Boomer IRAs

Great Debates
1

We’ve had numerous threads on the efffect the looming retirement of the Baby Boomers (Americans born between 1946 and 1964) will have on the US Social Security System, but I haven’t seen and can’t find a thread on an event much closer to hand.

According to the US Statistical Abstract 2004 (PDF file: See Item #691:Asset Ownership Rates for Households by Type of Asset and Household Characteristic: 2000), as of 2000, some 68.5% of the first ten years worth of Baby Boomers (those then 45-54 years old), about 26 million people, hold money in some sort of retirement account (IRA, 401(k), etc.), with the cohort behind them keeping pace as well.

As early as June of this year, the leading wave of Baby Boomers will be technically eligible (i.e., will have reached age 59-1/2) to begin withdrawing from these accounts.

From a couple of government sources, I get that the birth rate in 1945 was 2,858,000, and 1946 was 3,426,000. Assuming similar rates of people holding accounts and early deaths for the two years, the number of people starting withdrawals from retirement accounts this year could jump as high as 20% over last year.

What effect will this have on the US Economy?

There could be a bump in tax revenues for the money on which taxes were deferred, but what will this do for the banks that will be doling out cash to more people for the next 18 years?

2

I’m no economist, but wouldn’t these boomers getting their money out and spending it strengthen the economy?

3

Could be. but my understanding is that the spending habits of those on a “fixed income” are a little more frugal than the rest of us.

Plus, it depends on where they spend it.

4

As I understand, the banks are simply holding the money the same way they would do for any brokerage account. Thus, they haven’t lent it out to anyone, so there would be no problem in this regard.

Of course, the effect on the economy would depend on a) how much the average boomer has in their IRA b) how much they will take out to spend. Without knowing that (at least a), it’s very difficult to judge what the effects will be. I didn’t see the information in your link.

5

If they’re not lending it out to anyone, how does it earn interest? IANABanker.

6

From a financial planning standpoint we can infer some reasonable assumptions:

Such a 59 1/2 year old with a substantial IRA has engaged in reasonable planning and prudence in order to place that money where he/she did, and resist taking it out earlier at a penalty.

Please note that 59 1/2 is the minimum age when normal distributions may be made. In fact, boomers have had access to their money through techniques like five year averaging, and annuitized distributions without penalty for quite some time.

Because of this we can expect that there will be no great rush on the money. It’s been available. If the boomer in question is still working and receiving other income they may not wish to begin distributions as those will be taxable at the same rate as their other income (if it doesn’t bump them into a higher rate.)

Sine the assets in an IRA grow tax deffered, they are among your most valuable assets from an investment stanpoint. They get to compound without having taxes drawn off, whether they be taxes on dividends, or capital gains. There is no fear of selling appreciated assets in an IRA either.

Because of all these factors, it is unlikely that a prudent financial plan will involve distributions at an early age regardless of eligibility. The tax defferal is too big an advantage to be given up. For the most part, we can assume that significant retirement assets will be allowed to compound until minimum distributions must occur, which is the year following the year in which a party turns 70 1/2.

In many cases people at age 70 1/2 today are opting to “stretch” their IRAs (taking out even smaller distributions by naming a young beneficiary and basing the distribution on the joint life expectency actuarial table,) in order to take out as little as possible and avoid taxes.

Their is one major caveat to what I’ve said. An IRA is typically a lousy asset to die with in a large estate. The entire sum gets taxed twice at death. For example, if you have a $500,000 IRA and no stretching occurs, upon death that full amount must be withdrawn and income taxes must be paid Then, assuming the estate is large enough, it is also taxed federally through the estate tax. That rate begins at 55%. Combine that with the income tax and local taxes and it’s easy to get deceased IRAs getting taxed at 90% or more of their value.

Deferal is always key, but part of any good plan is preserving assets from this kind of extreme taxation.

So, to answer your question, it is unlikely that there will be any discernable effect in tax revenues because:

  1. The ability to take distributions without penalty pre 59 1/2 has been available for several years.

and

  1. Taking distributions early in retirement is generally undesirable due to investment, taxation, and estate issues.

Hope that helps.

7

Perhaps I’m misunderstanding your question, but an IRA isn’t like a standard “you put money in, the bank lends it out and through the miracle of fracional reserves, you (and the bank) get interest.” It’s a holding fund for other investments.

The few IRAs I have dealt with all put money into money market funds until the account holder moved the funds into stocks, funds, bonds, whatever, using the bank as their broker. The bank collected money on the standard broker fees and deducted any other applicable fees (like fund management, etc.). So that’s where they make their money. That and they pester the fuck out of you to buy their own funds, etc., which they of course have a vested interest (no pun intended) in seeing grow.

8

I’m no economist either but that isn’t necessarily true. By spending all that money prices will increase and capital will become harder to raise. The first could lead to high inflation or the second could lead to slow economic growth or both. (hello stagflation!)

9

While working we BBs are earning decent incomes, paying taxes and contributing to the economy. Once retired, the retirement incomes are less than earning income so we will be paying less taxes. In addition, since our big ticket purchases are presumably now behind us, we will be coasting. (In theory, of course.)

As far as I can tell we will not strengthen the economy but drain from it, especially as we age and incur age-related illnesses. Since we also will probably live longer than our parents, the drain on the economy will be more as well.

10

I suppose this is what I envisioned when I made the OP, although I think Scylla’s points are well-taken.

Still, whether acute or stretched out over time, it seems to me we’re going to have a huge cohort at one end of the demographic spectrum slowing down the economy, and we will need to hope that the second boom is comfortably in their prime earning years before it becomes a big problem. The oldest of them are about 20 right now, so it’s possible we just make it by the skin of our teeth

11

What effect, if any, will the Boomers’ retirement have on the stock market? When they cash out IRAs, aren’t they effectively withdrawing from the market? Will stock prices be depressed when this big cohort starts cashing in its chips?

12

As pointed out above, very few boomers will “cash out” their IRA’s and other retirement funds on the spot. Most of those that do decide to spend the money will take it in small monthly amounts to supplement their retirement income. Effects on the economy as a whole should be minimal.

But here’s an, in my opinion, legitimate concern re: the stock market: Many boomers that have had their retirement money in stock mutual funds and other stock related assets may elect to move all or part of that money to less risky investments, like CD’s or short term bonds. They’ll be more concerned with keeping what they have than they are with making more. This could have a negative effect on stock prices.

OK, you didn’t ask, but here’s what I did. I retired eight days ago. My income from company retirement plus Social Security will be enough to “get by on” for as long as I live.
I’m not interested in just getting by. I intend to do some traveling, visit places, and buy a new car when we need one. I haven’t been putting money into 401k’s and IRA’s for 25 years just to “get by” in retirement.
Early last year I took half of my money out of stock related funds and put it in low risk, low return investments. I can draw $800 per month (pre-tax) from this money for over 15 years, and that’s what I’m going to do. That plus my guaranteed income from retirement and Soc. Sec. will be about the same as my income when I was working.
Hopefully, the remaining half will make some good gains in the stock market. In any case, in 15 years I may not give a shit anyway, or might not even be here. In 10 or 12 years I’ll decide what to do with the remaing half of my investments.

Peter Lynch, Fidelity’s investment guru, once was asked when to take money out of the stock market. He said to take it out if you are going to need it in two years or less. If an avalanche of boomers follow his advice, or do what I have done, there could be a large amount of money leave the stock market.
Or not. If anyone really knew what was going to happen, they’d be a billionaire in short order.
I’d recommend not trying to outsmart the markets or the economy in general. YOU run your money, don’t let your money run you. Leave it in stocks when your timeframe is long, make changes when your life situation changes.

13

You’re positing a problem that doesn’t necessarily exist. Our economy does an absolutely wonderful job of seperating people from their money. Older folks will still be consumers. In many areas their consumption will increase as they age and retire. What this means economically is a lot of money looking to purchase goods and services. This translates into a very high demand for the workers and producers who supply the goods and services needed by the aging population which is good for the economy.

14

I read an article that basically said that although it is expected that your spending will diminish, it’s really not as much as people think. Seems to me that your needs will increase to fill any amount you have to spend! :stuck_out_tongue:

And this is how many BBs see their retirement. They saved all these years and now want to use that money for enjoying the time they have. It’s what I’m planning (but I have a ways to go!)

On other notes, for people like myself, I’m looking forward to Boomers retiring! Once they leave their jobs, people like me who are still considered young by work standards, who have LOTS of experience in our fields, should end up in high demand. That’s my story and I’m sticking by it. Optimism, Baby!

15

I haven’t read the terms of my IRA account lately, but as I recall the brokerage that holds my IRA is allowed to make such use of the funds and securities that I deposit with them as they see fit provided that they must insure that their usage does not harm me in anyway. They are allowed to loan out both the cash in my account and any securities my account may from time to time contain for whatever purpose as long as they make up any deficit from their own resources should I request a distribution.

What bank would agree to hold cash without the right to subordinate it? They’d lose money doing that.

16

Congratulations!

Lucky bastard.

17

Why, thank you! So far it’s been a blast. (Cool retirement party Saturday night)