Financial advisers have repeatedly warned panicked investors not to sell their stocks and bonds despite the huge stock market drop in recent months. So not only is it counterintuitive, but financially reckless, for the federal government to require senior citizens to sell portions of their retirement accounts when it doesn’t make fiscal sense.
Maine Sens. Susan Collins and Olympia Snowe have urged the Treasury Department to suspend the practice during the current financial turmoil. In the longer term, they have proposed legislation to adjust the requirements.
Currently, when people reach the age of 70½, they must begin to withdraw funds from their Individual Retirement Accounts or retirement plans like 401(k)s. If they do not take these distributions, they face financial penalties. Of course, some retirees need the withdrawals to pay their bills, but forcing others take out money now could shortchange them later in retirement.
Especially for recent retirees, being forced to withdraw money now (which means holdings in these accounts must be sold) makes little financial sense. Leaving the money in these accounts, if possible, would allow retirees to recoup some of the losses they’ve incurred as stock prices have tumbled. Taking out money now locks in the losses.
“Forcing our nation’s retirees to liquidate assets at distressed prices makes little sense,” Sen. Collins wrote to Treasury Secretary Henry Paulson recently. “Such an outcome would not only be unfair to retirees, but would also work against our efforts to stabilize the financial markets.”
She asked the secretary to suspend the required withdrawals for at least this year and to waive any penalties. In another common sense move, Sen. Collins asked the department to change the way it calculates how much must be withdrawn to make it based on whichever is less, the account balance on the first day of the year or the last day. This would adjust required withdrawals downward if the value of an account declines precipitously during the year, which has happened this year.
The department can make both of these changes without congressional action. If it is unwilling to do so, Congress must step in quickly to void this year’s requirements.
Sen. Snowe has sponsored legislation to suspend the required withdrawals through 2010. “Retirees are counting on the money they’ve saved during a lifetime in these accounts only see much of it evaporate this year,” Sen. Snowe said this week. “We must give individuals time to recover their losses and not require them to prematurely withdraw their hard-earned savings.”
These are reasonable changes that should soon be made.