When it comes to how people manage their income and spending in retirement, it appears we’ve got a bunch of rule-followers!
A research paper from J.P. Morgan Asset Management shows most people aren’t tapping their retirement accounts before their required withdrawals, and even then, they’re only withdrawing the minimum. About 80% of the retirees studied didn’t withdraw money from accounts before their required minimum distributions, and about 84% of those who reached RMD age took only the minimum amounts.
“Required minimum distributions appear to be the dominant withdrawal ‘guidance.’ The vast majority of retirees—particularly those with less observable wealth—do not take distributions before RMD age, and those older than RMD age choose to take only the RMD amount,” the report, authored by J.P. Morgan Funds Chief Retirement Strategist Katherine Roy and Kelly Hahn, states as a key takeaway.
While it’s good they aren’t lavishly raiding their 401ks during the early stages of retirement, taking out too little raises issues of its own. Using the RMD guidance to help them distribute their wealth in retirement isn’t what that guidance was designed to do, and can lead to retirees unnecessarily hording their wealth at the expense of their quality of life.
“The RMD approach has some clear shortcomings,” the report states. “It does not generate income that supports retirees’ declining spending in today’s dollars, a behavior that we see occurs with age. In fact, the RMD approach tends to generate more income later in retirement and can even leave a sizable account balance at age 100.”
On the consumption front, the authors believe the most effective way to withdraw wealth is to support actual spending behaviors, as spending tends to decline with age. Unlike the RMD approach, reflecting actual spending allows retirees to support higher spending early in retirement and achieve greater utility of their savings.
The authors conclude that the RMD approach doesn’t solve for any specific retirement outcome, and therefore can fall short of meeting the goals for consumption and longer-term objectives.
For many 401k plan participants, an in-plan retirement spending offering may be quite helpful. In J.P. Morgan Asset Management’s July 2021 plan participant survey, 85% of respondents said that they would likely leave their balances in their plans post-retirement if there was an option to help generate monthly retirement income.
The paper also explores two other key findings:
- De-risking is commonplace: 75% of retirees reduce their equity exposure after they roll over their assets from a 401k to an IRA. The greater the equity share in the 401k allocation, the more significantly participants derisked.
- Income and spending in retirement are highly correlated. As income increases with the start of Social Security payments and taking RMDs, spending increases.
Drawing on an Employee Benefit Research Institute (EBRI) database of more than 23 million 401(k)1 and IRA accounts, and J.P. Morgan Chase data for around 62 million households, the report studied 31,000 people as they approached and entered retirement between 2013 and 2018. It offers what the authors are calling the “very first holistic financial view of households in transition” from work life to retirement.
SEE ALSO:
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Veteran financial services industry journalist Brian Anderson joined 401(k) Specialist as Managing Editor in January 2019. He has led editorial content for a variety of well-known properties including Insurance Forums, Life Insurance Selling, National Underwriter Life & Health, and Senior Market Advisor. He has always maintained a focus on providing readers with timely, useful information intended to help them build their business.
If I don’t draw on my 401k/IRA then where do I get income? Keep working? Take SS before 70? So I withdraw with the hope that it would reduce my RMD and if I didn’t need it, I can always re-invest it, just not in a retirement account.