Boomers Are Cashing in Their IRAs Early According to Report

Most people know they can withdraw funds from their IRA, penalty free, after the age of 59 ½ (earlier for certain exceptions). And, most people have no plans to do so. After all, the money you put into an IRA is for “retirement,” after the age of 65.

According to BloombergBusinessweek, however, a report by the Employee Benefit Research Institute found that 48 percent of people, 61 to 70 in the bottom half of income distribution took funds out of their IRAs during the period from 2002 to 2010. Of those in the top quarter, income-wise, 29 percent of 61 to 70-year-olds pulled IRA funds.

The amount taken out was substantial. High-income earners withdrew 12 percent of total funds, while those at lower income levels took out 17 percent of the money they had been saving for retirement.

The report also found that seniors 71 and up withdrew smaller amounts – often just the minimum required beginning at age 70 ½. Even then, many older seniors found a way to save part of those funds in other types of accounts.

One drawback of the study, according to report author and EBRI research associate, Sudipto Banerjee, was that there is no distinction between people who took money out year after year, versus different people withdrawing funds. Obviously, the situation would be worse for people drawing down their accounts on a yearly basis, versus those who have a one-time need.

Adding to the drain on retirement savings brought on by these earlier-than-expected withdrawals from IRAs is the problem of low interest rates, subject of another EBRI study, according to EBN News.

This study, which is still forthcoming, is designed to quantify the very effect of low interest rates and muted yields on investors’ ability to save enough for retirement.

At a policy forum event, previewing the research behind the report, EBRI research director, Jack VanDerhei said, “This low-interest environment has an extremely large impact on failure rates.”

In fact, VanDerhei said, baby boomers that otherwise would have had sufficient retirement income under historical interest rate averages, would run out of money if current low rates continue.

As with the first study cited, there are problems with the upcoming study as well. The scenarios are hypothetical – interest rates may, and probably will change. In addition, the scenario mentioned about assumes the retiree would count on retirement savings for 100 percent of their income whereas, lowering that to 80 percent drastically reduces the percentage of boomers who would run out of money.

In addition, the effects of low interest rates are more dramatic among higher income investors than among less affluent retirees.

"Given the impact of Social Security,” VanDerhei said, “most households are never going to run out of money. But they certainly could run short."

The impact of early withdrawal of funds and the effects of low interest rates in general, should not be ignored. The obvious solution to the former is to avoid drawing down retirement accounts early, if possible, perhaps taking a lesson from older retirees who have simply learned to adjust their lifestyle to accommodate less income as they age.

As for low interest rates and their impact on retirement savings, the best most people can do is be aware and adjust spending accordingly.