Helping Baby Boomer Clients Deal With The Realities Of RMDs

As over 58 million baby boomers reach 70 ½ over the next two decades, they must deal with the realities of required minimum distributions (RMDs). Boomers are just starting to deal with RMDs and the potential tax repercussions in earnest, with the first baby boomers turning 70 ½ in 2016. As a result of the massive number of people being required to draw down their retirement assets, up to $10 trillion will be subject to these mandatory withdrawals over the next 20 years according to a report by BNY Mellon.1

While RMDs are a necessity, that doesn’t mean people have to like them. According to a recent study,2 a majority of high net worth people have a negative opinion about them, with 83 percent saying they hate paying taxes on their RMDs that come out of most tax-deferred retirement plans.

Beyond thinking through the strategy for actually withdrawing assets (it can be a manual process), financial professionals should work with baby boomer clients to create a plan for using their RMDs, and help them figure out how to take the money in a tax-efficient way.

Making a Plan
As people enter retirement and approach age 70 ½, they may know that they have to take RMDs, but feel unsure of what exactly to do with the proceeds. Do they just put those funds into a savings account? Use the money as part of their income in retirement? Reinvest it? Donate money to charity?

Over a third of people in the study (35 percent) say they wish they had a better plan for using their RMDs, but overall a majority (79 percent) agree that they want to use their RMDs in a way that allows their portfolio to grow. That means they might not be satisfied just taking the money and dropping it into their checking or low-interest savings accounts.

Before you help them develop a strategy for how they should use their RMDs, work with clients to determine what their upcoming financial goals may be. Do they want to take a big trip? Reserve funds for future healthcare costs? Leave a legacy?

Whether or not clients need the money plays no role. They must take the distributions regardless, and financial professionals should help them find a way to use the withdrawals in a way that works for the client’s goals and meets their desire for potential growth.

Understanding the Tax Impact
There’s no shortage of tax questions around RMDs, and nearly a third (32 percent) say they have difficulty understanding how RMDs could impact their overall tax obligation. This presents an opportunity for financial professionals to not only educate their clients on RMDs, but to talk through what can happen to their tax bill come next April—including being bumped into a higher tax bracket.

While 67 percent of consumers say they have a good plan to minimize the impact of taxes on their retirement income overall, that still leaves one-third who do not have a strategy in place.

Since paying taxes on RMDs is a big pain point, explore opportunities that can help make up for lost funds. In fact, 71 percent of respondents said they would be interested in using RMD payments to fund a financial product that offsets the impact of taxes.

Also, in order to avoid the hefty 50 percent excise tax that is triggered if a client fails to take their RMD by the year-end deadline, explore some of the ways they can automate the withdrawals so they don’t have to worry about missing a deadline and paying a penalty.

Facing the Realities of RMDs
As the number of baby boomers turning 70 increases over the next few years, they will have to face the realities of RMDs—which can include being forced to take money they didn’t need or want and then the double whammy of having to pay taxes on it.

The role of the financial professional in helping clients navigate RMDs can’t be understated and will be of increasing importance in the coming decades as nearly 58 million baby boomers will be required to take RMDs in the next 20 years.

Start to think through your own process of helping them plan for RMDs, and by anticipating their pain points and needs you can help them create a strategy for taking RMDs that helps meet their goals and addresses their taxes efficiently.

This article is for general educational purposes only. It is not, however, intended to provide fiduciary, tax or legal advice and cannot be used to avoid tax penalties or to promote, market, or recommend any tax plan or arrangement. Please note that Allianz Life Insurance Company of North America, its affiliated companies, and their representatives and employees do not give legal or tax advice. Encourage your clients to consult their tax advisor or attorney for their specific situation.

2. RMD Options Study* by Allianz Life.

*Allianz Life Insurance Company of North America conducted an online survey. The RMD Options Study was conducted in February/March 2018, and included a nationally representative sample of 805 respondents ages 65-75 with retirement savings of $500,000 if single or $750,000 if married and who are the primary decision maker or share equally in decision making.

As Vice President of Advanced Markets for Allianz Life Insurance Company of North America (Allianz Life®), Kelly LaVigne oversees the Advanced Markets team and is responsible for its strategic direction. This includes providing content and expertise to assist financial professionals in acquiring and serving clients through retirement planning, estate planning, and other tax-related strategies.
Prior to joining Allianz Life, LaVigne was director of advanced markets and director of industry and regulatory strategies for Transamerica Capital Management. Before joining Transamerica, he served as vice president of advanced markets for AXA Equitable, where he and his team published a book on retirement income planning to help financial professionals enhance their retirement income practice. LaVigne has also had leadership roles at ING/Aetna Financial Services and Travelers Life and Annuity.
LaVigne holds a Juris Doctor (JD) from Western New England College School of Law in West Springfield, MA, and a Bachelor of Science degree in communications and marketing from Central Connecticut State University in New Britain. He holds FINRA 6 and 26 securities registrations, a Life and Health Insurance license, and is a Certified National Instructor for Life Insurance Continuing Education.
LaVigne can be contacted at Allianz Life Insurance Company of North America, 5701 Golden Hills Drive, Minneapolis, MN 55416. Telephone: 763-765-6614. Email: