84% of Pensioners make this RMD Mistake.  Are You One Of Them?

84% of Pensioners make this RMD Mistake. Are You One Of Them?

Retirees who limit retirement account withdrawals to RMDs may be making a mistake, according to JPMorgan Chase.

Retirees who limit retirement account withdrawals to RMDs may be making a mistake, according to JPMorgan Chase.

Although retirees are only required to withdraw a certain portion of their retirement savings as distributions each year, a study from JPMorgan Chase shows that there is probably good reason to withdraw more. A withdrawal approach based entirely on required minimum distributions (RMDs) not only fails to meet retirees’ annual income needs but can also leave money on the table at the end of life, according to the financial services firm.

A financial advisor can help you determine the right amount of retirement income. Find a consultant today.

Using internal data and an Employee Benefit Research Institute database, JPMorgan Chase studied 31,000 people approaching and retiring between 2013 and 2018. Most were withdrawing only the minimum amount the majority (84%) of pensioners who had already reached the RMD age. Meanwhile, 80% of retirees who had not reached the RMD age had yet to take distributions from their accounts, the study found, suggesting they want to preserve capital for later retirement.

However, pensioner prudence regarding withdrawals can be misguided.

“The RMD approach has some glaring shortcomings,” wrote Katherine Roy and Kelly Hahn of JPMorgan Chase. “It does not generate income that supports the declining spending of retirees in today’s dollars, a behavior we see occurring with age. In fact, the RMD approach tends to generate more income later in retirement and can even leave a significant account balance at age 100.”

What are RMDs?

Retirees who limit retirement account withdrawals to RMDs may be making a mistake, according to JPMorgan Chase.

Retirees who limit retirement account withdrawals to RMDs may be making a mistake, according to JPMorgan Chase.

An RMD is the minimum amount that the government requires most retirees to withdraw from their tax-advantaged retirement accounts at a certain age. In 2020, the RMD age was raised from 70.5 to 72. A JPMorgan Chase study examined data that preceded this change.

While most employer-sponsored retirement plans and individual retirement accounts (IRAs) are subject to RMDs, owners of Roth IRAs are exempt from taking minimum annual distributions.

The following retirement accounts meet required minimum distributions:

RMD is calculated by dividing a person’s account balance (as of December 31 of the previous year) by their current life expectancy factor, a figure set by the IRS. For example, a 75-year-old has a life expectancy factor of 22.9. If a 75-year-old retiree has $250,000 in a retirement account, he would need to withdraw at least $10,917 from his account that year.

RMD Approach vs. Declining Consumption Strategy

Retirees who limit retirement account withdrawals to RMDs may be making a mistake, according to JPMorgan Chase.

Retirees who limit retirement account withdrawals to RMDs may be making a mistake, according to JPMorgan Chase.

Using the RMD approach, a retiree simply takes minimum required distributions each year. This strategy has some significant advantages over a more static technique, such as the 4% rule. For one, using actuarial statistics, the RMD approach factors in a person’s expectation based on their current age; the 4% method does not. Also, by only withdrawing the minimum amount each year, the account owner will reduce their tax bill for the year and retain the maximum tax-deferred growth.

However, Roy and Hahn of JPMorgan Chase note that a more flexible withdrawal strategy tied to the actual spending behaviors of retirees is more effective in meeting income needs and lowering the possibility of dying with a significant account balance remaining.

Assuming that people spend earlier in retirement than in their later years, a withdrawal strategy should match this reduction in consumption, even if it means taking more than the required minimum distribution, wrote Roy and Hahn.

“From a consumption perspective, we believe that the most effective way to withdraw wealth is to support actual spending behaviors, as spending in today’s dollars will decline with age,” they wrote. Unlike the RMD approach, reflecting actual expenses allows retirees to support higher spending in early retirement and achieve greater use of their savings.”

Comparing the RMD approach to the taper strategy, JPMorgan Chase found that a 72-year-old with $100,000 in retirement savings could spend more money each year using the taper strategy approach until age 87 when the RMD strategy would support higher spending.

Meanwhile, the same retiree would still have more than $20,000 in his account by the time he turns 100 if he had limited his distributions to the minimum. A 72-year-old using the reduced consumption approach would have only a few thousand left by age 100.

While an RMD approach may increase the risk of a retiree being able to leave money to loved ones, a retiree who is more concerned about meeting their own needs would probably benefit from an option that is more tapering in their consumption. later in life.

Base line

A JPMorgan Chase study found that 84% of retirees who reached RMD age were limiting their retirement account withdrawals to the required minimums. This method may leave a pensioner with less annual income than required. A withdrawal approach that is more closely aligned with the retiree’s spending needs will provide greater retirement income and reduce the chance that retirement funds will outlive the retiree.

Retirement Savings Tips

  • Do you have a financial retirement plan? It’s never too late to start planning and a financial advisor can help you do that. Finding a qualified financial advisor doesn’t have to be difficult. SmartAsset’s free tool matches you with up to three financial advisors serving your area, and you can interview your advisor at no cost to decide which one is right for you. If you’re ready to find an advisor to help you achieve your financial goals, get started now.

  • Whether you are still years or decades away from retirement, it is important to know where you are on the road to retirement. SmartAsset’s free 401(k) calculator can help you determine how much you can expect your savings to grow over time and how much you might have when the time comes you have to retire.

Photo credit: ©iStock.com/katleho Seisa, ©iStock.com/Wand_Prapan, ©iStock.com/eggeeggjiew

The post 84% of Pensioners are making this RMD mistake appeared first on SmartAsset Blog.

Leave a Reply

Your email address will not be published.