Although retirees only need to pay part of their retirement savings As an allocation each year, A study by J.P. Morgan Indicates there may be good reasons to take out more.only based on required minimum distribution The financial services firm found that not only did RMDs fail to meet retirees’ annual income needs, they also left money behind at the end of their lives.
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JPMorgan Chase conducted a study of 31,000 near-retirees between 2013 and 2018, using internal data and the Employee Benefit Institute database. Among retirees who have reached RMD age, the vast majority (84%) have withdrawn only the minimum amount. The study found that 80% of retirees who have not yet reached RMD age have not yet taken distributions from their accounts, suggesting they want to preserve capital for later retirement.
Still, retirees’ caution about withdrawing money could be misguided.
“The RMD approach has some clear shortcomings,” JPMorgan’s Katherine Roy and Kelly Hahn wrote. “It would not generate the income to support retirees as their spending declines in today’s dollars.” , we see this happening as we age. In fact, the RMD approach tends to generate more income in retirement and can even leave a sizable account balance at age 100.”
What is RMD?
An RMD is the minimum amount the government requires most retirees to withdraw from their tax-advantaged retirement accounts at a certain age. In 2020, the RMD age increased from 70.5 to 72 years. JPMorgan’s research examined data before the change.
The following retirement accounts all have required minimum distributions:
one RMD calculation Divide a person’s account balance (as of December 31 of the previous year) by his current life expectancy factor to get a number Set by the IRSFor example, the life expectancy coefficient of a 75-year-old man is 22.9. If a 75-year-old retiree has $250,000 in a retirement account, he will need to withdraw at least $10,917 from the account that year.
RMD method and declining consumption strategy
Using the RMD method, retirees only need to adhere to required minimum distributions each year.This strategy does have several significant advantages over more static techniques, e.g. 4% rule.On the one hand, using actuarial statistics, the RMD method considers a person’s expectations based on his or her current age; the 4% method does not.Additionally, by withdrawing only the minimum amount each year, the account owner will reduce his tax bill and maintain maximum tax-deferred growth.
However, JPMorgan’s Roy and Hahn note that more flexible withdrawal strategies tied to retirees’ actual spending behavior could more effectively meet income needs and reduce the likelihood of dying with a large remaining account balance.
Roy and Hahn write that, assuming people spend more before retirement than they did in their actual years, withdrawal strategies should match the decline in consumption, even if that means the latter spend more than required minimum distributions. .
“On the consumption side, we believe the most efficient way to extract wealth is to support real spending behavior, as spending trends decline with age in today’s dollars,” they wrote. “Unlike the RMD approach, which reflects real spending, Spending allows retirees to support increased spending early in retirement and achieve greater utility from their savings.”
When comparing the RMD approach to the declining consumption strategy, J.P. Morgan found that a 72-year-old with $100,000 in retirement savings could spend more money each year using the declining consumption strategy until age 87, at which point the RMD strategy would support more High expenses.
Meanwhile, if the retiree limits his distributions to the minimum amount, he will still have more than $20,000 in his account by the time he reaches age 100. Using the declining consumption method, a 72-year-old man would only have a few thousand dollars left. 100 years old.
Although the RMD approach may increase the likelihood that retirees will leave money to loved ones, retirees who are more concerned with meeting their own needs may benefit from options associated with declining consumption in later life.
A JPMorgan Chase study found that a whopping 84% of retirees of RMD age limit retirement account withdrawals to the minimum required. This approach may leave retirees with insufficient annual income to meet their needs. Aligning retirement funds with retiree spending needs will provide more retirement income and reduce the chance of retirement funds outliving retirees.
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