Keep your income stream flowing through retirement
Getting pre-retirees to view their retirement savings as a monthly paycheck is still an uphill battle.
“The whole idea of designing an income stream is still not catching on until people are getting those last few checks before retiring and all of a sudden it dawns on them that pretty soon they’ll have to pay the electric bill out of their savings,” said Marcia Mantell, a former investment industry executive and author of “What’s the Deal With Retirement Planning for Women?”
As Mantell and other retirement experts gathered recently at the Retirement Income Industry Association’s annual meeting, a pair of separate industry studies seemed to suggest many people are taking risks with their lump-sum savings that could have a big impact on their eventual retirement income.
Nearly a third of older workers leaving their jobs cashed out of their 401(k) plans instead of rolling them into IRAs, fund giant Vanguard found in a study of nearly 250,000 of its workplace plan participants.
Another study, by the Employee Benefit Research Institute, found that stock allocations for about 26 million IRA accounts rose to nearly 61 percent of total portfolios in 2013.
Both trends could be problematic for retirement income if those cashing out don’t have other savings or if market declines decimate portfolios.
There are a couple of caveats worth noting, however.
In the Vanguard study, two-thirds of the workers 60-plus who left their jobs did roll their 401(k)s into IRAs or leave them in their old employer’s plan, suggesting the money was being preserved for retirement needs, researchers concluded.
And the 30 percent of participants who cashed out their plans after leaving their jobs corresponded to the group of workers who had left their companies in 2004. Those who left jobs in subsequent years have cashed out at lower rates, though people leaving in the most recent years still might opt to do that.
As for IRA holders ramping up the stock portion of their accounts, a fair amount of the increase is simple inertia — the effect of the stock market runup between 2010 and 2013 — said EBRI researcher Craig Copeland.
And some IRA holders may be keeping large stock positions because they intend to pass the accounts on to subsequent generations instead of using them for retirement income, he said.
“There was still a large percentage of assets in equities, even for the oldest IRA owners,” Copeland said. “If they are just holding these accounts as bequests it may be a sound strategy, but if they have to live off these assets, it’s not such a sound strategy,” he said.
In another EBRI study earlier this year, Copeland found that most IRA holders are leaving the accounts untouched until the year they turn 70 1/2, when they are required to begin taking distributions.
“We’re still at a point where a significant number of retirees still have a defined benefit pension plan and so they are able to delay” taking withdrawals from IRAs, he said. “That is becoming less common, and in another five years the picture will be much different.”
In other words, experts said, more people will have to begin designing an income distribution plan for their IRAs, and they’ll have to do it sooner than age 70.
And while some retirees already do this — or simply follow the withdrawal guidelines for required distributions — the retirement industry needs to make the process clearer for the next generation of retirees, Mantell said.
More pre-retirees need to understand, for example, the implications of rolling their funds into an IRA versus leaving it in a 401(k) plan after they’ve left the company.
One such implication important to women, she said, is the looser beneficiary designation requirements on IRAs. In a workplace plan, if a participant wants to name someone other than a spouse a beneficiary, the spouse has to sign off on that, she said. No such requirement exists for IRAs, she said.
“The key is really simplicity. How do I make my mother understand how much she’ll be able to spend at age 85? You have to start getting people to get this down on paper in their 50s so they’re not scrambling in their 60s,” she said.