Saturday, May 16, 2015

The “New” Math?

One of my more frustrating memories of parenthood was trying to help my kids with their homework. Not because I hadn’t covered the territory once upon a time myself, or because I couldn’t manage to refresh my recollection(s) of the subject. It wasn’t enough to teach my kids a method sufficient to arrive at the correct answer, and to help them understand how we got there. No, it didn’t “count” unless I could arrive at the answer by adhering to what struck me as a weirdly inefficient and complicated regimen upon which their teachers insisted.

If this was the “new math,” I remember thinking at the time, I fear for the sanity of the next generation.

This past weekend The New York Times ran an article aptly, if somewhat awkwardly, titled, “New Math for Retirees and the 4% Withdrawal Rule.” The focus of the article, like the 4% rule itself, was how to pace withdrawals in retirement so that you don’t run out of money before you run out of retirement. However, like so many other things these days, it’s apparently not as simple as it once was, complicated by the low interest rate environment and the current high stock market values.

Though a lot of time, thought and attention has been paid to the 4% rule (and its progeny), to me it’s basically just math. After all, once you stipulate certain assumptions about the length of retirement, portfolio mix/returns, and inflation, a guideline like the 4% “rule” is really just a mathematical exercise.

‘Drawing’ Board

But if those rules purport to tell us how much we can draw from our retirement savings without running out, how does that compare with what people are actually withdrawing? The Employee Benefit Research Institute (EBRI) has previously examined withdrawal patterns in their IRA database, and found that the median IRA individual withdrawal rates amounted to 5.5% of the account balance in 2010, though among those 71 or older (when required minimum distributions kick in) were much more likely to be withdrawing at a rate of 3-5%.

Those median numbers don’t tell the whole story, of course. A separate EBRI analysis, this one based on data from the University of Michigan’s Health and Retirement Study (HRS), found that lower-income workers were withdrawing money from their individual retirement accounts in much greater numbers, earlier, and at much larger percentages, than other workers. In fact, the report noted that nearly half (48%) of the bottom-income quartile of those between the ages of 61 and 70 had made such an IRA withdrawal, and that their average annual percentage of account balance withdrawn was 17.4% — higher than the rest of the income distribution. In sum, a number of individuals, again, notably lower-income workers, were withdrawing more from their retirement savings accounts than those in higher income groups — and apparently more than the 4% “rule” would suggest would allow them to avoid running out of money in retirement.

Will these drawdown rates create a problem down the road? Will these individual run short of funds in retirement? Will those withdrawals, along with other resources that may be available, be sufficient to live on? The answers, of course, depend on the individuals, their circumstances, health, needs, expectations — and preparations.

Those ultimate realities may be new for some — but the “math” won’t be.

- Nevin E. Adams, JD

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