Years ago a I asked an academic economist I knew about the conflicting POVs that it was desirable to encourage our citizens to save for the good of the economy vs the POV that the desirable action was spending, since if an individual did one they were of necessity not doing the other.
His answer was similar to your comment above. In today’s world (well this was maybe 20 years ago but same idea) what mattered more was the international flow of investment. Not just “developing” countries of course. If Boomers liquidate assets faster than Millennial investment replaces it such that bargains are to be had in the United Staes economy relative to other markets then investors across the world relatively shift money in. As long as the world’s economies are generating money to invest.
For better and worse we are an unavoidably interconnected global economy.
So let’s take a comfortably upper middle class family. Income has been what $150 to 200K/yr and they intend on traveling some in retirement. They’ve saved the 4 to 5 times annual salary advised so have $1M stocked away in the retirement nest egg as they retire. RMD the first year is about $37K and it is taxable income and sure it goes up … by 87 to about $100K.
Now let’s assume that they have other savings and investments as well and that their retirement lifestyle will use significantly less than their previous annual income. Still they will be spending more than the $37K that year and why would they not use that taxable income to fund it before going into other resources?
Okay. They’ve saved twice that (which of course few have), and have $2M in the retirement fund. RMD starts out at about $80K. Still of course less than half what the annual income was.
Yes they are going to spend SS first but still, unless they spend significantly less in retirement than they did as working stiffs, SS plus RMD does not leave a whole mess to reinvest.
For a relatively high earner RMD alone is often not enough to live in the style one did before retirement and it should be spent before liquidating other assets to support a lifestyle. And if more is not needed why take out more than RMD from the tax-deferred account?
Okay, live long enough such that RMD increases substantially then figuring out where else to put it is a question.
It really depends on what sort of lifestyle one wants to have in retirement. Some expenses, like commuting and office clothes, are unnecessary. But there will be new ones, for medications and travel, if you choose to do that. And keep in mind that your annual income is already reduced by the amount you’re contributing to the retirement fund, and won’t need that in retirement. Plus if you’re s homeowner, you may not have a mortgage by the time you retire. And if you had children, they are probably out of college and no longer an expense when you retire.
They aren’t living on that one source of income. People that save that well could easily live on SS plus pensions or whatever. The RMD is basically forced upon them. If they could, they’d rather leave in the tax-deferred accounts. But the IRS doesn’t like perpetual tax-deferment, so it has to come out. And then go somewhere. Good savers could easily be in the position where re-investment is the option.
Bad savers don’t have much, if any, savings tucked in away in tax-deferred accounts. So the RMD is immaterial to them.
So you do not include those people in averages! That seriously messes up any calculation based off of that.
Note: It’s a required minimum distribution. If everyone was living off their tax-deferred savings, the “required” part would be unncessary. The name practically screams “Please move this into taxable forms.” It doesn’t scream “Please spend this money.”
I’d be willing to bet that this is wrong for at least 80% of the population. Social Security (assuming it survives the gutting the GOP is trying to do it it now) maybe, but it doesn’t come close to replacing your pre-retirement income.
Most notably, though: Unless you’re a member of a short list of professions, you don’t have a pension. Remember that this stuff was all drawn up when pensions still existed as a thing. Companies generally don’t provide pensions any more; they were replaced with 401Ks and the like, so it seems a reasonable assumption that the 401Ks and other protected accounts are now serving the function that pensions used to.
As noted, 4-5 times salary may not be enough. I have seen recommendations of 10x and more. One common guideline is 25 x (expected annual spending - annual SS income). The typical 4% safe withdrawal rate calculation depends on the 25x number.
Common advice is to deplete taxable savings before starting to draw down IRA/401k accounts. This allows the tax-advantaged retirement accounts the longest period of tax-free growth.
Before I retired, I struggled with figuring a number that was a percentage of my final income. I ended up tracking spending for a few years to figure it out. Since I was no longer raising kids, paying a mortgage, saving for retirement etc. it was quite a bit less than my final salary.
I have saved a bunch. I have no pension. I do have other investments that are not tax-deferred. I do not want to live off of SS alone if I ever retire. If that day occurs I’ll be wanting to live well, better than SS alone affords.
When it’s time, if I had a choice I’d rather let the tax deferred investment ride as long as possible and liquidate some of the other investments to live off of first. But some of the tax deferred is required to be converted into income. I will be forced to have the RMD as taxable income stream and of course I will use that taxed income before creating any more taxable income by liquidating investments. Why would I do otherwise?
Sure some people may have enough in other, non-tax-deferred, income producing investments that they will be either re-investing the RMD or the income produced by those other investments (in practicality the same thing) or gifting what they legally can to next generations. But even among the upper middle and lower upper class who have saved well that is not a majority.
Which is a very good point and which is why naive averaging to guesstimate the % of tax-deferred investments that are spent/re-invested will be misleading.
We have an increasingly polarized economic system. The many with not much going for them in retirement don’t make up the bulk of 401(k) and what not savers in terms of dollar amounts.
Perhaps 80% of people, but much less than 80% of dollars. There are two somewhat related but different questions. The one which has mainly driven the discussion though is the idea the stock market will be depressed by US tax deferred account withdrawals. That’s a question of 's, and most 's are owned by people who don’t need to spend RMD’s, besides the bulk of US owned assets which aren’t in tax deferred accounts, besides the fact that foreigners can, do and will also buy US assets (and vice versa).
But there are definitely a large number, at least very significant %, of people in the US who don’t have enough 's saved to avoid steep declines in standard of living in retirement. And 'well then I can't retire' is often trumped by health issues and obsolescence of work skills. And a big economic issue like that can feed back to investment returns for those who do have assets. But on the narrower idea of asset markets being depressed by RMD's, I think some people forget to shift gears from politics where each person/vote is held equal to economics where each is equal.
Well the 1% wealthiest controls roughly a third of all investments and hell the top 0.1% wealthiest alone controls as much wealth as the complete bottom 90%.
Not sure though how many of them have large portions of their net worth tied up in 401Ks and IRAs. I’d suspect that the top 1% and above have other places to find … shelter. Does Buffet have a 401K? I wonder.
Most people, including good savers in the 80 to 99%iles for income and wealth, will be spending RMD each year. And no such is not going to cause a crash. Will other things? Maybe.