J.P. Morgan Asset Management determined that many retirees are using required minimum distributions (RMDs) as their main “guidance” for when to draw down retirement assets.

Drawing on an Employee Benefit Research Institute (EBRI) database of more than 23 million 401(k) and individual retirement account (IRA) accounts, as well as J.P. Morgan Chase data for about 62 million households, J.P. Morgan studied 31,000 people as they approached and entered retirement between 2013 and 2018. The study determined the vast majority of retirees do not take distributions before the RMD age, which was 70.5 but has since been increased to 72.

Of the group that said RMDs were their “guidance” for drawing down assets in retirement, roughly 80% of those younger than RMD age were not taking withdrawals. About 84% of those subject to RMDs took only the required amount.

“The problem with using the RMD [as drawdown guidance] is that it is mismatched with how we observed households actually spending,” says J.P. Morgan Asset Management’s Chief Retirement Strategist Katherine Roy. “It constrains spending in the beginning and leaves assets in the end.”

The study found that, in reality, retirees are spending more in the beginning of retirement when they have newfound time and better health, and their spending declines as they age.

Roy says without good planning for withdrawing assets in retirement, individuals are not optimizing their lifestyle for fear of outliving their assets.

Using RMDs as guidance “feels like a compromise, but it’s not helping them spend effectively and it’s not reserving enough for long-term care needs or legacy goals,” she says. “People say, ‘Isn’t it good they’re spending less in the beginning so they have more later in retirement?’ but when we run the numbers, it’s not a lot more.”

Information Needed to Create an Effective Drawdown Strategy

Jonathan Price, senior vice president and corporate retirement practice leader at Segal, says the biggest decision that will affect a withdrawal strategy is at what age to retire. Retiring too soon can heighten an individual’s risk of running out of money in retirement. He says it’s important to remember that people make spending decisions throughout retirement, and individuals could either take their assets too rapidly or too late.

But, he adds, participants have opportunities to do some self-correcting. The best policy is for participants to project how their assets will fare over time, but it is challenging for them to know how to do that on their own, Price notes.

To prepare an effective drawdown strategy for retirement, participants need to understand their spending today and how that will evolve and change throughout retirement, Roy says. They need to run a long-term analysis to understand how their accumulated wealth can support their spending plans. Next, she says, participants need to think about solutions that will align with the way they plan to spend their money in retirement. “We’ve used our spending research to inform a number of things over the years, and now we’re looking at stable versus flexible spending—what is consistent spending in retirement what is inconsistent,” Roy says.

She adds that participants need to think about what income they will have to support their spending—including whether an annuity would be a good fit and what the right Social Security claiming strategy is for them.

“I’m concerned that with such a dominant view of RMDs as guidance for when to spend retirement savings, participants are using other income sources [prior to RMD age] and they could maybe make better decisions about the Social Security claiming age and have more stable income in retirement,” Roy says.

In an article about J.P. Morgan’s study, “Mystery No More: Portfolio Allocation, Income and Spending in Retirement,” Roy and co-author Kelly Hahn say a goals-based planning approach is important.

“People tend to do well when they manage their money based on their goals, time horizon and risk tolerance,” they say. “In principle, this means taking on greater investment risk (and potential return) for assets intended for the end of a projected lifetime that could be 20, 30 or even more years away (for example, long-term care or a bequest). Meeting those goals, if applicable, should not be left to chance, dependent on what is left over after RMDs are taken. The assets should be managed more proactively.”

Helping Participants Create a Drawdown Strategy

Price says plan sponsors can help participants create a drawdown strategy for retirement before the withdrawal decision point.

“It begins with the plan sponsor being engaged with the retirement readiness of employees,” he says. “Plan sponsors should make sure participants are tracking toward having assets to be able to retire at an appropriate age. This is particularly true for some of most disadvantaged in retirement savings—for example, low-income employees, women who have had gaps in employment, etc. Plan sponsors should be doing the right kind of analytics to make sure the savings-compromised parts of the employee population are identified.”

Plan sponsors can help, Roy says, by providing communications to help participants think through what post-retirement solutions their employers make available. “Approximately 85% of participants say they are willing to keep their assets in the plan if offered income solutions, but it needs to be more than income solutions,” she says. “It has to be a combination of guidance and tools, investments and income solutions. Participants need all three to tailor solutions to their unique needs.”

Price says plan sponsors, recordkeepers and advisers can work together to help participants put together a withdrawal strategy in the years before they retire. Prior to reaching the decumulation phase, employers and service providers can offer education and tools to help participants. Plan sponsors can also use plan design to make sure participants have the right features and investment options to help with decumulation, he adds.

As participants get closer to retirement, they need education about whether they have the appropriate amount of assets for retirement and about ways to draw down those assets. They need tools that can model potential drawdown strategies, Price says.

He adds that every plan is different, as is every participant. Drawdown strategies need to consider the assets a participant has available, as well as other benefits they will have for retirement (e.g., long-term care insurance). That’s important education for plan sponsors to provide, Price says. “Considering what assets are available to be used and when involves looking at benefits other than retirement savings,” he says.

Price says Segal has seen more plans include withdrawal options other than lump sums in their plan designs, as well as elements in investment lineups to preserve assets or create income—guaranteed income products embedded in target-date funds (TDFs), for example.

Some plan sponsors are creating what is called a “retirement tier,” which the Defined Contribution Institutional Investment Association (DCIIA) defines as a range of products, solutions, tools and services, which support participants who are near, entering or in retirement. This includes investment options that fit a retiree’s goals, as well as advice offerings and different withdrawal strategies.

Roy says she’s also been thinking about the requirement to include lifetime income illustrations on participant statements.

“I think it is a positive thing, but it’s flawed,” she says. “It assumes participants will take their entire balance and turn it into an annuity, but people don’t want to turn over everything; they want liquidity available to them. We need to show them how they can have a combination of the two—keeping a certain amount that makes them comfortable invested in the plan and putting some of their balance toward an annuity.”

Price stresses that the best chance of success in creating a withdrawal strategy starts decades earlier with savings strategies. “Saving early in your career and investing appropriately will make sure enough is in place to create a drawdown strategy,” he says. “The best way to succeed with any—and definitely with an optimal—strategy is through years of accumulating assets.”

“Fear of spending is constraining retirement lifestyles to great degree. We need to address that and make people more comfortable with spending what they’ve accumulated,” says Roy.