Americans between the ages of 61 and 70 are withdrawing money from their
IRAs in amounts that are larger, both in absolute dollar amounts and as
a percentage of their IRA account balance, than those taken by older
households, according to a new report from the Employee Benefit Research
Institute.
And what’s especially troubling about that finding is this: IRA owners
under the age of 70½ are not even legally required to start taking
required minimum distributions (RMDs) from their IRAs. Under current tax
rules, traditional IRA account holders are only required to start
taking withdrawals from their IRAs no later than April 1 of the year
following the year in which they reach age 70½.
According to the EBRI report, Americans between the ages of 61 and
70—the so-called pre-RMD crowd—withdrew on average $16,655 per year from
their IRAs, while those between the ages of 71 and 80 withdrew $10,557.
What’s more, the pre-RMD Americans spent most of their IRA withdrawals
on regular expenses, while the post-RMD set actually saved some of their
withdrawal in CDs and the like.
The numbers are even worse for pre-RMD Americans who are in the two
lowest-income quartiles. Nearly half of those households withdrew money
from their IRAs, and on average those in the lowest-income quartile
withdrew 17.4% of their account balance. That amount, by the way,
exceeds the percentages required to be taken by those withdrawing RMDs,
which start at around 3.75% for most IRA owners and don’t exceed 6%
until about 83, said Jeffrey Levine, an IRA Technical Consultant with Ed
Slott and Co. and a contributor to MarketWatch’s RetireMentors.
Now this might not come as a surprise, but the consequences of dipping
into one’s IRA before age 70½ are significant. People could be putting
their future standard of living at risk, especially if they don’t other
sources of income in retirement such as a defined benefit pension plan
or income from employment.
“I think we are seeing for the age group of 61 to 70, people who had
planned to continue working but due to layoffs, a bad economy, and the
like now need to dip into their retirement dollars far sooner than
expected or planned,” said Thomas O’Connell, president of Senior Wealth
Solutions. “With the likelihood of a 20- to 40-year retirement time
frame, this is going to be catastrophic for many of these folks in their
later years.”
You don’t have to search far to find others who share that outlook. “I’m
not surprised by this,” said Jeremy Portnoff of Portnoff Financial.
“Many reports show that people do not save enough so it makes sense that
when they get to retirement—some are retiring too early, they have not
accumulated enough money—their distributions are much larger than they
would be required to be. This probably doesn’t bode well for their
ability to sustain relatively high withdrawals.”
Others see the same problem, but a different cause. “I think what is
happening is many corporations have moved away from monthly pensions for
retirees, thus leaving the money management decisions and the
withdrawal rate decisions up to the consumer,” said Matt Curfman, a
senior vice president with Richmond Brothers.
Often, he said, a younger retiree, defined as someone in their mid-50s
to mid-60s, will want to draw more out while they are young and healthy,
but they do so at a great risk. “Should they live well into their 80s
or 90s, it is entirely possible that they may run out of money if they
kept that higher withdrawal rate up over longer periods of time,” said
Curfman.
In many cases the higher withdrawal rate at a younger age can be OK as
long as when another source of income comes in, such as Social Security
payments, that withdrawal rate is reduced accordingly, Curfman said.
Absent that, Curfman said the only way a high withdrawal rate will work
is if the rate of return on a portfolio always exceeds that withdrawal
rate. He noted, for example, that from 2000 to the end of 2012 the
S&P 500 average return was 3.45% per year and the actual return was
1.61% per year. “If you were retired for this 13-year period with your
portfolio invested in the stock market and your withdrawal rate exceeded
1.61% it is very likely that your portfolio has lost money or is down
from where you started. That can be unsettling, especially if these were
the early years of your retirement.”
Meanwhile, the author of the EBRI report said IRA owners must be neither
overly cautious nor overly aggressive when it comes to IRA withdrawals.
“As more and more baby boomers enter retirement with large portions of
their retirement savings in IRAs, their financial security in retirement
may well depend on how they manage these accounts postretirement,”
Sudipto Banerjee, EBRI research associate and author of the report, said
in a release. “Some may be overly cautious in drawing down their IRA
balances, sacrificing a more enjoyable retirement, while others may
spend too much too soon, jeopardizing their retirement security.” Read IRA Withdrawals: How Much, When, and Other Saving Behavior.
Exceptions to the rule
In the main, experts advise against withdrawing money from your IRA to
pay for current living expenses. “There’s a reason many people with
large IRA balances or other savings hold off on taking distributions for
as long as possible,” said Levine. “If you can afford to wait, it
generally produces better results.”
But there are exceptions to the rule. In fact some experts recommend
that Americans withdraw money from their IRAs before age 70½ and delay
taking Social Security until age 70. Doing so, the experts say, reduces
the amount of one’s RMDs and taxable income and it also increases the
amount of one’s Social Security benefit. Read Innovative Strategies to
Help Maximize Social Security Benefits. Read also The Baby Boomer’s
Guide to Social Security.
“When I talk to my clients about retirement-income planning we are
talking about several things that are not intuitive to them,” said Craig
Adamson, president of Adamson Financial Planning. “First, when should
they draw on their Social Security? Sometimes it makes sense to pull
money from IRAs in a low-tax environment and let the Social Security
income continue to grow to full retirement age or up to age 70 to
maximize the benefit.”
Of course, when taking early distribution keep a close eye on your tax
bracket: “By taking early distributions from IRAs, are they going to
break through into the next tax bracket to support their lifestyle?”
asked Adamson. “Is this money they could be taken from Roth IRAs,
non-qualified accounts such as bank savings or CDs, or from cash value
life insurance so there is no tax consequence.”
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