When you are forced to withdraw money in a bear market


Financial planners warn investors against attempts to time the market. It’s notoriously difficult to guess exactly when sentiment on Wall Street will reverse – even professionals are likely to be wrong.

Yet that is essentially what countless retirees are being forced to do these days – playing chicken with a market rocked by 40-year high inflation, war in Ukraine, supply shocks and a sense of depressed consumption.

For retirees mandated by IRS rules to take required minimum distributions from tax-deferred retirement vehicles such as Individual Retirement Accounts or 401(k)s, the prospect of having to withdraw funds during a bear market is unpleasant enough to cause some to tighten their belts until the market rebounds – or until Congress intervenes.

Planners are reporting a surge of new clients struggling to juggle retirement spending expectations with a suddenly dwindling nest egg.

“We have a lot of new customers who need to go through RMDs,” said Peter Gallagher, managing director of Unified Retirement Planning Group. He found that some were fully invested in riskier asset classes such as stocks, which exposed them to market slump, rather than in safer categories such as bonds. “They didn’t have the idea that they were taking as many risks as they were,” he said.

Sometimes there’s not much else to do but deliver the bad news. “We had people who were 100% in tech stocks, and we had to tell them, ‘Look, you’re down 40% from the top,'” Gallagher said. “It’s a very difficult conversation, because we have to sell.”

The ABCs of RMD

As defined benefit pension plans have been replaced by defined contribution plans such as 401(k) plans, tax deferral is an incentive for workers to save. Many retirees depend on distributions from their retirement accounts for their day-to-day income, a need that has grown as the prices of gas, groceries and other basic necessities continue to rise. The RMD rules for account holders as well as heirs aim to prevent retirement accounts from becoming tax shelters for inherited wealth.

The latest significant changes to these rules were made by the SECURE (Setting Every Community Up for Retirement Enhancement) Act of 2019, which raised the age at which account owners must begin receiving distributions from 70½ to 72 and accelerated the time frame within which people who inherit IRAs or similar accounts must make withdrawals.

Holders of these accounts must begin making withdrawals no later than April 1 of the year following their 72nd birthday and continue to do so at the end of each subsequent calendar year. (Roth IRAs, which are funded with after-tax dollars, do not require RMDs.)

The amount account holders must withdraw varies from year to year, depending on their account balance as well as their expected life, and distributions are taxed as ordinary income. Individuals with multiple accounts have flexibility in that the full amount of their distribution can be withdrawn from one or more accounts, but the penalty for non-compliance is high: RMDs that are not withdrawn on time are taxed at a rate of 50%.

Cil Frazier, a retired TV marketing professional who lives in a suburb of Birmingham, Alabama, said she will have to start taking her RMDs by April, which she is reluctant to do.

Frazier, 71 and a widow, said Social Security and a small amount of retirement income are enough to pay her mortgage and most day-to-day expenses at the moment, but she’s worried about inflation driving up her cost. of life.

“I’m paying more money for things I normally buy,” she said, adding that she braces for higher energy bills as temperatures rise in the southeast. “I shop more carefully. I set the air conditioner thermostat higher. »

People who help retired Americans manage their finances are alarmed by the vulnerability this cohort — especially historically marginalized populations — faces due to market fluctuations. This is especially tricky for those who don’t have a fund manager, as investors have to calculate for themselves how much they need to withdraw to meet the RMD requirements.

“It’s very complex, and it’s almost impossible for a layman” to manage without help, said John Migliaccio, senior financial literacy consultant.

In today’s post-retirement economy, Americans have had to take a more active role in managing their pre-retirement money, whether or not they have the knowledge to do so.

The historically long pre-pandemic bull market and rapid turnaround after the spring 2020 plunge have lulled investors into complacency.

“The shakes that we’ve had in the market over the last few years – these are short-term impacts on the market, so people have been conditioned to think we’re going to see a rebound pretty quickly,” Kathy Carey said. , director of research and planning at Baird Private Wealth Management. “I feel like this downturn could last a bit longer.”

How retired investors are doing

Some retirees, like Frazier, manage by tightening their belts. Others dusted off their CVs. What labor market observers have called “non-retirement” is bringing people aged 55 to 64 back into the labor market.

“A lot of seniors are going back into the workforce,” said Cindy Hounsell, president of the Women’s Institute for a Secure Retirement. “It also gives them the opportunity to catch up a bit.”

Others are tapping into the equity built up in their homes, said Steve Rick, chief economist at CUNA Mutual Group. “I’ve been amazed at the increase in home equity balances,” he said. “Home equity lending is booming right now.”

Frazier worried that her initial RMD might be high enough to knock her out of her 12% tax bracket. “That’s a huge 10% jump,” she said.

It plans to wait until the fall to take its required initial distribution, hoping Congress steps in or volatility subsides.

Although congressional intervention would buy time, foregoing access to these funds would be a double-edged sword, as delaying its distribution would mean postponing about $8,000 of dental work that Frazier hopes to do. “I try to save all the teeth I can,” she said.

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