“Another bad decision is that I didn't move any of my money from a traditional 401(k) to a Roth 401(k). Neither did my husband. So we have to take more withdrawals than we need right now and pay taxes.” Retirement expert Alicia Munnell said the latter in a recent Wall Street Journal interview. It’s no reach to speculate that the situation she describes isn’t unique.
In Munnell’s case, her initial plan was to retire at 65. It used to be the traditional retirement age. What’s changed has clearly been a combination of longer lives borne of rising health with work that gets better and better by the day. Some would say the two aren’t unrelated.
Whatever the answer, the visible reality is that the age of 50 is the new 40, 60 is the new 50, 70 is the new 60, and on and on. Munnell is evidence of this, which is why it’s no reach to speculate that her situation isn’t unique. As she went on to cheerily lament in the aforementioned interview, “Someone should have said, 'if you're going to work until 82, you might not want to put all your savings into a traditional 401(k). Put some into a Roth."
Translating what most already understand, Munnell and her husband saved on the assumption of “early” retirement at 65, only to continue to working. The tax laws similarly presume “early” retirement, and as a consequence people are required to begin withdrawing from 401(k) accounts when they, like Munnell and her husband, don’t need the money. It’s a needless taxable event that will be felt by increasingly healthy “seniors” who are still working and saving for retirement at a time when dated tax laws imagine withdrawals necessary to pay for retirement. Something’s going to have to change.
The bet here is that what will change is the age at which minimum 401(k) withdrawals are required to begin. Evidence supporting this claim can be found in rising 401(k) wealth itself. Compare the latter with expected Social Security income. To say the 401(k) side is set to replace Social Security as the “third rail” of politics is similarly no reach. With 401(k) accounts exposed to the stock market versus Social Security exposed to general federal revenues along with the federal government’s flawed definition of inflation, it’s evident that Social Security’s share of retirement wallet share is poised for rapid decline.
Since it is, it’s only natural that politicians will gradually migrate to popular policy proposals that delay taxable withdrawal dates. It will be the politically wise thing to do as “senior citizens” more and more live and work as though they’re not. As this evolution reveals itself, tax preferences will change, including the desire to see the increasingly dated notion of retirement change.
Some reading this now will no doubt say that the predictions are Pollyannaish, that deficits and national debt will make it necessary for Treasury to increase tax collections every which way possible. Don’t bet on it.
Just as the when of “retirement” will become a dated notion, so will the notion that more tax revenues are required to pay off debt. The view is backwards. The paradoxical truth is that deficits and debt are logical consequences of too much tax revenue, not too little.
Bank on all manner of narratives changing for the better in the not-too-distant future. In other words, taxes on 401(k) withdrawals won’t be the only tax rates coming down.
