A white paper recently published by BNY Mellon focuses the attention of the retirement industry on the massive outflow of assets that will begin soon as the first cohort of baby boomers in the U.S. reaches age 70½, the age at which Required Minimum Distribution (RMD) requirements take effect under U.S. retirement and tax regulations.
A brief review of the number of individuals involved, the extent of the assets involved, and the end result of the RMD requirements indicates why this is such an urgent topic for the retirement industry.
- The number of people involved: The population of individuals in the U.S. aged 70 and older increased by 24 percent from the year 2000 to 2015, from 25.2 million to 31.7 million. That same population is projected to grow to nearly 38 million in the next five years. Over the 20-year period from 2015 to 2035, the population aged 70 or more will more than double from the year 2000 baseline to nearly 59 million.
- The assets and distributions involved: At the end of 2014, retirement plans in the U.S. that must comply with Required Minimum Distributions requirements annually under U.S. retirement and tax regulations – IRAs, defined contribution plans, and annuities – accounted for more than $16 trillion in total assets.
- The end result: Consider the case of just a single individual with a retirement balance of $250,000. When that person reaches the age of 70½, his or her required minimum distribution under U.S. retirement and tax regulations will be just over $9,000. A hundred thousand individuals in the same situation would generate asset outflows totaling $900 million. But the order of magnitude for the retirement-age population in the U.S. is much higher — it's tens of millions. Projections suggest that up to $10 trillion in assets may be subject to mandatory withdrawals over the next two decades.
How will the retirement industry manage this enormous outflow of assets? That's the question BNY Mellon is asking the industry to consider. And to consider it now — while there's still time to prepare for the huge increase in outflows that will begin when baby boomers begin reaching age 70 in large numbers.
"We have a great deal of experience supporting insurance companies that face similar challenges managing the distribution dynamics associated with payments to life insurance policy beneficiaries — in fact, helping clients manage their retained asset programs is a service offering that's experiencing significant growth. These same concepts could be applied to any firm managing retirement assets," said white paper author Ed Shane, managing director and head of sales and relationship management, Insurance & Electronic Receivables Payment Services for BNY Mellon's Treasury Services business.
Shane noted that life insurance beneficiaries often elect to have their insurance payments deposited in interest-bearing accounts with many of the payment features of a conventional checking account. "Our research indicates that many of the retirees who will be receiving RMDs have concerns about payments they expect to make for particular purposes like health care. We believe it's time for the retirement industry to begin thinking about these kinds of offerings as part of strategies for managing the massive RMD-related asset outflows that will be taking place over the next five years."
The dialogue with the retirement industry will continue later this spring with an educational Webinar and series of follow-on messages.