RMD(Minimum amount the government requires most retirees withdraw)
84% of Retirees Are Making This RMD Mistake
https://finance.yahoo.com/news/84-retirees-rmd-mistake-130022029.html
Summary
Though retirees are only required to take a certain portion of their retirement savings out as distributions each year, a study from JPMorgan Chase shows that there is likely good reason to take out more.
The vast majority (84%) of the retirees who had already reached RMD age were only withdrawing the minimum. Meanwhile, 80% of retirees still had not reached RMD age were yet to take distributions from their accounts, the study found, suggesting a desire to preserve capital for later in retirement.
Retirees who limit retirement account withdrawals to RMDs could be making a mistake, according to JPMorgan Chase.
Though retirees are only required to take a certain portion of their retirement savings out as distributions each year, a study from JPMorgan Chase shows that there is likely good reason to take out more. A withdrawal approach based solely 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 their lives, the financial services firm found.
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Using internal data and an Employee Benefit Research Institute database, JPMorgan Chase studied 31,000 people as they approached and entered retirement between 2013 and 2018. The vast majority (84%) of the retirees who had already reached RMD age were only withdrawing the minimum. Meanwhile, 80% of retirees still had not reached RMD age were yet to take distributions from their accounts, the study found, suggesting a desire to preserve capital for later in retirement.
Retirees’ prudence surrounding withdrawals may be misguided, though.
“The RMD approach has some clear shortcomings,” JPMorgan Chase’s Katherine Roy and Kelly Hahn wrote. “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.”
What Are RMDs?
An RMD is the minimum amount the government requires most retirees withdraw from their tax-advantaged retirement accounts at a certain age. In 2020, the RMD age was raised from 70.5 to 72.
An RMD is calculated by dividing a person’s account balance (as of Dec. 31 of the previous year) by his 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 be required to withdraw at least $10,917 from his account that year.
RMD Approach vs. Declining Consumption Strategy
Assuming people spend more earlier in retirement than during their latter years, a withdrawal strategy should match this declining consumption, even if it means taking more than the required minimum distribution, Roy and Hahn wrote.
“On the consumption front, we believe the most effective way to withdraw wealth is to support actual spending behaviors, as spending tends to decline in today’s dollars with age,” they wrote. “Unlike the RMD approach, reflecting actual spending allows retirees to support higher spending early in retirement and achieve greater utility of their savings.”
Though RMD approach may increase a retiree’s odds of being able to leave money to loved ones, a retiree who’s more concerned with meeting his own needs would likely benefit from an option tied to his declining consumption later in life.
Comment
Pensioners in major developed countries, including the United States, accumulate capital for various personal pensions, retirement pensions, and public pensions while receiving pre-retirement benefits.
However, after actual retirement, they live with the minimum pension ceiling set by the government, which leads to the ironic result that the pension balance eventually survives longer than the retiree.
Therefore, it seems to be an important point to design an appropriate withdrawal amount so that the total amount of pension can match the life cycle life pattern or consumption pattern and live accordingly.