FWIW, here’s some sample numbers for RMD percentages at various ages.
(These are based on current life expectancy. YMMV when you retire. There are also variations for spouses based on age differences, etc.)
70 3.6%
75 4.4%
80 5.3%
85 6.8%
90 8.8%
95 12%
100 16%
…
115+ 53% (So even if you magically had some money left in your 401(k) in your 110’s, the IRS really, really wants you to make it into taxable income ASAP.
If you die while taking RMDs, your heirs have to continue taking them but at their life expectancy rate. A 30 year old inheriting grandmas IRA doesn’t have to take much out.
So a 401(k)/IRA might continue to grow a bit during some of your 70s, but unless you have a really good investment it will start draining down. And at a faster and faster rate.
Note that you can convert an IRA into an annuity and you pay taxes only on the amount you get each year. No explicit RMD requirement. So the taxed amount is smaller early on. Things are more even spread out. If you get to 90+ the income stays mostly steady. But the annuity field is heavy with shady folk.
One of the best is TIAA* (which I’ve got do to being a college prof., but it’s open to anyone for general investment). You can do a joint annuity, set a fairly length mininum term (so your heirs continue to receive it if you die early), etc.
The trick is to invest the excess money you’re getting and grow that on the post-tax side of things.
They’ve dropped the “CREF” from their name. They still do real estate funds, just a shorter name.
I see limited validity to that point. In case you’re comparing alternatives which pay you an interest rate per se (a bank account, bonds, etc ‘fixed income’ in the jargon) it’s true there’s not much point saying the bank account pays 1% now and that’s ~-1% real, but the 5yr CD pays 2% and that’s 0% real assuming the same inflation for both. You can just shortcut it and say the CD pays 1% more than the bank account now does, against the possibility the bank account rate will rise or fall over the next 5 yrs whereas CD rate is fixed, and you can instantly redeploy the bank account money if another opportunity arises whereas (usually) you have to pay an interest penalty to withdraw money from the CD. Inflation doesn’t have to be explicitly considered to make that comparison.
However in the general context of investing over long periods, as implied by questions by 29 yr old like ‘what happens to my 401k when I’m 70?’, nominal return is meaningless, only inflation adjusted return is meaningful. It’s really the opposite of what you said. It’s only a ‘feeling’ that there’s any meaning to estimating you’ll have $7,000 nominal dollars 40 yrs from now starting with $1,000 now (5% nominal return). Without knowing the inflation rate you can’t meaningfully compare $7,000 with your liabilities (ie what it will cost to live in retirement) which is the whole point of investing the money.
Additionally, bond investments are assumed to be a minority and the simple theoretical relationship between between stock expected return and PE I used is to real return. In that case you’d just be adding back an assumed inflation rate to get a nominal rate, which is again meaningless for most individual investors over a long period ('I need 100k nominal $‘s 30 yrs from now no matter what the inflation rate turns out to be’…describes almost no individual in the real world).
It looks like there are a lot of restrictions and potential “gotchas” in doing so, but it’s certainly an option. I wouldn’t personally recommend it - health insurance, at the very least, will be expensive and getting more so regardless of whatever happens with Obamacare.
The friend could also look into converting his IRAs to Roth IRAs. I don’t know what all that entails beyond paying a boatload of taxes right now, and I don’t know how that affects one’s ability to take fund out without penalty (as you can with a regular Roth - you can withdraw the initial amount but not the earnings).
He could also switch to Roth-only contributions vs pretax contributions, if he has those options. That might let him start taking money out before 59 1/2 years - I think, but am not sure, that such funds have to have been in the account for 5 years or more.
And, he could switch future savings more toward non-retirement vehicles - again, making those funds accessible earlier than 59 1/2.
Yep, Tired and Cranky beat you to it. I don’t know their circumstances completely, it’s possible that they don’t qualify for some reason, but I’ll pass this on.
I might have missed it or misunderstood. There is only a RMD for retirement accounts that will be taxed on withdrawal. A Roth IRA or a Roth 401k have no RMD.
The reason I mentioned Roth vehicles above (if your question was in response to that) was that you can withdraw Roth money early (before age 59 1/2 that is) without penalty or tax. But only the principal - if you put 5,000 away in a Roth, and it’s grown to 20,000, you can withdraw only 5K. If you take more than that before age 59 1/2, you run into tax/penalty issues.
So - investing in a Roth vs. traditional vehicle would offer that flexibility for someone wanting to retire a bit before minimum retirement age. If I thought we stood a chance in hell of retiring early I’d definitely go more heavily toward Roth myself (then again, we’re just 2 years away from the legal age, so…)
Up thread I mentioned a book, If You Can by William Bernstein which has a free Kindle edition. There is also a PDF web version here. It is a quick read, with excellent advice.
Also, a comment about advisor / mutual fund fees. The PBS Frontline video quoted Jack Bogle, who points out that a 2% aggregate fee, compounded over fifty years will eat up two-thirds of your investment growth! Well worth paying attention to fees.
When I retired, another aspect of fees became obvious. An advisor who had managed a small IRA for me pitched a plan to include my separate 401K under his management - in a plan that would cost me 2% annually - or 1% if it reached a million.
He went on to show how I could withdraw 4% annually and never run out of money. When I realized he expected me to pay him 1 or 2% of my portfolio - which was 25-50% of my annual withdrawal, I left that advisor and followed Berstein’s advice.
If you end up with decent income, you probably want to do the travel/leisure in your 70’s, and by mid-to-late 80’s you may be slowing down; you won’t need as much. Especially in your 90’s.
When you hit the age where you need to go into a home - you should see what those cost! My dad in NJ was paying $4000-plus a month; he made enough with pension (remember those?) that he didn’t qualify for Medicare supplement to home care costs. Step-mother’s Alzheimer home cost $7,000 a month. Theoretically, if you don’t have the money, the government will pay (minimally). But if there are two spouses living off the same fund, one may find they have nothing left after paying for the other. And if you unload your savings to your kids, you have to wait 2 or more years after the disbursement for government support to kick in. (They don’t want you to give away your money and plead poverty…)
As others have pointed out, your account is still just like it was when you were contributing - except that you are taking out a certain amount (prescribed minimum or more) every year. It could theoretically keep growing. However, the government would prefer to get its taxes rather than wait until you kick off.
The pessimist theory says the stock market has been all about the baby boomers making loads of money and (some) have been saving up for retirement, creating a bull market of buyers chasing more and more investment opportunities. As the boomers progressively cash out over the next few decades starting recently, it will become more and more sellers trying to find anyone to unload their investments onto.
I’ve read a few “boomers are beginning to retire now” articles that suggest this; also predict that as boomers get older, they will want to move out of their McMansions (high maintenance effort for an 80-year-old) and the smaller next generations with poorer incomes will no be able to pay the same high prices for them… so look for a housing price decline, although the recent real estate debacle has kind of messed up that one.
Can you find any data on the distribution of IRA/409 assets by age? There’s plenty telling us how much each generation has saved on average, but not gross amounts which allow for different sizes of generations.
So according to your link, boomers have a total of $10 trillion in tax-deferred savings. Seems like a pretty big number. Let’s put that in perspective - Friday’s NYSE volume was 3.5 billion. Volume is a measure of the number of stocks that trade hands - not even the *value *of those stocks. A quick google tells me the average stock price is ~$53. So while it wouldn’t be the best idea for all $10 trillion of that savings to be cashed out on a single day, boomers are going to be cashing in 10 weeks worth of market activity over the course of decades. I don’t see the issue.
Trading volume is completely misleading. Theoretically you could have a day’s trading volume be greater than the value of all the stocks listed.
The market value of the big two US stock exchanges is around $26T. 26 vs 10 is more suitable comparison. But it’s still oversimplifies. Some tax-deferred savings aren’t in stocks. OTOH there’s a lot of savings that aren’t tax-deferred.
But the general rule is that there is a lot more investment money (which the Boomers make just one chunk of) than safe, suitable investments. Hence the drive to get people to invest in shaky stuff like weird mortgage packages, etc.
Trying to encourage investment at this point is very counter productive. Spending will have a positive effect. Which is what the Boomers will be doing with some of their money.
Yes the relevant comparison would be stock value not volume, or all assets. Total US household net worth is in the range of $80 trillion. 10 trillion liquidated quickly would have a huge effect on prices. That said it's not going to be liquidated quickly, and the flip side to all the hand wringing now about concentration of wealth in the US is that most personal investment *'s* are by households that wouldn’t have to liquidate them when they retire. A lot of investment 's are owned by people who can live off the income from the assets and just pass the assets to their heirs. Again a fairly big % of invested 's, not a big % of people, are in that situation.
Also there’s the whole rest of the world as a market for US assets, and foreign assets for US investors of course too, so you can’t just look at the question as if the US asset market were a closed system. Other countries have faster aging populations than the US or will have, but some also have rapidly increasing wealth and appetite for foreign assets. China might fit both categories. All in all it’s quite mainstream to be concerned about the impact of demographics on stock prices, but like everything else figuring it out far in advance of the market figuring it out is extremely difficult. It’s foolish IMO, for the great majority of people, to base personal investment decisions on a factor like that.
This I’m not sure I understand. If it’s the usual implication that people should spend to ‘help the economy’ that’s a fallacy, or true only at some stages of the economic cycle. More generally it’s surprisingly difficult to say what’s ‘too much’ or ‘too little’ savings overall economically. The US has a big current account deficit, which means there’s less domestic savings in the US than investment in the US. It’s harder to determine what’s ‘wrong’ or ‘right’ about that. However, if there was more domestic savings in the US, which would mean that deficit would narrow (whereas tariffs, ‘more patriotism by corporations’ etc cannot make it narrow) most people’s seat-of-the-pants economic sense would be that that would be better. However how to make total savings increase is not clear.
But, back to distribution, there’s clearly a coming social problem of a lot of people not saving for retirement and who will have to cut back their standard of living when they do, or will lobby for more govt aid when they do. That wouldn’t be solved by more savings if the additional savings is by people who already save enough for their future needs.
The general point of that article and many similar is that over the next few decades there will be more money coming out of the stock market and other investments, than going in. This would be aggravated if current apparent trends get worse - student debt, lack of good employment prospects, possibly higher SS deductions and taxes, etc. - and so the younger generations have less opportunity to build their own savings. To what extent this trend would impact the prices of investments depends on the degree of withdrawal.
The extremely low interest rates for over a decade has driven , and the 2008 economic collapse demonstrates, the desperation of all investors to find alternative better-yielding investments. The rate of return of investments over all goes to the heart of the OP’s question. Sporadic good rates of return don’t help as much if a retiree must endure another depression like 2008 where their principal is heavily drawn down, while also dropping in value.
Of course, the largest asset for most households, is the house… presuming it’s not over-mortgaged. This is not very liquid and not usually cashed out, if at all, until near the end of retirement life. There’s a whole separate debate in what happens when everyone tries to sell their old house into a dwindling buyer base of much smaller families.
The only bright(?) side, is if the USA can get it’s illegal immigrant issue under control - there will be a shortage of working age employables and that should drive up wages.
That’s not the point of that article at all. “Tyler Durden” is saying that because boomers are going to start being forced to take their RMDs, Wall Street advisors are facing a potentially losing battle as the pool of assets they earn management fees on begins to dwindle if they don’t convince their clients to reinvest those assets into non-qualified accounts.
Nowhere does it suggest that cashing out is going to crash the stock market. Maybe you could link to a different article that does?
Again sure there have been many articles like that whether the linked one is really one of them or not. Two of the major points such articles sometimes miss are:
US asset markets aren’t a closed system. More demand for US assets from developing countries getting rich could offset a demographic change in investment flows in the US.
Just as everyone complains now about high % of US wealth in a small % of households, for some reasons that might be valid different debate, by the same token most $'s invested in the US stock market don’t belong to people who will have to spend RMD’s. And RMD’s ‘withdrawn’ ie taxed but just reinvested because the owners don’t need to spend them will have no effect.
But a slow down in the growth of US population growth, including less immigration, is a pretty clear negative in terms of dealing with the aging population. There might be political and social reasons for reducing immigration, and a big issue of optimizing what immigrants come in. But just slowing down immigration to create a labor shortage is just going to exacerbate the problem of fewer people of working age supporting more retired people.
Anyway trying to predict what the value of the stock market will be in the long term is impossible, period. Same as the long term price of oil etc. Lots of interesting articles and opinions. Somebody will be right. But knowing who is impossible.
I don’t suggest slowing immigration to raise wages. I suggest that enforcing laws about illegal immigrants will shrink the labour pool. (Unless legal immigration is increased).
Another factor to consider is defined benefit pension plans… remember them? Most were closed off a decade or two ago. So those funds too will start depleting over the next decades.
The article says the average savings is only $133,000. Even allowing that say, 1/3 of households have significant savings, that’s only half a million each. A withdrawal of 3.4% would be $17,000 each - pre-tax.
(Emphasis mine)
I don’t think $17,000 a year additional retirement income leaves much behind for re-investment… Most boomers will be withdrawing to finance living expenses.
US assets will be competing with foreign assets for foreign dollars. The real estate market in Vancouver, for example, is heavily skewed by overseas investors, resulting in recent drastic tax action. I guess one important issue will be how friendly or heavy-handed the country is. Canada is not in the habit of freezing foreigners’ assets and arm-twisting foreign banks to do what they say.
You went a long way to get to a not well-supported point.
There is no point in looking at averages per household. The whole thing is heavily skewed by the small fraction that have a lot setup in tax deferred accounts.
While the overwhelming majority either have no such accounts or not enough to have extra to re-invest, it’s the large amount held by some that will affect the markets. Averages in this situation doesn’t tell the story at all.
And note that we’re not talking about 1 percenters here. We have quite a bit in tax-deferred savings. Planning on the best way of moving it out to minimize taxes is a major conundrum. Then what to re-invest in is another big issue. We are middle class, but good savers.