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Baby Boomers Forced to take Required Minimum Distribution

Baby Boomers are a very large portion of our population. They’ll be taking their first RMDs this year. RMD stands for Required Minimum Distribution. The Government forces us to pay taxes on our retirement account when we turn 70 years of age. This is only on qualified plans (IRAs, 401Ks, and other qualified accounts).

Consequently, only the people who have needed the income have had to take money from the market. That’s only up until this year.

Edward Shane from BNY Mellon adds his own sentiment. “As a result, throughout the next 20 years, billions of dollars annually will be forced from retirement accounts through distributions. These distributions will, in many cases, be taken in the form of a single large annual payment.”

The Required Minimum Distribution & The Bull Market

Our whole population will be forced to pull out their first RMD for the first time this year. The RMD percentage goes up every year to force people to draw down their account value. As a result, the government gets tax revenue.  Kristen Grind from WSJ said, “Assets held by 401(k) plans ballooned to $4.6 trillion in the fourth quarter of 2014, up 171% from $1.7 trillion in 2000, according to the Investment Company Institute, a trade organization for mutual funds.”

Currently, We are sitting in a 7-year bull market. A bull market means it keeps going up and up. I think if you pair the expectation of an increasing market with a forced RMD, probably any drop in the market would be crushing to Baby Boomers. Consequently, this is good for the government and taxes, yes. What about the market and the young people investing in it? Assuming the average size of a retirement account is 250,000, here are the numbers:

Baby Boomers Image 1

In this case, the resulting withdrawal of $9,124.09 represents 3.65% of the retiree’s retirement balances at the time of the calculation. Note that, over time, the formula results in a growing distribution percentage. However, it is eventually applied against a declining balance as withdrawals (likely) begin to exceed earnings in the account.

Forced Required Minimum Distribution

Source: IRS5

Edward adds “The impact of these events will be substantial and will pose a challenge to the retirement industry. After decades of asset accumulation, this unbridled exit of funds is poised to have a material and adverse impact on the retirement companies that manage these accounts. “

Converging Elements

While the actual valuation of current RMD outflows and projections of future distributions are inexact in the absence of hard data, consider the following statistics:

  • The value of retirement assets for all RMD-eligible plans currently totals an estimated $16.2 trillion.
  • The current population of 50-69-year-olds who will reach RMD status over the next 20 years will increase by more than 27 million individuals. As a result, by 2035, the total number of retirees taking RMDs could swell to 58.7 million individuals according to census projections.
  • It is estimated that more than 65% of current traditional IRA investors (and their assets) will enter into the RMD strata in the coming 20-year period.6 As a result, if projections are correct, up to $10 trillion in assets will be subject to mandatory withdrawals over the next two decades.
  • A first-year withdrawal, based on the current IRS formula, requires a distribution of 3.65% of eligible assets. Furthermore, the percentage grows as the retiree ages and jumps to 5.35% for that same individual at age 80. As a result, at age 90, the mandated withdrawal percentage leaps to 8.77% of the account holder’s balance.

Can the Gen Xers, Gen Ys, and Millennials replace those lost funds in the market with their contributions to their retirement accounts?  I don’t believe they can.

In conclusion, our younger generations are not savers, rather, they’re spenders. Look at how much housing has gone up and how much they are spending on student loans. That does not leave them enough.  Just my thoughts – what are yours?

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