Thursday, March 23, 2017

Required Minimum Distributions Spell Disaster (& Even Greater Intervention) As Sellers Overwhelm Buyers (CORRECTED)

"It ain't what you don't know that gets you into trouble.  It's what you know for sure that just ain't so."  Mark Twain was brilliant...unfortunately, I am not. I made some errors in the original article regarding distribution duration which are now corrected below...I also updated the charts to show employment vs. retirees alongside straight population changes.  Pardon my occasional errors.

Simply put, investing for the long term had it's time but that time is drawing to a close.  The math is pretty easy...we'll have too many sellers and too few buyers.  Why?  At age 70.5 years old, retirees are mandated by force of law to sell tax deferred assets accumulated over their lifetime and do so in a 27.5 year period.  Conversely, buyers, incented by tax deferral (but not forced to buy by law), generally have a 35yr window of accumulation.  Over the past 65 years (on a population basis), there were three new buyers for every new seller.  Over the next 25 years (on a population basis), there will be three new sellers for every new buyer. 

Consider - Sellers vs. Buyers


The population of 70+yr/olds in America is skyrocketing.  There are more than a few ramifications due to this but in this article. I want to focus on what happens to this population at age 70.5.

Particularly, when an American reaches 70.5yrs old, he/she is compelled to begin selling assets held in tax deferred retirement accounts (IRA's, 401k's, profit sharing, SEP's, Simple IRA's, etc.).  These are called required minimum distributions.  The minimum % to be sold is about 1/27th of the assets annually although the current life expectancy for a 70.5yr/old at present is about 85yrs/old (men 84, women 86).

So, the average 70.5yr/old has 27.5yrs to sell off tax deferred assets although their life expectancy is about half that...the majority of these proceeds will be utilized to fund the retirees costs of living.  Some retirees may be selling significantly more than the RMD and some may be selling but reinvesting some or all the proceeds...but let's assume net-net, 70yr/olds are selling 1/27th of their tax deferred assets annually.


Now on the flip side, there is the population of 25-60yr/olds Americans working to accumulate assets to subsequently fund their retirement.  This population generally has 35yrs to save up for retirement before their savings go neutral from 60-70yrs/old, and begin their distributions at 70.

The chart below shows the population of the two groups from 1950-->2015.

  • 25-60yr/olds +78 million
  • 70+yr/olds +24 million
Over this 65yr period, there were over three new buyers for every seller.
The chart below shows the populations from 2015-->2040.
  • 25-60yr/olds +11 million
  • 70+yr/olds +31 million
Over this 25yr period, there will be three new sellers for every new buyer.

This is saying over the next 25yrs on a population basis, there will be three new sellers per every new buyer and sellers are mandated to sell faster than it is hoped that buyers accumulate.  This is assuming there is adequate job growth and wage growth providing the excess income for retirement savings...something that has not been happening since '00 if one looks at either metric).  However, to be a saver, generally one must have a source of employment to have the excess to I'm going to look at 25-54yr/old total employment (no data available for 25-60yr/olds or 25-54yr/old full time employment before 2000) vs. 70+yr/old retirees.And if current employment trends hold, a best guestimate for this relationship from 2015-->2040 looks like this...
To see this in dollar terms, I extrapolate the 25-54yr/old total employees multiplied by the annual savings necessary to save $250k ($7,143 annually) vs. the 70+yr/old population selling based on required minimum distributions based on $250k in tax deferred savings (selling $9,259 annually).

The chart below shows this from 1950 through 2015.

And the chart below shows the trend change from 2015-->2040 and this assumes all is well.

But all is far from well.  Job growth and particularly full time job growth among the 25-54yr/old cohort has stalled since 2000 after growing rapidly for 50 years.
And as for wage growth...just ain't what it used to be.
And if we make an assumption that the significantly slower growth in full time jobs and wage growth results in just a 15% reduction in retirement savings among the 25-54yr/old employment base, the mandated sellers & buyers converge by 2040.

Some may wonder, what about foreign investment coming into US markets to save the day?  Consider THIS.  And those wondering about US real estate, much of the same dynamics are in play, HERE.

Invest accordingly.