27

This article on Marketwatch quotes Raoul Pal of Goldman Sachs claiming that baby boomers have to sell 5% of their retirement accounts by the end of the year. Here is the specific passage:

Pal says the third biggest issue facing stocks involves the baby boomers, Americans born between the mid 1940s and mid 1960s. They face an annual requirement to sell about 5% of their individual retirement accounts, loaded with stocks in some cases, as they reach 70.5 years old.

Is this true? Why would baby boomers have to sell a certain percentage of their retirement stock funds? Is it a hard requirement, or just some general guideline of 'good advice' that they are encouraged to follow?

  • Since the age at which you're required to take RMDs is 70.5, it doesn't affect people born after mid-1949 this year. – jamesqf Oct 11 at 2:56
  • 2
    What percentage of the stock market capitalization is held by individuals in tax-deferred accounts with RMD's by individuals who are 70.5 and older in the US? I'd bet that the percentage is fairly small and will remain as the baby boomers age. – Brian Borchers Oct 11 at 18:33
  • 1
    The article is a bunch of incorrect statements written by an alumnus of Goldman Sachs, not someone currently employed there. – Dilip Sarwate Oct 11 at 19:50
43

In the US, "Traditional" retirement accounts are generally subjected to something called Required Minimum Distributions (RMDs). For clarity, a "traditional" account is one where there is a tax benefit confered on contribution to the account, but distributions from the account are subject to tax. RMDs exist to force taxable events on these retirement-type tax-preferred funds.

Roth type accounts, where taxes are still due on contributions but waived on distribution, are not subject to this requirement, because the distribution means nothing to the government.

I wouldn't put any weight to the idea that this transparent and well known obvious requirement imposed on retirement accounts has an impact on the market. It's not as though all people facing an RMD requirement wait until the market is about to close on December 31. The distributions happen through the year among all of the other market activity, it's not reasonable to assume this requirement results in net outflows to the market.

  • 15
    There is also no requirement that you actually sell the securities. If for instance they're held in mutual fund X under your IRA/401k account, you could just move a sufficient number of shares to your regular account. Of course for tax purposes this would be treated as selling the IRA shares and buying regular shares, so you'd owe tax on the value of the shares moved. – jamesqf Oct 11 at 2:54
  • 2
    Also, unless I'm missing something, if they're selling, someone is buying. – AbraCadaver Oct 11 at 13:56
  • 3
    @AbraCadaver True, but since the sellers have more incentive, it becomes a buyer's market and drives prices down. – Barmar Oct 11 at 18:27
  • 4
    I think the author's assumption is that even though they can spread their withdrawals throughout the year, a significant number will procrastinate and wait until the last minute. Kind of like you can do Xmas shipping in July, but few people do. – Barmar Oct 11 at 18:29
  • @Barmar the issue is that most retirees need to spend money through the year and don't practice elaborate thoughtful capital planning. No one needs a Christmas gift in July but people need food and other costs. – quid Oct 13 at 17:50
15

In the USA, you must take a Required Minimum Distribution (RMD) from your (traditional IRA, 401k, 403b) retirement account starting at age 70.5. If all of your retirement investments are in stock, then you will need to sell stock and move it out of the retirement account (or possibly transfer some of the stock out of the retirement account).

Your financial institution will normally help you calculate the RMD. It is based on your estimated life span using Social Security tables, it is about 4% of your balance for your first year, the percentage increases every year (keeping the distribution amount roughly constant). Or, you can calculate it yourself here:

Retirement Topics - Required Minimum Distributions (RMDs)

Note - age 78 divisor is 20.3, and at 79, 19.5. At that point the RMD is above 5% of account value.

  • 1
    Correct me if I'm wrong, but based on the worksheets the RMD for a 70-year-old is 1/27.4 or 3.6%, no? – D Stanley Oct 10 at 18:40
  • 1
    @DStanley - Yes, about 4%. I will edit the post, thx. – Mattman944 Oct 10 at 18:53
  • 2
    Thanks- I have other issues with that "expert analysis" (not yours) but that one caught my eye (and apparently the OP's as well) – D Stanley Oct 10 at 18:55
9

The IRS mandates a Required Minimum Distribution from IRA, 401(k) and 403(b) accounts once you reach a certain age.

The quoted pundit says Boomers will be thinking ‘I’ve got too much equities,’ which they do have.

All these Boomers allegedly selling a mandatory chunk of stock is what is supposed to make the market drop.

It's a reasonable hypothesis, but current workers are still investing in their retirement accounts.

  • 1
    Thanks for your answer. However, it leads to the question of why this effect would be any stronger this year than in previous years. Because baby boomers are a particularly large demographic, and we're at the stage where many of them will be reaching that age? – Time4Tea Oct 10 at 18:29
  • 6
    @Time4Tea correct. Smart Boomers, though, will have already reduced their exposure to equities, and middle income Boomers have been taking their RMDs to live on. Plus, there's all us who are still working who invest in 401k/403b/IRA accounts every paycheck. – RonJohn Oct 10 at 18:35
  • 5
    It's also possible that some boomers will withdraw from their IRA and put it in similar securities in a non-retirement investment account (minus taxes). One of many issues I have with the linked "expert analysis". – D Stanley Oct 10 at 18:56
3

That's somewhat misleading. What is true is that age 70-1/2, they must start withdrawing a fraction of their traditional IRA, traditional 401K, 403B, etc. every year. This does not apply to Roth versions of these assets.

However, this does not oblige a stock sell-off.

Because nothing prevents the owner from simply selling the stock in the IRA, withdrawing the proceeds, and then using the money to re-buy the stock. This isn't a wash sale because the tax treatment of the two assets are different.

In fact, a smart retiree may well have already done this for tax reasons. Suppose retiree has $25,000 in an S&P 500 index fund at age 60. In the following 15 years, it grows to $100,000.

  • If it is left to grow in the IRA account, and withdrawn at age 75, the growth is taxed as regular income when it is withdrawn, e.g. In a 25% bracket, tax is $25,000.
  • If it is withdrawn at age 60 and placed in a normal brokerage account in an S&P 500 index fund, the 15 year growth will tax at the 10-15% long term capital gains rate. Tax at age 60 is $6250 and tax at age 75 is $7500.

So it is advantageous for a person to pull stocks out of a retirement account and re-buy them in a normal way.

A well-managed fund will have less of these, anyway.

Good investment practices call for moving a retirement account away from equities and into less volatile investments. That is to prevent a situation where a stock (or the whole market) takes a major hit, and the market does not recover before the retiree needs the money. At 70-1/2 this move-away should be fairly well along. So accounts subject to this mandatory distribution should not be "loaded with stocks" anyway.

However, if an account had an S&P 500 index fund that the retiree was forced to sell, and the retiree's strategy did call for being in the market, they would simply buy a similar amount of VOO in a regular, taxable brokerage account, as discussed above.

2

This is a case where proper punctuation vastly changes the meaning of a statement. The claim that people are required to sell a portion of their individual retirement accounts in general is absurd. However, there is a particular type of account called an Individual Retirement Account, or IRA. "Individual Retirement Account" is a proper noun that refers to a particular type of individual retirement account. The term is used with regard to what a source told the author, so perhaps this was said verbally, making capitalization not apply to the initial discussion, and the author somehow managed to get a job writing financial articles without knowing enough to put in the capitalization themself.

IRAs are a special program set up by the US government to give tax advantage to money put in a particular type of account, and it has particular restrictions, one of which is that you have to start moving money out of it once you reach retirement age. Since the accounts generally contain investment vehicles such as stocks, moving funds out of the account often takes the form of selling the stock. However, one can just move the stocks out the account without selling them.

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.