The United States is a demographic time bomb, plain and simple. Over the next 30 years, the U.S. economy will face an unrelenting demographic transition as ~75 million baby boomers exit the highest wage earning years of their life and start to draw down what little retirement savings they’ve managed to tuck away while wreaking havoc to the public “safety net” ponzi schemes, like Social Security, that will almost certainly be insolvent in a decade.
Per the U.S. Census Bureau, over the 30 years, the number of people in the U.S. over the age of 65 is expected to double while those 85 and up will triple. Needless to day, the overall population growth of the United States is a fraction of that which means that millennials are about to get crushed by their parents….so it’s probably a good thing they already live in mom and dad’s basement.
In aggregate, per the Wall Street Journal, Boomers have saved $10 trillion in various tax-deferred saving accounts. While that sounds like an impressive figure, with 75 million Boomers, it equates to an average of $133,000 per person which, needless to say, is insufficient to fund ~20 years of retirement.
But while the Boomers, and by extension taxpayers, are facing a harsh future, Wall Street has made a killing in fees off of managing the ever growing balance of retirement accounts as Baby Boomers have come of age. But that all looks set to change as America’s aging population is forced by IRS regulations to take retirement withdrawals once they hit 70 1/2 years of age.
As illustrated by the chart below, over the past 2 decades Americans have consistently contributed more than they’ve withdrawn from tax deferred accounts, excluding recessionary periods. But that all changed in 2013 and 2014 as the first wave of Boomers hit the magical age of 70.5 with a total of $25 billion of net withdrawals in 2014 alone.
Contributions to tax-deferred retirement plans outnumbered withdrawals through much of the 1990s and 2000s. That flow began to reverse as boomers entered their retirement years earlier this decade.
Investors pulled a net $9 billion from workplace retirement-savings plans in 2013, according to the Labor Department. In 2014 the withdrawals jumped to net $24.9 billion. Full-year information for 2015 from the Labor Department isn’t yet available, but large mutual-fund companies that manage the bulk of U.S. retirement assets say outflows continue to rise. Fidelity Investments expects 100,000 customers to take their first required distributions in 2017, up from 91,000 in 2016.
Still, distributions are expected to grow exponentially over the next two decades because of a 1986 change to federal law designed to prevent the loss of tax revenue. Congress said savers who turn 70 ½ have to start taking withdrawals from tax-deferred savings plans or face a penalty. Specifically, retirees who turn 70 ½ have until April of the following calendar year to pull roughly 3.65% from their IRA and 401(k) funds, subject to slight differences in the way the funds are treated by the Internal Revenue Service.
Moreover, mandatory withdrawals, as set by the IRS, grow exponentially as America’s Boomers get older. While mandatory annual withdrawals are only ~3.5% of assets at age 70.5, that number grows to 8% by age 90. And even though it may not sound like a lot, 3.5% of $10 trillion is $350 billion worth of assets that would have otherwise been paying Wall Street a handsome annual management fee.
U.S. law requires anyone age 70 ½ or older to begin annual withdrawals from their tax-sheltered retirement accounts and pay
taxes on those distributions. The oldest of the nation’s 75 million baby boomers cross that threshold for the first time this month, according to a U.S. Census Bureau estimate of when that demographic group began.
The obligatory outflows from 401(k)s and IRAs are expected to ripple through the U.S. economy, the stock market and a money-management industry that relies heavily on fees from boomers’ tax-sheltered savings plans and assets.
Boomers hold roughly $10 trillion in tax-deferred savings accounts, according to an estimate by Edward Shane, a managing director at Bank of New York Mellon Corp. Over the next two decades, the number of people age 70 or older is expected to nearly double to 60 million—roughly the population of Italy.
Firms that manage 401(k) plans are trying to persuade clients to reinvest their withdrawals in other products rather than spending or donating the cash to charity. It’s another pain point for many traditional money
managers already struggling to keep some clients from shifting into lower-cost index-tracking mutual funds.
But don’t worry Wall Street, the average millennial has a massive $1,000 nest egg saved up to help you fill those annual $350 billion gaps.
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