Much of what is written as advice to retirees and those planning their retirements ignores the unavoidable Required Minimum Distribution (RMD) law that does a pretty good job of determining how much to withdraw from one's traditional IRAs each year. For example at age 70, it demands that you withdraw 3.6%, 5.3% at 80, and 8.7% at 90. If you can adjust your lifestyle to survive on these amounts, and adjust your investments to produce them, you'll never run out of money.To give a simple example, the RMD on a $1,000,000 IRA at age 70 will be $36000; by law you must withdraw at least that amount. If you can live on it plus Social Security and whatever else you have, and if you can earn $36000 by investing the 1 million in your IRA, you'll be in good financial shape. In later years, you may have trouble earning enough to cover the RMD as it increases, but you'll be closer to the end of life and can afford to dig into principal.I found it helpful, as I saved for retirement, to estimate how much money I would need each year with no paycheck. This made it easy, based on the RMD table, to determine how much I'd have to save before I could retire, and therefore how long I would have to work to reach that goal. This has worked out well; I had to work to age 75 to get my number but now at 80, I have lived on my RMD for 5 years and have not reduced my principal.
Nothing says you have to spend all of the RMD. You have to withdraw it but you can invest some in taxable accounts if you don't need it live on.
...This has worked out well; I had to work to age 75 to get my number but now at 80, I have lived on my RMD for 5 years and have not reduced my principal. ...Another strategy for withdrawing money in retirement is to start out spending a certain percent of your money each year then to adjust it each year for inflation. This is called a "safe withdrawal rate" (aka SWR) (Google this) and 4% is often mentioned as being a good starting point in order to likely have your money last for 30 years of retirement.Here are some links with some info on safe withdrawal rates;http://en.wikipedia.org/wiki/Trinity_studyhttp://www.retireearlyhomepage.com/safesum.htmlWith the current low interest rates some people suggest that starting out at a bit less than 4% might be a good idea. Starting with a 3.6% RMD at the age of 70 is right in this ballpark of what the SWR would be if the goal is to have your money last until you are 100.Your method of using the RMD as your withdrawal rate is initially very close to what you would do with the SWR method which is good but this could be a coincidence. The big differenc is that the RMD does not take inflation into account.I would be extremely concerned that between future inflation and how the RMD requirements changes as you get older that the RMD rate and the theoretical SWR rate will diverge and that there is a 50/50 chance that you will eventually start withdrawing and spending more that it is theoretically safe to spend each year. It would be good to crunch the numbers to see just into how these rates will differ as the RMD goes up when you get older.
Emphatically, keep in mind the RMD merely requires that you begin paying income taxes on funds in your tax preferenced 401K and IRA accounts.It says nothing about spending the money, and you certainly can reinvest it.The pretax contributions and gains in your tax preferenced retirement accounts are taxable when distributed. You cannot get your hands on the funds without paying taxes. For planning purposes it is reasonable to discount the value of those accounts by their after tax value. Or by all means, it is best to take those distributions under the lowest tax rates possible.
My point is that one has to take the distributions; everyone with untaxed money in a retirement fund is obliged to withdraw the amount stated in the MRD table. If you don't need it all, good for you, but you'll have to pay tax on it. If you're trying to decide when to retire, knowing your MRD will help you decide when you've got enough in your retirement fund to stop work and live on your saved money.A second point is that you should try to invest your funds to provide at least enough income to pay the annual MRD.
cummiw writes,A second point is that you should try to invest your funds to provide at least enough income to pay the annual MRD. I think most successful retirees look at total return (i.e., interest, dividends and capital gains) instead of limiting themselves to income producing securities.I'm more than happy to sell a few shares and take a capital gain to fund my annual living expenses.intercst
My point is that one has to take the distributions; everyone with untaxed money in a retirement fund is obliged to withdraw the amount stated in the MRD table. If you don't need it all, good for you, but you'll have to pay tax on it. If you're trying to decide when to retire, knowing your MRD will help you decide when you've got enough in your retirement fund to stop work and live on your saved money.A second point is that you should try to invest your funds to provide at least enough income to pay the annual MRD. I tend to disagree on both points. I don't really see how RMDs affects my savings "target" and I have no issues drawing down the principle.I plan on retiring long before RMDs kick in and I plan on withdrawing from my IRAs annually without RMDs, likely up to the 25% tax bracket.The goal should not be to pay zero taxes but rather to minimize your taxes throughout retirement.-murray
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