Retirement Accounts – More Than the Minimum Required Distributions?

The fact that we are living longer than our parents and grandparents is changing so many aspects of our lives.  One area that will be impacted by this longevity  is retirement accounts.  So many of our clients have it ingrained in their minds that they must not touch their retirement accounts.  They withdraw only the minimum amount each year that the government says they must, what is known as minimum required distributions.  But is that really the best approach?

 Retirement accounts enjoy tax deferred status.  The tax that one owes on the growth of these accounts is not paid until the money is withdrawn from the account.  The thinking goes that by withdrawing the money after retirement there will be less in taxes because the retiree will be in a lower tax bracket than during working years.  Many also view their accounts as something they want to pass on as an inheritance to children and other loved ones.  This combination results in the “I don’t want to withdraw anything” attitude.

 For so many of our clients, the majority of their investments sit in retirement accounts.  This makes their failure to plan for long term care more acute because if we want to protect assets, by using trusts, for example, we must move those assets out of the retirement accounts.  Doing so, however, can cause a large tax bill, one that most are reluctant to pay, thinking that, they’ll never really need long term care, or they’ll wait till it happens.  Waiting, however, can cause disastrous results.

 Moving through the 21st century as a greater number of people live 20, 30 or even 40 years in retirement, we may need to reconsider how we use our retirement accounts.  Maybe it isn’t best to keep the money in the account as long as possible with the specter of long term care on the horizon.  Perhaps it might be better to start withdrawing funds soon after retirement, rather than gambling that we won’t need long term care.  Guessing wrong will likely result in the loss of more than just the tax on the withdrawals, perhaps even the entire account towards the cost of long term care. 

 As one advisor I know put it, we forget that not all the money in the account is ours.  If we recognize that, roughly one third of the money is Uncle Sam’s it is easier to accept the tax bill that comes with withdrawing funds.  Of course, this is not a one size fits all situation.  Everyone needs to consider the matter individually based on their own set of facts.  But, when our thinking on such an important decision becomes so automatic, we need to go back and examine the wisdom of that approach because times are definitely changing and we need to adjust with them.