If you’re a Baby Boomer and approaching retirement, you’ve likely asked yourself a couple of important questions: When exactly should I retire? Should I start taking Social Security now? And what about my IRA — how much money should I pull out and when?
According to new research from the Employee Benefits Research Institute (EBRI), more and more young retirees are answering that last question with a resounding, “right now!” EBRI found that not only are households between the ages of 61 and 70 making IRA withdrawals before they’re required to do so, but they’re making larger withdrawals than older households. Specifically, 22 percent of households at age 61 are making IRA withdrawals, and those who fall in the lowest income bracket are annually withdrawing 17.4 percent of their account balance.
Financial adviser Bill Losey was not surprised. “The bottom line is a lot of people in the younger age brackets don’t have pensions like older folks,” Losey said. “Most of those people are then relying solely on Social Security and their investment portfolio. They’ve saved in IRAs and 401(k)s for a reason,” that reason being that there’s no pension to fall back on.
But he was concerned. “The [17.4 percent withdrawal rate] was absolutely stunning,” said Losey. “And it was stunning because a lot of advisers have latched onto the 4-percent rule,” he said, noting that withdrawing only 4 percent from your accounts each year has been thought to make your money last 30 years, which for most people will take them through retirement. (Recently, the 4-percent rule itself has come under fire. You can read about that here.) A withdrawal rate of 17.4 percent “says they’ll run out of money in less than ten years,” Losey said.
In an interesting twist, the EBRI study also found that older Americans — ages 71 to 80 — are taking the required minimum withdrawal from their IRA, but instead of spending it, are saving it. While only 10.9 percent of people ages 61 to 70 are saving their IRA withdrawals, 31.5 percent of people ages 71 to 80 are putting those withdrawals in CDs or another savings vehicle. This, too, Losey found to be consistent with behavior he’s observed in his own clients.
“That’s a very common thing I see because a lot of folks grew up with Depression-era parents,” he said. “Many people are afraid to take money out. A lot of folks are taking money out, paying the tax and putting the money in a non-IRA or CD.”
So if one group is withdrawing — and spending — too much, and another group is perhaps not eager enough to spend what they’ve saved, is there a happy medium?
For those who are approaching 60 and feeling like there’s no choice but to tap into that IRA soon, Losey recommends first making sure you’ve cut back on excess spending. “I still like people to go through a checkbook and see if there are areas they can cut back,” he said. “If they don’t have a formal budget, it’s not uncommon for people to find $100 to $500 per month on resources that bring no value to life and would be very easy to cut out and free up cash flow.”