Will the stock market volatility reduce your retirement funds?
After a productive and too often strenuous lifetime of work, the time comes when we want to rely on the dollars we’ve saved and the income for which we have planned.
Many of us saved in qualified funds retirement accounts, such as 401 (K)s, IRA, and Keoghs. Contributions to those plans are made with pre-tax dollars and which have grown without further taxing. Many people must take money from those plans to live out their retirements. Other people don’t need to invade those plans for their immediate cash needs. However, everyone holding qualified plans is compelled by Federal taxation rules to start taking distributions from those plans after they turn 70 and ½. The Government tells us year by year what percentage of the funds must be withdrawn, and those amounts are known as RMDs.
This brings up an interesting quandary if your qualified funds are held in equities, such as stocks or mutual funds, wherein those equities are subject to losses of values when financial markets fall. At first consideration, one might say that if the assets values were down, that it would be good to wait until markets recovered before taking distributions. However the tax penalties for not taking RMD distributions on time are severe, so it is difficult to envision when that would ever be a beneficial strategy.
The IRS rules state that the amount of RMD is calculated by percentages applied against the year-end asset value of the immediately ended prior year. Information on this can be found on the IRS website and by reading about IRS forms 560 or 590-B.
Over time there have been some significant drops in equity markets in the range of 30% to 50%. If, for example, you held a qualified account with $100,000 at year-end and were required to take a distribution of 3.5% that particular year, an RMD of $3,500 would be required.
Now, what happens in the event of a significant market drawdown at the time you go to pay the 3.5% of the prior year’s balance. Suppose the market dropped 30%. The account value would be reduced to $70,000 at the time you withdrew the $3,500, and the percentage of your assets that you would have to withdraw for that year’s distribution would swell to 5%! A five percent withdrawal is well above the level of distributions that are considered conservative for maintaining sufficient balances in funds earmarked for retirement.
And, not only would the percentage of assets liquidated for the RMDs be higher than you might desire, but an insult is added to injury by the fact that the entire RMD is taxable income on your tax return!
Naturally, if you were taking more money out of the plan than the required RMD, the erosion of the balance would be even more severe.
What all this points out is how critical it is that the balances upon which you will depend for retirement not be subject to equity losses.
With proper planning, it is possible to hold assets in financial products that are not subject to drops in the equity market, and that will provide guaranteed income for your entire lifetime.
The products involved are proven through decades of use by millions of people and the financial results from them are guaranteed by some of the most substantial financial companies available.