dividends paid by Hershey are a key funding source for the non-profit Hershey Trust as it donates money for the betterment of society. The same is true at Hormel. But this basically means that Hershey, and Hormel, have huge investors that want to see the companies pay reliable and growing dividends. That’s exactly what I want to see too. And it helps explain why Hershey’s dividend has been increased annually for 14 consecutive years and has trended generally higher for decades.
We’re aligned, but there’s a history here
That said, the Hershey Foundation has often found itself in the headlines for less than desirable reasons (think things like infighting and insider trading). But what happens at the Hershey Foundation, other than its voting, doesn’t actually impact the day to day decisions at Hershey the company. So I don’t worry too much about the Foundation’s bad press. And while I’m sure the Foundation could poke its nose where it doesn’t belong, it doesn’t want to kill the golden goose that lays the dividend eggs. So the more likely outcome is that the Hershey Foundation leaves Hershey’s business mostly alone.
All in all, I may not have a loud voice at Hershey, but the Hershey Foundation certainly does. The fact that we both want to get paid a reliable dividend is a very big plus for me in owning Hershey stock.
Tapping into your retirement savings before age 59.5 typically triggers a 10% early withdrawal penalty in addition to the income taxes you’ll owe. Using Internal Revenue Service Rule 72(t) can help you generate income from your nest egg in your 50s or earlier without paying that penalty. If you use it, you’ll still have to pay regular income taxes, and the process is complicated and inflexible.
Talk to a financial advisor to get personalized guidance on your options for generating retirement income before 59.5.
Rule 72t Fundamentals
Rule 72(t) is a section of the tax code covering early withdrawals from retirement savings plans. This particular rule allows you to take substantially equal periodic payments (SEPPs) from an IRA, 401(k) or other qualified retirement plan without incurring the 10% early withdrawal penalty you would otherwise generally have to pay.
To employ Rule 72t strategy, you must take annual distributions calculated using one of three IRS-approved methods for determining the payment amount. These SEPPS must continue for five years or until you reach age 59.5 – whichever is longer.
You can’t adjust the payment amounts during this time or else you’ll face the penalty you initially avoided. You also can’t make additional withdrawals from the account beyond your scheduled payments. This inflexibility makes Rule 72(t) tricky to use. But for those with adequate savings who want to retire early, it can provide penalty-free income.
Understanding Substantially Equal Periodic Payments
The IRS has a specific interpretation of what constitutes a SEPP. The three methods allowed by the IRS for calculating SEPPs are:
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Required minimum distribution (RMD) method: This typically produces the smallest annual payment.
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Amortization method: This spreads your balance over life expectancy to produce a larger payment amount.
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Annuity method: This provides a fixed mid-range payment between the RMD and amortization methods.
You must calculate payments based on your life expectancy, so the older you are when starting them, the higher the amounts will be.
A Rule 72t Example
To get an idea of how Rule 72t might work in a hypothetical case, consider a retirement saver who is 55 and has $800,000 in their retirement accounts when they decide to retire early. Using the amortization method and a 5% assumed interest rate, they could take annual payments of $49,500 from their accounts for the next 10 years until they turn 65.
By doing this, they would avoid having to pay the 10% early withdrawal penalty, which would save $4,950 for each of the payments until they reach age 59.5.
Talk to a financial advisor about the best plan to finance your retirement.
Rule 72(t) Limitations
While Rule 72(t) offers a path to penalty-free retirement income before 59.5, there are some real and potential limitations to its benefits. They include:
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You still must pay income tax on distributions at your regular rate.
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Once started, you can’t discontinue payments without a penalty.
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Calculating your precise payment involves complex math.
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You lose tax-deferred growth by withdrawing the money.
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You can no longer contribute to the account after you start withdrawing from it.
Given these restrictions, Rule 72(t) works best for those who have adequately saved and are sure they want to begin retirement distributions in their 50s.
Rule 72(t) Alternatives
Rule 72t can provide a way to tap retirement funds penalty-free without having to wait, but it’s not the only approach. Other potential options include:
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401(k) loans, allowing you to borrow from yourself and repay the money.
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Using the Rule of 55, which lets you tap a 401(k) penalty-free after leaving an employer at 55 or later.
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First-time homebuyer withdrawal, permitting a $10,000 penalty-free IRA withdrawal towards buying your first home.
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Certain other exceptions, such as for higher education costs and some medical expenses.
Each approach has pros and cons to weigh. Hardship withdrawals are still taxed as income but avoid the 10% penalty. 401(k) loans allow access without taxes or penalties but must be repaid. The Rule of 55 only applies to employer plans, not IRAs. A financial advisor can help you weigh your options and make a plan for a comfortable retirement.
Bottom Line
Rule 72(t) allows penalty-free early withdrawals from retirement accounts, but comes with major restrictions. While avoiding the 10% penalty, you still owe income taxes on distributions. Payments are fixed for 5+ years and can’t be changed without penalty. You lose tax-deferred growth and can’t contribute anymore. Given the limitations, Rule 72(t) only works for someone with adequate savings who is fully committed to early retirement.
Tips
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Have a financial advisor walk through the pros, cons and calculations involved with a Rule 72(t) distribution strategy. SmartAsset’s free tool matches you with up to three financial advisors in your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
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SmartAsset’s Retirement Calculator helps you determine whether you’re saving enough to retire.
Photo credit: ©iStock.com/jacoblund
The post I Have Enough in My Retirement Accounts. Can I Use Rule 72(t) to Retire Early? appeared first on SmartReads by SmartAsset.
Millions of seniors today collect a monthly benefit from Social Security. And for many, it would be impossible to pay the bills without that money.
But Social Security’s rules might need to change in the coming years to ensure that the program is able to keep up with scheduled benefits. Social Security is facing a funding shortfall that lawmakers need to address by making adjustments to the way the program works in one shape or form. Here are a few potential Social Security changes to gear up for that may not seem so wonderful at first.
Image source: Getty Images.
1. A new full retirement age
Full retirement age (FRA) is when you can claim your complete Social Security benefit based on your earnings history. If you were born in 1960 or later, FRA is 67. But because the program desperately needs to conserve funds, lawmakers are considering pushing FRA back to 68 or 69.
Now this would likely come in the form of a phased adjustment to FRA. It’s unlikely that lawmakers will decide that everyone born in 1960 or after suddenly can’t claim their full benefits until a later age. Rather, that change would likely apply to younger workers, while those nearing FRA at present would likely get to stick to 67. But still, this is a change that could impact a lot of people’s retirement plans.
2. A higher tax rate on Social Security
Workers are required to fork over a chunk of their income to fund Social Security. Right now, 12.4% of wages up to a certain limit that changes every year are taxable. And thankfully, salaried employees split that 12.4% evenly with their employers so they’re not paying that whole sum.
But lawmakers may decide to raise that 12.4% tax rate for Social Security. That would easily do the trick of getting the program more robust funding. Of course, it would also result in workers losing a larger chunk of their income — and also put more of a burden on companies that might, in turn, pass that cost onto consumers via higher prices for their products and services.
3. A new set of criteria for giving out Social Security benefits
Social Security is not a welfare program, so seniors who have millions of dollars to their name can receive a monthly benefit in retirement. But that could potentially change. Another proposal that’s been floated to help boost Social Security’s revenue is to means test seniors and reduce or even eliminate benefits for those who are higher earners.
Now of the three changes mentioned here, this one is the least likely to become reality. Denying wealthy retirees their Social Security benefits would pretty much change the scope and intent of the program, and that’s probably not something lawmakers would actually want to do. But desperate times could call for desperate measures.
Some steps need to be taken to ensure that Social Security is able to continue paying benefits in full through the years. And these proposals aren’t the only ones on the table. But they do have the potential to come to life, and that’s something workers today need to understand. And while all of these changes might seem less than desirable, do keep in mind that a universal reduction in Social Security benefits also isn’t wonderful — so it may be a matter of the lesser of two evils.