Boomers Start Taking RMDs

Amid all the changes and uncertainty that 2017 has brought so far, it is also the year that the first wave of the Baby Boom generation must start taking required minimum distributions (RMDs), and the number doing so will only grow from this point.

Most plan participants who roll their money out of their retirement plans have financial advisors. Many who keep their money in the plan are unadvised. However, even those that have a financial advisor often do not get their advisor’s help on taking RMDs or what to do with the money they withdraw.

How effective will the unadvised be at knowing which investments to draw their RMDs from and how to invest any money they decide not to spend? These decisions are complex. It is difficult for these participants to know how much investment risk they should take to get the investment returns they need to maintain financial security for the rest of their lives without taking on more investment risk than they must. For many retired Boomers, by age 70½, inflation will start to bite into the value of their principal. And further complicating decisions, cognitive decline increases during one’s 70s, impairing the ability of more and more to make good investment decisions.

It is one thing to misallocate investments during the accumulation period when time can allow the value of investments to recover from a down market. But after money comes out, it can never go back in.

It is difficult to evaluate how well people are doing with their decisions about RMDs. My firm’s research has found a fairly wide variety of techniques utilized. The most common approach is to take the money out of the plan pro rata, keeping the asset allocation proportionately the same. A quarter of those taking RMDs do that.

One out of every six took the RMD from investments that are not doing well, while an equal share took the RMD only from stocks. Participants with investable assets of $1 million or more were particularly likely to withdraw from stocks only. One-eighth used the RMD to rebalance. Yet, 1 in 10 are not sure how they did it, especially women.

Some of these decisions were probably effective and some probably were not, but my guess is that many could have done better had they had professional support. Both those with and without an advisor used these tactics equally, leading me to believe that the advisor is often silent on this aspect of retirement income planning.

Read more commentary by Lisa Greenwald here.

We have reached an inflection point. The number of people taking RMDs will be growing for a long while. So what should and will plan sponsors, plan providers and plan advisors do to help people taking RMDs make informed investment and spending decisions?

For employers whose motivation to put retirement plans in place included helping their long-term employees achieve financial security in retirement, this is a time to provide critical help, through a plan provider or advisor. A plan advisor offering advice on RMDs may earn trust and benefit from an eventual rollover or the ability to manage and advise on non-plan assets. Nor should it be an expensive endeavor for plan providers, who stand to gain by retaining or attracting assets. Though these may be competing interests for providers and advisors, Boomers hitting this magic age will benefit from any advice they receive.

This is an opportunity to provide important help to a targeted population and to create a situation in which everyone involves wins and can feel good about it. The identities of the participants starting to take are clear, as are the amounts they must take. This is a population likely in need of help, and plan RMDs providers and advisors are well-positioned to help them and benefit in the process.

Lisa Greenwald is an AVP at Greenwald & Associates, an independent research firm specializing in research for the retirement and financial services industries. This column originally appeared in the Spring issue of NAPA Net the Magazine.

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