J.P. Morgan Asset Management determined that many retirees
are using required minimum distributions (RMDs) as their main “guidance” for
when to draw down retirement assets.
Drawing on an Employee Benefit Research Institute (EBRI)
database of more than 23 million 401(k) and individual retirement account (IRA)
accounts, as well as J.P. Morgan Chase data for about 62 million households,
J.P. Morgan studied 31,000 people as they approached and entered retirement
between 2013 and 2018. The study determined the vast majority of retirees do
not take distributions before the RMD age, which was 70.5 but has since been
increased to 72.
Of the group that said RMDs were their “guidance” for
drawing down assets in retirement, roughly 80% of those younger than RMD age
were not taking withdrawals. About 84% of those subject to RMDs took only the
required amount.
“The problem with using the RMD [as drawdown guidance] is
that it is mismatched with how we observed households actually spending,” says
J.P. Morgan Asset Management’s Chief Retirement Strategist Katherine Roy. “It
constrains spending in the beginning and leaves assets in the end.”
The study found that, in reality, retirees are spending more
in the beginning of retirement when they have newfound time and better health,
and their spending declines as they age.
Roy says without good planning for withdrawing assets in
retirement, individuals are not optimizing their lifestyle for fear of
outliving their assets.
Using RMDs as guidance “feels like a compromise, but it’s
not helping them spend effectively and it’s not reserving enough for long-term
care needs or legacy goals,” she says. “People say, ‘Isn’t it good they’re
spending less in the beginning so they have more later in retirement?’ but when
we run the numbers, it’s not a lot more.”
Information Needed to Create an Effective Drawdown
Strategy
Jonathan Price, senior vice president and corporate
retirement practice leader at Segal, says the biggest decision that will affect
a withdrawal strategy is at what age to retire. Retiring too soon can heighten
an individual’s risk of running out of money in retirement. He says it’s
important to remember that people make spending decisions throughout
retirement, and individuals could either take their assets too rapidly or too
late.
But, he adds, participants have opportunities to do some
self-correcting. The best policy is for participants to project how their
assets will fare over time, but it is challenging for them to know how to do
that on their own, Price notes.
To prepare an effective drawdown strategy for retirement,
participants need to understand their spending today and how that will evolve
and change throughout retirement, Roy says. They need to run a long-term
analysis to understand how their accumulated wealth can support their spending
plans. Next, she says, participants need to think about solutions that will
align with the way they plan to spend their money in retirement. “We’ve used
our spending research to inform a number of things over the years, and now
we’re looking at stable versus flexible spending—what is consistent spending in
retirement what is inconsistent,” Roy says.
She adds that participants need to think about what income
they will have to support their spending—including whether an annuity would be
a good fit and what the right Social Security claiming strategy is for them.
“I’m concerned that with such a dominant view of RMDs as
guidance for when to spend retirement savings, participants are using other
income sources [prior to RMD age] and they could maybe make better decisions
about the Social Security claiming age and have more stable income in
retirement,” Roy says.
In an article about J.P. Morgan’s study, “Mystery No More:
Portfolio Allocation, Income and Spending in Retirement,” Roy and co-author
Kelly Hahn say a goals-based planning approach is important.
“People tend to do well when they manage their money based
on their goals, time horizon and risk tolerance,” they say. “In principle, this
means taking on greater investment risk (and potential return) for assets
intended for the end of a projected lifetime that could be 20, 30 or even more
years away (for example, long-term care or a bequest). Meeting those goals, if
applicable, should not be left to chance, dependent on what is left over after
RMDs are taken. The assets should be managed more proactively.”
Helping Participants Create a Drawdown Strategy
Price says plan sponsors can help participants create a
drawdown strategy for retirement before the withdrawal decision point.
“It begins with the plan sponsor being engaged with the
retirement readiness of employees,” he says. “Plan sponsors should make sure
participants are tracking toward having assets to be able to retire at an
appropriate age. This is particularly true for some of most disadvantaged in
retirement savings—for example, low-income employees, women who have had gaps
in employment, etc. Plan sponsors should be doing the right kind of analytics
to make sure the savings-compromised parts of the employee population are
identified.”
Plan sponsors can help, Roy says, by providing
communications to help participants think through what post-retirement
solutions their employers make available. “Approximately 85% of participants
say they are willing to keep their assets in the plan if offered income
solutions, but it needs to be more than income solutions,” she says. “It has to
be a combination of guidance and tools, investments and income solutions.
Participants need all three to tailor solutions to their unique needs.”
Price says plan sponsors, recordkeepers and advisers can
work together to help participants put together a withdrawal strategy in the
years before they retire. Prior to reaching the decumulation phase, employers
and service providers can offer education and tools to help participants. Plan
sponsors can also use plan design to make sure participants have the right
features and investment options to help with decumulation, he adds.
As participants get closer to retirement, they need
education about whether they have the appropriate amount of assets for
retirement and about ways to draw down those assets. They need tools that can
model potential drawdown strategies, Price says.
He adds that every plan is different, as is every
participant. Drawdown strategies need to consider the assets a participant has
available, as well as other benefits they will have for retirement (e.g.,
long-term care insurance). That’s important education for plan sponsors to
provide, Price says. “Considering what assets are available to be used and when
involves looking at benefits other than retirement savings,” he says.
Price says Segal has seen more plans include withdrawal
options other than lump sums in their plan designs, as well as elements in
investment lineups to preserve assets or create income—guaranteed income
products embedded in target-date funds (TDFs), for example.
Some plan sponsors are creating what is called a “retirement
tier,” which the Defined Contribution Institutional Investment Association
(DCIIA) defines as a range of products, solutions, tools and services, which
support participants who are near, entering or in retirement. This includes
investment options that fit a retiree’s goals, as well as advice offerings and
different withdrawal strategies.
Roy says she’s also been thinking about the requirement to
include lifetime income illustrations on participant statements.
“I think it is a positive thing, but it’s flawed,” she says.
“It assumes participants will take their entire balance and turn it into an
annuity, but people don’t want to turn over everything; they want liquidity
available to them. We need to show them how they can have a combination of the
two—keeping a certain amount that makes them comfortable invested in the plan
and putting some of their balance toward an annuity.”
Price stresses that the best chance of success in creating a
withdrawal strategy starts decades earlier with savings strategies. “Saving
early in your career and investing appropriately will make sure enough is in
place to create a drawdown strategy,” he says. “The best way to succeed with
any—and definitely with an optimal—strategy is through years of accumulating
assets.”
“Fear of spending is constraining retirement lifestyles to
great degree. We need to address that and make people more comfortable with
spending what they’ve accumulated,” says Roy.
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