Under Pressure

IRA Holders Withdraw More Funds, Too Fast, During Times of Economic Crisis

Demonstrating the financial mindset of households during times of market downturn

A new study from the Employee Benefit Research Institute (EBRI) offers context for the economic challenges of 2020. Access the full report here.

A new EBRI study finds both the share of households reporting individual retirement account (IRA) withdrawals and the average withdrawal-to-balance ratio went up during the 2008–2010 Financial Crisis among IRA owners ages 50 to 70. This suggests that during market downturns, households are more likely to withdraw too much, too fast from their IRA balance.

The Issue Brief, “IRA Withdrawal Patterns in Times of Crisis,” finds for households 71 and older who were subject to IRA required minimum distributions (RMDs), the 2008 market downturn did not appear to have increased the share withdrawing from their IRA. However, it did result in increased average withdrawals relative to account balances for those taking withdrawals in excess of the RMD.

“While the 2008–2010 financial crisis and the current coronavirus pandemic are remarkably different in origin and impact, both downturns presented significant financial hardship for American households, which could lead IRA owners to tap into their account balances.

Additionally, similar to the provisions of 2020 CARES Act, the Worker, Retiree, and Employer Recovery Act of 2008 waived RMDs for 2009,” said Zahra Ebrahimi, Research Associate, Employee Benefit Research Institute, and author of the report. “Reported changes in IRA withdrawal patterns in response to financial hardships and RMD waivers during the last economic crises could be used as an indicator of what to expect from the current one.”

Excerpts From The Issue Brief ‘IRA Withdrawal Patterns In Times Of Crisis’

Reported changes in IRA withdrawal patterns in response to financial hardships and RMD waivers during the last economic crises could be used as an indicator of what to expect from the current one...

One of the provisions of the Coronavirus Aid, Relief, and Economic Security (CARES) Act that affects retirees is the waiver of required minimum distributions (RMDs) for 2020. The waiver, which applies to all 401(k) and individual retirement account (IRA) owners, provides flexibility so that retirees can avoid liquidating assets at low prices and preserve their assets.

In this Issue Brief, we explore historical IRA withdrawal patterns of older Americans, including those taking only RMDs and those taking distributions that exceed the RMD level. We look at prior crises, such as the Great Recession of 2008–2009, to see how withdrawal patterns were affected by both financial hardships and RMD waivers during that time.

Using the Health and Retirement Study (HRS), the Employee Benefit Research Institute (EBRI) examines the IRA withdrawal behavior of older Americans in the 50–70 and 71-and-older age groups, before and after the age of RMDs, from 2002–2016, biennially.

We find that:

  • Both the share of households reporting IRA withdrawals and the average percentage of their account balances withdrawn went up between 2008 and 2010 for IRA owners ages 50–70, suggesting that during market downturns, households are more likely to withdraw too much, too fast from their IRAs.
  • For households ages 71 and older who were subject to RMDs, the 2008 market downturn did not appear to have increased the share withdrawing from their IRAs. However, it did result in increased average withdrawals relative to account balances for those taking withdrawals in excess of the RMD. The 2009 RMD waiver had a modest impact in lowering the share of households who made RMD-only withdrawals.
  • IRA withdrawals of households ages 50–70 and those ages 71 and older who withdrew more than the RMD were associated with a decline in the households’ other financial assets.
  • On average, households ages 71 and older who withdrew only RMDs increased their other financial savings and non-housing wealth.
  • Both the share of households taking withdrawals that exceeded RMDs and the average percentage of the IRA balance withdrawn increased as income decreased.