The retiree advocacy group AARP has asked U.S. Treasury Secretary Henry Paulson to temporarily freeze mandatory retirement account withdrawals.
Americans aged 70 ½ and over are required to take distributions from their retirement accounts based on the fair market value of their account on the last day of the previous year.
Failure to take a required distribution by Dec. 31 results in a tax penalty equal to 50 percent of the amount of the distribution.
In effect, seniors would lose half of their money in one shot, on top of a huge market decline.
“The sudden decline in the economy and plunging stock markets has jeopardized the retirement savings of millions of retired workers,” says AARP CEO Bill Novelli in a letter to Paulson.
“In addition to steps that are already being taken to stabilize the financial markets, we believe it is also critical to help stabilize individual finances.”
The group wants minimum withdrawals to be optional for this year to give older Americans financial flexibility in the face of the drop in stock markets.
Seniors are in a real bind. Some had expected to take reverse mortgages to fund retirement, but now house prices are in free fall. Others planned to double down on stocks, hoping to ride a bull market into retirement.
Of course, financial planners say most seniors should be heavily into bonds and other fixed-income instruments toward the end of their working years. But, as interest rates fall, fixed-income rates fall, too, making riskier stocks more attractive to baby boomer investors.
And it's nearly impossible for seniors to plan for a future that could last years or last decades, what planners call “longevity risk.” So many stay in stocks despite the risk of a bull market collapse, which has happened now.
"People are living 30-plus years in retirement, and sourcing a secure income flow that can increase with inflation is paramount to a successful retirement," Dean Catino, managing director of Monument Wealth Management in Alexandria, told The Washington Post.
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