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Thursday, March 23, 2017

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

"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.

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 15 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. 

Further, let's assume the average retiree has accumulated $250k in tax deferred savings while the average 25-60yr/old is attempting to eventually save $250k.  Importantly, the window of selling is about 40% the length of the window to buy.

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 1/15th of the assets annually based on the current life expectancy for a 70.5yr/old, which at present is about 85yrs/old (men 84, women 86).

So, the average 70.5yr/old has 15yrs to sell off tax deferred assets...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 1/15th 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, there will be three new sellers per every new buyer and sellers are mandated to sell over twice as fast as it is hoped that buyers accumulate (assuming there is adequate full time 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).

To see this in dollar terms, I extrapolate the 25-60yr/old population 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 $16,667 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 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 25-60yr/old population, the mandated sellers overwhelm buyers in about 15yrs from now.

Invest accordingly.