While drawing boards have been used by engineers and architects for more than two centuries, the phrase “back to the drawing board” is of much more recent origin, coined by the artist Peter Arno in a cartoon first published in the March 1, 1941, issue of The New Yorker magazine.
The cartoon features a crashed plane in the background, a parachute in the distance, several military officials and rescue workers rushing to help/investigate — and one remarkably nonchalant individual, walking in the opposite direction with a rolled up document tucked under his arm as he comments, “Well, back to the old drawing board.”
For all the richly deserved focus on retirement savings accumulations, a growing number of advisors are now focusing on how those already in (and fast approaching) retirement are actually investing and drawing down those savings.
A recent EBRI analysis[1. The data for this study come from the University of Michigan’s Health and Retirement Study, which is sponsored by the National Institute on Aging. See “IRA Withdrawals: How Much, When, and Other Saving Behavior,” online here.] found that at age 61, only 22.2% of households with an IRA took a withdrawal from that account.[2. IRAs are, of course, a vital component of U.S. retirement savings, holding more than 25% of all retirement assets in the nation, according a recent EBRI report. A substantial and growing portion of these IRA assets originated in other employment-based tax-qualified retirement plans, such as defined benefit (pension) and 401(k) plans.] That pace slowly increases to 40.5% by age 69 before jumping to 54.1% at age 70, and by the age of 79, almost 85% of households with an IRA took a distribution.
The EBRI analysis also found that the percentage of households with an IRA making a withdrawal from that account not only increased with age, but also spiked around ages 70 and 71, a trend that appears to be a direct result of the required minimum distribution rules in the Internal Revenue Code. Those rules require that traditional IRA account holders begin to take at least a specific amount from their IRA no later than April 1 of the year following the year in which they reach age 70-1/2, or else suffer a fairly harsh tax penalty.
In fact, at age 71, 71.1% of households owning an IRA that took a withdrawal reported that they took only the RMD amount, increasing to 77.4% at age 75, 83.2% at age 80, and 91.1% by age 86.
However, the EBRI report noted that IRA-owning households not yet subject to the RMD — those headed by individuals between the ages of 61 and 70 — made larger withdrawals than older households, both in absolute dollar amounts as well as a percentage of IRA account balance. Indeed, the bottom-income quartile of this age group had a very high percentage (48%) of households that made an IRA withdrawal — and their average annual percentage of account balance withdrawn (17.4%) was higher than the rest of the income distribution. Moreover, those younger households that made IRA withdrawals spent most of it.
While a significant percentage of those in the sample are drawing out only what the law mandates, the data indicate that more of those in the lower-income groups not only draw money out sooner, but also draw out a higher percentage of their savings — perhaps too early to sustain them throughout retirement.[3. The EBRI Retirement Readiness RatingsTM indicate that approximately 44% of the Baby Boomer and Gen-Xer households are simulated to be at risk of running short of money in retirement, assuming they retire at age 65 and retain any net housing equity in retirement until other financial resources are depleted. Those individuals may well become part of the significant percentage of retirees who eventually must depend on Social Security for all of their retirement income. See “All or Nothing? An Expanded Perspective on Retirement Readiness.”]
Advisors know that planning and preparation matters — not only for retirement savings, but in retirement withdrawals. Because for those whose retirement resources run short too soon, it’s generally also too late to go “back to the drawing board.”
Footnotes
