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'Taking' Chances

Our industry has long maintained that a greater focus is needed on decumulation — the process/pattern for drawing down the retirement savings that the traditional focus on accumulation has nurtured.  

Arguably, a variety of annuity or annuity-type products already exists, some of which are embedded within current plan designs, but most of which are not. Meanwhile, plan sponsors and participants alike seem to be, for the most part, still opting for “something else.”  

So, how are participants deciding how — and how much — to withdraw from these retirement savings accounts?  

An analysis by the Employee Benefit Research Institute (EBRI) 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 (RMD) rules in the Internal Revenue Code. 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.

More recently, an analysis of actions taken by retirement plan participants at TIAA-CREF found that roughly one third of those who were affected by the RMD rules discontinued those distributions in 2009, when the law was temporarily modified to allow for a suspension of RMDs in the wake of the 2008 financial crisis. However, the report noted that the probability of suspension declines substantially with age and rises modestly with economic resources, and that individuals taking monthly distributions were less likely to suspend distributions than those taking annual distributions, especially at higher wealth levels.  

A separate survey of participants who chose not to suspend their RMDs found that a quarter (24.0%) ranked as “very important” that the RMD was seen as a good guide to the appropriate speed of the drawdown (another 37.5% said that criteria was “somewhat important”), and that many individuals viewed those requirements as “a useful guide to feasible consumption spending.” More than half of the fourth and highest quintile of respondents (57.5% and 53.6%, respectively) saw the RMD as a guide to spendable amount (only 36% of the lowest quintile were of that opinion).   

In the EBRI data, while a significant percentage of those in the sample were 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.  

Indeed, as retirement withdrawal strategies go, the RMD, like “rules of thumb” such as the so-called 4% rule, has the benefit of a certain mathematical precision, certainly for those who can afford to wait. But for many retirees, it’s likely a retirement drawdown “strategy” that is taking chances with time, if not money.

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