Read a source that the average American’s 401k/IRA is only about $70,000+ at the time of retirement, despite them typically needing it to be at least 10x larger.
With that sort of small 401k, what do these retirees typically do with it? Do they just withdraw the whole account in small annual bites of, say, $5,000 per year and scrape by with whatever other Social Security/other sources of income they can scrounge up? Cash it all out as one big lump sum?
Your 401k grows tax free but taxes apply when you started pulling from it. I’d guess most people pull from it gradually to supplement SS, rather than take a lump sum payout.
I’m curious. What else would you do with an IRA, if only it were 10x larger?
If it’s big enough, you live off some of the investment returns and it’s bigger when you die than when your retired.
If it’s smaller than that, you live off the returns and it’s the same size when you die as when you retired.
If it’s a little smaller yet, you consume all the earnings and slowly deplete the principal, but still die with money in the account.
if it’s lots smaller yet, you’ll spend it pretty quickly trying to avoid sleeping your car. Then what?
Of course RMDs get in there once you’re at/past age 72, but that’s a distraction to the thrust of the OP, so I’ll ignore that issue.
Now as to investment choices …
Nowadays with low transaction costs, whether your IRA/401K is $7K or $7M you can build the exact same portfolio and achieve the exact same rate of return. 5% annual on $7M is a darn good living. 5% on $7K is … not.
That seemed incredibly low to me, so I did The Google:
$256k (age 55-64)
$555k (age 60s)
$207k (age 55-64)
mmm
I suspect there’s a big difference between the average amount in the accounts among every one who has an account versus among every American.
i.e. total assets in 401Ks / total account holders >> total assets in 401Ks / total Americans
Check out the median 401(k) balances from your own links above. The median value is likely to be more representative because the averages are skewed by people with very high balances.
$89,716 (age 55-64)
$209,382 (age 60s)
$71,168 (age 55-64)
The last source pretty much exactly supports the OP’s contention.
Fair point. I saw “average” in the OP, but now see that it refers to average American, not average 401k balance.
mmm
Sorry, wrong wording. I meant “median” and not “average.” Of course there are some people with massive 401ks who’d pull the average up. My poor grades in statistics in college biting me again…
For Canadian RRSP’s, same idea, there’'s a formula - you must withdraw X%, and that goes up with age - from for example about 5% at age 71 to about 20% at age 90. Balance transferable to a spouse as the same saving plan, but “cashed out” and taxed for the estate when the last spouse dies.
The concept is that it is for retirement income. The percentages make it so that unless the stock market (or whatever investment) is going crazy for many years, you will have a steadily declining balance.
I’m surprised the American tax-free savings is not the same. The idea after all is retirement, not to build up a nest egg for the kids.
You can of course pull out some or all any time, you just pay the taxes. My current strategy is to pull out any extra that does not put me into a higher tax bracket, and put it into regular savings, since Canada offers a TFSA also (contributions - a limited amount per year - to a TFSA are already taxed, but growth is not taxed, so more flexible)
For the OP - if you’re living strictly on social security and part time work at McD’s, then I would assume $6,000 a year extra - $500/month - is a handy bit more. Even if you have only $70,000 then $3,000 a year will last from 65 to your 80’s.
Sorry. Not Really American here. What is an RMD?
Not LSLGuy, but RMD = Required Minimum Distribution. It means you are required to withdraw a certain amount of money from your 401k every year once you reach a certain age. I believe it’s typically about 4 percent when you reach age 72, or something like that.
For those that haven’t hit 72 yet, the age was raised to 73.
The USA does have that
It’s called an RMD or Required Minimum (annual) distribution. Which is actuarially designed to deplete your tax advantaged savings balance at your statistical death. RMDs start age 72 (as of now; it has changed and will change again) and assume typical market returns.
If the markets and/or your investment choices suck and you live a long time, your RMD will asymptotically empty your IRA/401K long before you die. Conversely, if the market is on fire for 10-15 years, and/or you die relatively early, the RMD is a minor drag on your portfolio, not a big one.
Thanks for poking in there @Velocity & @Nars_Glinley.
There are many 401k accounts sitting in plans scattered across the country that many participants have completely forgotten about. Most of those have a few hundred to a thousand $$$ in them. Many companies over the past few decades have offered to contribute a few hundred $$ into new employees accounts as a means to encourage employees to also contribute. Many companies have policies that unless the employee opts out, they will begin withholding contributions for the employees 401k accounts again as a means to get employees to contribute to their own retirement.
With normal turnover, i.e. employees leaving and going to new jobs, many of these accounts get left behind and are never touched again by the participants.
There are an estimated 29 million left behind 401k accounts holding over $1.65 trillion in assets. That’s an average of $56k per account.
If you have a 401K/IRA that is too small to do much with you cash it in and go out to a nice restaurant and pay for your own dinner for the last time in your life. If you get there before 5PM you can afford 10-15% more food.
What happens when someone dies with a forgotten 401k? Does the administrator company (Fidelity, etc.) have some obligation to track down their heirs and pass on the money to them?
If the individual set up a beneficiary in their account, then the account would transfer to the beneficiary upon their death.
But if no beneficiary is named, then subject to individual state laws, they amounts are converted to cash and are escheated to the respective states as unclaimed property.
The plan administrator is not obliged to track down heirs.
Some (maybe most?) individuals with smaller accounts often do what individuals with larger accounts do…make withdrawals to help pay for unexpected or one time large expenses when they arise and leave the rest alone until they reach the age for mandatory withdrawals. If these individuals have an S&P index fund and/or a dividend/income fund in their IRA, then they most probably have chosen to allow the dividends/investment income money to be re-invested in the fund(s) so the value of the fund(s) will hopefully continue to grow long term.
I imagine some individuals end up making withdrawals to help pay for out-of-pocket medical or dental expenses if needed even if means draining the account because when one’s own health or a loved one’s health is at risk, this may be the only source of funds available.
Not quite true. The required minimum distribution is a percentage of the balance, based on your age and expected lifespan. Two people with different starting balances, whose investments perform the same, will have the same percentage of their money left after a few years. Different absolute amounts, of course. And by the time you hit age 110, you are going to have very little left.
If the markets do badly, but you still only take the RMD, the amounts will be lower, that’s all.
Playing with an assume 5% rate of return each year, someone would be in their late 80s by the time their principal dropped below its starting balance. Someone with a lower starting figure, of course, is likely to have less in the way of other assets, and thus might well be drawing down faster than the RMD mandates.
But getting back to the OP: They may do any of the above - take their RMDs only, take it all as a lump sum to do something like buy a residence, or whatever. Most, I suspect, take the RMD plus a bit.
As far as “needing to be 10x larger”… ooooh yeah. It’s a terrifying thought.