Financial planners warn investors against trying to time the market. It’s notoriously difficult to guess exactly when sentiment on Wall Street will change course — even professionals will likely be wrong.
But that’s essentially what countless retirees today are forced to do: play a game with a volatile market ravaged by 40 years of high inflation, the war in Ukraine, the accompanying supply shocks and increasingly gloomy consumer confidence.
For retirees mandated by Internal Revenue Service rules to receive the required minimum benefits from tax-deferred payments, such as individual retirement accounts or 401(k)s, the prospect of having to withdraw money during a bearish market is unpalatable enough to prompt some. to tighten their belts until the market recovers – or until Congress intervenes.
Planners are reporting a spate of new clients struggling to reconcile expectations of their retirement spending with a suddenly reduced nest egg.
“There are a lot of new clients coming in that need to take RMDs,” said Peter Gallagher, general manager of Unified Retirement Planning Group. Going through their accounts, he found that some were fully invested in riskier asset classes like stocks, exposing them to the swoon of the market, rather than safer categories like bonds. “They didn’t feel like they were taking as much risk as they were,” he said.
Sometimes there is not much else to do than to tell the bad news. “We had some people who were 100 percent in technology stocks, and we had to tell them, ‘Look, you’re down 40 percent from the high,'” said Mr. Gallagher. “It is a very intense conversation, because we have to sell.”
The ABC’s of RMD
Since defined benefit plans have been replaced by defined contribution plans such as 401(k)s, tax deferral is an incentive for employees to save. Many retirees depend on benefits from their retirement accounts for their daily income, a need that has become more acute as the prices of gas, groceries and other necessities continue to rise. RMD rules for account holders and heirs are designed to prevent retirement accounts from becoming tax shelters for inherited wealth.
The last significant changes to those rules were made by the SECURE (Setting Every Community Up for Retirement Enhancement) Act of 2019, which increased the age at which account holders must begin taking benefits from 70½ to 72 and accelerated the timeline by which people who inherit IRAs or similar accounts must make withdrawals.
People with these accounts must begin withdrawing funds by April 1 of the year after they turn 72, and by the end of each subsequent calendar year. (Roth IRAs, which are funded with after-tax dollars, do not require RMDs)
The amount an account holder must withdraw varies from year to year, based on their account balance and expected life, and the distributions are taxed as ordinary income. People with multiple accounts have some flexibility in that the total amount of their distribution can be withdrawn from one or more accounts, but the penalty for non-compliance is high: RMDs not withdrawn by the required date are taxed at a rate of 50 per cent.
Cil Frazier, a retired TV marketing professional living in suburban Birmingham, Ala. lives, said she is due to start taking her RMDs in April next year, which she doesn’t like to do.
Ms Frazier, 71 and a widow, said Social Security plus a small amount of retirement income was enough to cover her mortgage and most day-to-day expenses for the time being, but she worries that inflation is pushing up her cost of living.
“I pay more money for things I normally buy. I’m shopping more cautiously,” she said, adding that she’s bracing for higher utility bills as temperatures rise in the Southeast. “I’m turning up the air conditioner thermostat.”
People who help retired Americans navigate their finances are alarmed by the vulnerability this cohort — especially historically marginalized populations — faces as a result of market movements. It’s especially tricky for those without money managers, as investors have to calculate for themselves how much they need to withdraw to meet RMD requirements.
“It’s very complex and it’s almost impossible for a layman” to make it without help, said John Migliaccio, a senior financial literacy adviser.
“It’s really indicative of, I would say, the crisis level of financial literacy in the country, especially among women and minorities,” he said. “They have lower-paying jobs, they’re not paid equally, they have a responsibility to care” – all of which lead to less financial security in retirement.
In today’s post-retirement economy, Americans have had to take a more active role in managing their money before retirement, whether they have the knowledge to do so or not.
“We’ve spent the past decade driving risk,” said Scott Cole, founder and president of Cole Financial Planning and Wealth Management. “We are convinced by the headlines, by the people we talk to, and we are convinced by the fact that our current system does not favor savers. It promotes risk.”
A combination of factors – an inability to save enough for retirement, and the feeling of having to “catch up” and not have to move money into safer investments while stock valuations broke records – has pushed many retirement savers into a day of reckoning.
“With returns such low in the fixed income market, I think people have been putting more inventory than they should have — then it started to look so good that they stayed,” said Alicia Munnell, director of the Center for Retirement Research at Boston High School. “If you can avoid selling now, that’s probably a good thing. These cycles end.”
Financial planners generally recommend that retirees allocate a certain percentage of their portfolio to cash or other stable and liquid assets to avoid having to cash in their stocks when values fall — but they also say they understand why customers tend to be careful when times are right.
“After years of telling clients that interest rates were going to rise — and fixed-income securities need to be cautious too — most advisors started to sound a bit like Chicken Little year after year,” said Joseph Heider, president of Cirrus Wealth Management. “Investors looking to squeeze the last bit of juice out of this long-running bull market, in both stocks and bonds, may have been a little short-sighted by what’s happened in recent months.”
The historically long bull market before the pandemic and the rapid reversal after the plunge in the spring of 2020 have also lulled investors to complacency.
“The shocks we’ve had in the market over the past few years — they’ve been short-term effects in the market, so people have been conditioned to think we’re going to see a rebound pretty soon,” said Kathy Carey, director of research and planning at Baird Private Wealth. management. “It feels like this downturn could last a little longer.”
How Retired Investors Are Coping?
Some retirees, like Mrs. Frazier, manage by tightening their belts. Others are dusting off their resumes. What labor market observers have termed “out-of-state” is bringing people in the 55-64 age group back into the labor market.
“A lot of older people are going back to work,” said Cindy Hounsell, president of the Women’s Institute for a Secure Retirement. “That also gives them a chance to catch up a bit.”
Others are leveraging the wealth built up in their homes, said Steve Rick, chief economist at CUNA Mutual Group. “I was amazed at the increase in the home equity,” he said. “Equity borrowing is currently booming. I think a lot of people use that as an alternative.”
Until March, annual growth in equity lines of credit was nearly 11 percent, according to data from trade group Credit Union National Association and its subsidiaries — the highest rate of growth since 2009.
“We’re doing it again now – we’re collecting cash,” said Mr. Rick. “People are dependent on debt again.”
Some hope lawmakers will mediate. In March, the House of Representatives passed legislation building on the SECURE bill and gradually raising the minimum age requirement to take benefits to 75 by 2032. Similar legislation has been introduced in the Senate, but the timetable for approval is uncertain.
Ms. Hounsell said this legislation could benefit seniors, especially since the IRS calculates how much retirement savers should withdraw based on their account balance at the end of the calendar year — about when the market peaked in 2021.
“I think it helps people catch up, and they don’t have to pay during the worst of the market going down,” she said. Especially for people who can stay in work a little longer, she says: “It’s a few years less to worry about.”
Ms. Frazier was concerned that her initial RMD could be high enough to lift her off her 12 percent tax bracket. “It’s a huge 10 percent jump,” she said.
She plans to wait until the fall to take her first required distribution, in hopes of Congress stepping in or reducing market volatility. “I’m curious what will change between now and then,” she said. “I wouldn’t take the RMD if I didn’t have to take it.”
While congressional intervention would take time, foregoing access to those funds would be a double-edged sword, as delaying its distribution would mean deferring about $8,000 in dental work, Ms. Frazier hopes to be done. “I’m trying to save all the teeth I can,” she said.
