Do retirees really, consistently, have the level of financial understanding necessary to manage, not a monthly pension check, but an IRA as their source of retirement income?
Many do, of course. But, based on anecdotal evidence, I suspect that there are many retirees whose understanding is hazy, at best, whether they’re lower-income workers who end up with an IRA due to a 401(k) rollover at work, or individuals whose spouse has always handled such matters and is no longer able to. Not to mention, of course, those retirees who have had significant cognitive decline without others being aware, or being able to step in.
What can go wrong?
I learned this weekend that the penalty for not making the Required Minimum Distribution (an annual amount that must be withdrawn from the IRA, determined from an IRS table based on life expectancy) is a tax of 50% of the amount that should have been withdrawn. This is a lot of money — all the more so because, I imagine, when an RMD had been missed, it’s unlikely to be a matter of being a “tax cheat” and far more likely to be a consequence of the myriad ways that retirees have difficulty with their finances, everything from illness or hospitalization, to disorganized finances, to simply forgetting as a consequence of general memory loss. Now, there is a means of requesting a waiver of the penalty, though we don’t know how generous or stingy the IRS is in approving these waivers. But still: 50% is a big chunk of change, as Dad would say.
Besides which: for someone who’s not particularly well-versed in financial matters (again, sample size of 1), the RMD is ripe for misunderstanding. The RMD is not an annuity; just because the IRS provides this number as a minimum amount to be withdrawn does not have any bearing on what the “right” amount is to withdraw each year, nor does it provide any protection against outliving your assets. And the sole significance of the RMD is that this is the amount which must be moved to a different account each year, and taxes paid on it — by no means is it required that one actually spend this money during the year.
Are these mistakes so foolish as to be ridiculous to believe that anyone would make them? Not when you consider the extent to which older adults are affected by cognitive decline. Yes, this is one piece in an overall puzzle, along with overall management of finances, bill-paying, even paying the property taxes before losing the house. But this is also more complex than the other pieces, too.
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