Taking RMDs during a recession hurts. Here’s how to manage the pain.
Is it better to tear off a bandage and make the pain disappear or to remove it slowly and gently, limiting the pain while prolonging it? This is essentially the question facing seniors who have spent decades saving for retirement and now must accept the minimum distributions required in a bear market.
People age 72 or older must withdraw an RMD each year from their Individual Retirement Account or a former employer’s 401(k) plan, and they can do so all at once or a little at a time. But with their account balances dropping, it’s likely to hurt both ways.
Those who wait until December to withdraw their annual RMD are taking a calculated risk that the market will recover from recent losses instead of yielding more ground. With the S&P 500 down about 12% this year, “it may make sense to continue to wait a bit” before taking an RMD, said Connor F. Spiro, senior financial consultant at John Hancock Advice. “Looking at the past numbers, there’s a good chance you could get some of that back before the December 31 deadline.”
However, many older people take RMDs at the beginning of the year because they need the money to pay their expenses, they want to “check that box” for the year as needed, or they want to avoid losses. investment opportunities throughout the year, Spiro added. And while that strategy may have been beneficial this year with stocks nearing record highs in early January, it costs seniors money over time, as the market has historically seen more good years than bad years, a he declared.
So how do you best manage RMDs in a downturn? Advisors say there are strategies seniors can use to minimize losses or manage distributions to allow markets to rebound. Additionally, there are ways to prudently maximize gains during a rally or in a bull market and minimize the need to sell securities in a bear market.
Most seniors with IRAs or similar accounts can calculate their RMDs using the Internal Revenue Service. Uniform Life Table. A separate table, which is on the IRS RMD Pageis used if the sole beneficiary of the account is the spouse of the account holder who is at least 10 years younger than the account holder.
A retiree who turns 72 this year and had an IRA balance of $100,000 on December 31 must take out an RMD of $3,650 for 2022, according to the IRS table. The RMD increases as the retiree ages, so an octogenarian with an account balance of $100,000 should withdraw $4,950 this year. Failure to take an RMD results in a 50% tax on the amount not distributed as required. Those turning 72 this year can defer their initial RMD until April 1, 2023; they are expected to pass the following RMDs each year before December 31, including a second in 2023 for that year’s distribution.
Seniors concerned about further market declines should consider dividing their RMD by four or 12 times and then selling that amount of assets quarterly or monthly, according to Steve Vernon, consulting researcher at the Stanford Center on Longevity.
Vernon, president of retirement education company Rest-of-Life Communications, said the idea is similar to dollar cost averaging, where you buy shares at regular intervals, adding more when the shares are beaten and less when they increase. “Basically, you’re just admitting, rightly, that you don’t know what the market is going to do, so you’re going to mitigate your risk by averaging throughout the year,” he said. “Trying to time the market usually doesn’t work very well.”
Retirees with cash might consider transferring securities from their IRA to a brokerage account to satisfy their RMDs and avoid selling assets at a discount, said Dan Casey, founder of Bridgeriver Advisors. Seniors will be taxed based on the value of those securities at the time of transfer, but the securities will have some time to bounce back.
“You can just transfer security without ever having to sell it,” Casey said. “As long as the value of this security satisfies the RMD, then all is well. You just need to make sure you have the money aside to pay the taxes.
After taking this year’s RMD, seniors should also consider converting assets from a traditional IRA or 401(k) account to a Roth IRA, which allows investments to grow tax-free and has no no RMD. Retirees will have to pay taxes on assets transferred into the Roth IRA, but with the market down sharply this year, that tax bill could be relatively small, Casey said.
However, older people should be aware of the so-called five-year rule. Funds converted to a Roth IRA must remain in the account for at least that long to avoid a 10% early withdrawal penalty.
Build up a cash reserve
Since a diversified portfolio should include cash, seniors should ideally be able to take an RMD without selling assets in a bear market, Vernon said. One way to build up cash is to pay dividends and capital gains distributions from things like stocks and mutual funds in cash instead of automatically reinvesting that money, he said. .
Balanced funds, which include a mix of stocks, bonds and other securities, are an effective way to do this, said Peter Casciotta, owner of Asset Management & Advisory Services in Lee County, Florida.
It designates three mutual funds from American Funds—
Income Fund of America
American Balanced Fund
Income from constructed capital
r (CAIBX) – as a way for retirees to build a “defensive stock portfolio”. Balanced funds typically experience less price volatility than stock-only mutual funds, and they provide reliable cash flow even in a bear market, Casciotta said.
“I have my older clients in them because they can still get good returns and they don’t have crazy volatility at all,” he said. “I call it a little plain vanilla.”
If seniors need to sell securities to cover an RMD, they should consider selling one or more of their best performing assets at opportune times throughout the year, such as after a stock has exceeded expectations in profit-wise, Casciotta said. Despite the recent market downturn, long-term investors should still have some assets that have performed well over time, and selling them gives other assets time to recover, he said.
“You have the whole year to withdraw your distribution, so there may be times when you can manually choose which investment to take your distribution from because at that time the economy is good,” Casciotta said. .
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