When you are forced to cash out 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 volatile market rocked by 40-year-old high inflation, war in Ukraine, associated supply shocks and a increasingly depressed consumer sentiment.

For retirees mandated by Internal Revenue Service rules to take required minimum distributions from tax-deferred retirement vehicles like Individual Retirement Accounts or 401(k)s, the prospect of having to withdraw funds during a market bearish 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. Looking at their accounts, he found that some were fully invested in riskier asset classes like stocks, which exposed them to market slump, rather than safer categories like 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.”

As defined benefit pension plans have been replaced by defined contribution plans like 401(k) plans, tax deferral is an incentive for workers to save.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.

Individuals in these accounts must begin making withdrawals no later than April 1 of the year after they turn 72 and continue to make them at the end of each subsequent calendar year. (Roth IRAs, which are funded with after-tax dollars, do not require RMDs)

The amount an account holder must withdraw varies from year to year, depending on their account balance as well as its expected life, and distributions are taxed as ordinary income. Individuals with multiple accounts have some 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 within time required 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 next April, which she is reluctant to do.

Ms. Frazier, 71 and a widow, said Social Security plus a small amount of retirement income is enough to pay her mortgage and most day-to-day expenses at the moment, but she worries about inflation driving up her Cost of life.

“I pay more money for things that I normally buy. I shop more cautiously,” she said, adding that she is bracing for higher energy bills as temperatures rise in the southeast. “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.

“It’s really indicative, I would say, of the level of financial literacy crisis in the country, especially among women and minorities,” he said. “They have lower paying jobs, they don’t get paid the same, they have a responsibility to take care of them” — all of which reduces financial security in retirement.

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.

“We’ve spent the last decade and a half encouraging risk,” said Scott Cole, founder and president of Cole Financial Planning and Wealth Management. “We are convinced by the headlines, by the people we talk to, and we are convinced by the fact that our current system does not favor savers. This promotes risk.

A combination of factors – an inability to save enough for retirement and a sense of having to “catch up” and not shift money to safer investments as stock market valuations hit record highs – caused many savers to retirement on a judgment day.

“With such low yields in the fixed income market, I think people put in more stocks than they really should have – and then it started to look so good that they stuck around,” said Alicia Munnell, director of the Center for Retirement Research in Boston. Middle School. “If you can avoid selling now, that’s probably a good thing. These cycles end.

Financial planners generally recommend that retirees allocate a certain percentage of their portfolio to cash or other stable, liquid assets to avoid having to cash in stocks when values ​​drop – but they say they also understand why customers tend to forego caution when times are good.

“After years of telling clients that interest rates would rise – and there was also a need to be cautious in fixed income – most advisors started to look a bit like Chicken Little year after year,” he said. said Joseph Heider, president of Cirrus Wealth Management. “Investors who wanted to squeeze the last bit of juice out of this long-running bull market, in both stocks and bonds, may have been a little taken aback by what has happened over the past few months. “

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

“The shakes that we’ve had in the market over the past 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.”

Some retirees, like Ms. 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. I think a lot of people are using it as an alternative.

Through March, annual growth in home equity lines of credit was nearly 11%, according to data from the Credit Union National Association trade group and its affiliates — the highest rate of increase since 2009.

“We’re doing it again now – we’re taking money out,” Mr Rick said. “People are relying on debt again.”

Some hope that lawmakers will intervene. In March, the House of Representatives passed legislation that would build on the SECURE Act and gradually raise the minimum age for making distributions to 75 by 2032. Similar legislation has been introduced in the Senate, but the time frame for adoption is uncertain.

Ms Hounsell said this legislation could benefit older people, especially since the IRS calculates how much retirement savers need to withdraw based on their account balance at the end of the calendar year – roughly when the market peaked in 2021.

“I think it helps people catch up, and they also don’t have to withdraw during the worst of the falling market,” she said. Especially for people who can stay employed a bit longer, she said, “it’s a few years less to worry about.”

Ms. 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.

She plans to wait until the fall to take her required initial distribution, hoping Congress steps in or market volatility abates. “I’m curious what will change by then,” she said. “I wouldn’t take the RMD if I didn’t have to take it.”

While 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 Ms. Frazier hopes to complete. “I try to save all the teeth I can,” she said.


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