|With roughly 77 million baby boomers entering retirement, much old, standard advice is being challenged by growing human longevity and retirees' risk of outliving their money.|
There are some ground rules courtesy of the IRS to abide by carefully. Failing to follow the letter of the law can cost you big time. Just how much you will need to withdraw -- the Minimum Required Distribution -- is a confusing calculation based on an actuarial assumption of lifespan. The IRS has worksheets, and there are a variety of online calculators to help determine the amount. Your plan sponsor and administrator, as well as your financial adviser if you have one, can crunch the numbers as well. If you have a 401(k) plan or IRA, the IRS requires that retirees take the first distribution by April 1 of the year after reaching age 70.5. In subsequent years, annual distributions are required by Dec. 31. Failing to do so will mean having to surrender a 50% excise tax on the amount you were supposed to have withdrawn.
A recent study by Fidelity Investments found that 62% of those soon to retire are stressed about making the transition from saving for retirement to living off those assets. Despite that, 75% of pre-retirees do not have a formal retirement income plan in place. One reason folks may be putting off this important step is "loss aversion." "Over the years, as money has gone into your retirement account, you've hopefully made a point of not touching it," says Eric Gold, a behavioral economist who studies the psychology of financial decision-making at the Fidelity Center for Applied Technology. "But when you retire, all of a sudden you need to write a check out of that account. You wouldn't think that this would be a problem, but it is. Spending your retirement savings isn't an easy thing to do. People fear the unknown and they fear loss. It can make them feel anxious."
Longevity, coupled with low interest rates, have made it difficult for retirees to merely shift assets into "safe" or cash positions for the long haul as they lose the returns needed to ensure a two- to three-decade span. A growing focus on having a post-retirement income stream, rather than relying on withdrawals from a finite pool of assets, has inspired a variety of new products, as well as old ones with new wrinkles. The top names in the financial world -- among them Schwab ( SCHW), Fidelity, Vanguard and Pimco -- have introduced products known as either "managed payout" or "income replacement funds." Although the funds have their uniquenesses, the basic pitch is that an investor chooses a fund with a desired payout (or one that adjusts over time, based on a future target date) and the professionally managed mix of holdings seeks to preserve principal and pay those expected goals from returns.