Older Americans have long accounted for a relatively high proportion of Florida’s population because many people want to retire in an area with a pleasant climate and friendly tax environment. However, over the next few decades the entire nation will start to look a lot more like the sunshine state in terms of demographic mix. Indeed, given the size of the Baby Boomer cohort (people born approximately between the years 1946 and 1964), it is unavoidable that the age structure of the country will shift toward a higher weighting of older Americans. The Stanford Center on Longevity (SCL), for instance, estimated that by 2050 more than one in five (21 percent) Americans will be at least 65 years of age. That is nearly double the ratio from 2010 and almost three times what was seen during the 1950s.
The number of people age 70 or older is expected to nearly double to 60 million over the next two decades, roughly equivalent to the population of Italy. This projection is particularly important because Boomers hold trillions of dollars in tax-deferred savings accounts that typically have minimum withdrawal requirements starting around age 70. Specifically, on April 1 of the year following the calendar year in which you reach age 70½, required minimum distributions (RMDs) from individual retirement accounts (IRAs), including SEP and SIMPLE IRAs, must begin. Owners must pull an increasing portion of their assets annually based on IRS formulas. RMDs exist because Congress wanted to prevent the loss of revenue associated with people leaving money in tax-deferred accounts indefinitely. To motivate compliance, there is a stiff penalty for missing the deadline: 50 percent of the amount not withdrawn. Similar payout rules apply to 401(k)s, 403(b)s, and other defined contribution plans, although there are a few key differences.
Tax-deferred retirement plan contributions had long surpassed withdrawals but the flow began to reverse earlier this decade as Baby Boomers started to enter retirement. Moreover, investors pulled a net of roughly $9 billion from their workplace retirement plans in 2013 and that jumped to $24.9 billion in 2014, according to the Wall Street Journal and U.S. Labor Department data. Such outflows are likely to only go up as Baby Boomers cross the RMD age threshold, something which the oldest Boomers have already started to do. The effects of ballooning RMDs over the next two decades on both the stock market and the money-management industry could be significant, especially if offsetting inflows from Millennials disappoint. As for Boomers themselves, many could be at risk if they are unaware of the withdrawal requirement and its severe penalty. Even for those Boomers who do know about RMDs, calculating how much needs to be withdrawn can be complicated, and there are also considerations for what to do with the funds afterward, e.g. spend, reinvest, donate, etc. All of this increases the importance of working with a professional financial advisor to make sure that deadlines are not missed, and that funds are put to use in a way that is aligned with one’s retirement aspirations.
Sources: U.S. Internal Revenue Service, Wall Street Journal, U.S. DoL, et alPost author: Charles Couch