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  • The safe or optimal rate of withdrawal from retirement asset accounts has frequently been discussed. Rates of 3% to 4% per year are often recommended.
  • The Federal required minimum distribution schedule offers a viable strategy which is likely to benefit many, if not most, retirees.
  • Using modest and conservative assumptions about retirement asset growth, the RMD offers a monthly benefit usually greater than 4%, increasing payout year to year, and preservation of assets.

Many contributors have attempted to deal with the issue of how rapidly should retirement savings be drawn upon. The traditional answer has often been 4% per year, although many have suggested 3% is more realistic for recent times with lower interest rates associated with fixed income investments. A study of the Federal schedule for taking required minimum distributions suggests that a more liberal drawing on resources is plausible, and can provide increasing benefits for many retirees over the course of a lifetime.

The schedule for required minimum distributions (RMD) describes how much one must take out of a tax protected account such as a traditional IRA, a Keogh plan, or a deferred compensation account, on which Federal income taxes were not paid when money funded these accounts. Under most circumstances, these accounts can be drawn upon after age 59 1/2 years, with Federal income tax being due on the amount withdrawn. The actual amount of Federal tax on the withdrawal will depend upon the retiree's marginal tax rate. However, after age 70, withdrawal is not optional - it is mandatory to withdraw at least certain minimum amount - and is subject to a harsh financial penalty if not withdrawn.

The actual amount of mandated withdrawal depends upon one's age, changing each year, with lower proportions required at age 70, and higher proportions required for older individuals. The table below displays the proportions required at different ages. The left hand column is the person's age in years, and should be interpreted as the tax year in which the person turns that age. The second column is the expected life span assumed by the law. The idea is that one needs to take out an amount which would totally deplete the account if that amount were withdrawn each year for the rest of one's life. For example, at age 70, a person is assumed to have a life span of 27.4 years, so the amount needed to be taken out at age 70 would be 1 / 27.4 of the account's value. But this makes it seem unnecessarily complicated - if you take the reciprocal of the assumed life span (divide the assumed life span into 1) - one gets a more easily understood percentage. This percentage is displayed in the right hand column.

Table 1: Required Minimum Distributions as a Function of Age, Expressed as Percentages:

Age of retiree

Distribution period (in years)

1 / dist period

70

27.4

3.65%

71

26.5

3.77%

72

25.6

3.91%

73

24.7

4.05%

74

23.8

4.20%

75

22.9

4.37%

76

22

4.55%

77

21.2

4.72%

78

20.3

4.93%

79

19.5

5.13%

80

18.7

5.35%

81

17.9

5.59%

82

17.1

5.85%

83

16.3

6.13%

84

15.5

6.45%

85

14.8

6.76%

86

14.1

7.09%

87

13.4

7.46%

88

12.7

7.87%

89

12

8.33%

90

11.4

8.77%

91

10.8

9.26%

92

10.2

9.80%

93

9.6

10.4%

94

9.1

11.0%

95

8.6

11.6%

96

8.1

12.3%

97

7.6

13.2%

98

7.1

14.1%

99

6.7

14.9%

100

6.3

15.9%

101

5.9

16.9%

102

5.5

18.2%

103

5.2

19.2%

104

4.9

20.4%

105

4.5

22.2%

106

4.2

23.8%

107

3.9

25.6%

108

3.7

27.0%

109

3.4

29.4%

110

3.1

32.3%

111

2.9

34.5%

112

2.6

38.5%

113

2.4

41.7%

114

2.1

47.6%

115 or older

1.9

52.6%

So, during the year one turns 70, 3.65% needs to be taken out. The percentage increases every year, and this increases to as much as 52.6% the year one turns 115. This is not really severe as it seems, since the oldest male in the United States recently died at age 111.

The really important variable for the retiree is how much the amount not withdrawn is growing. Money not taken out of the account can continue to grow tax free. Under modest assumptions about growth, the required minimum distribution schedule can work well for most people. The table below displays a scenario for a hypothetical account of $500,000 in which un-withdrawn funds are assumed to grow at a rate of 4.00% per year. But the proportions would apply to any amount.

Table 2. RMD Scenario for a Retiree with a $500,000 Tax Protected Account

Assumed:

$ 500,000.00

4.00%

Age

Initial Amt.

RMD taken out

Growth of remaining assets

Ending amount

Monthly Gross

70

$ 500,000.00

$ 18,248.18

$ 19,270.07

$ 501,021.90

$ 1,520.68

71

$ 501,021.90

$ 18,906.49

$ 19,284.62

$ 501,400.03

$ 1,575.54

72

$ 501,400.03

$ 19,585.94

$ 19,272.56

$ 501,086.65

$ 1,632.16

73

$ 501,086.65

$ 20,286.91

$ 19,231.99

$ 500,031.73

$ 1,690.58

74

$ 500,031.73

$ 21,009.74

$ 19,160.88

$ 498,182.88

$ 1,750.81

75

$ 498,182.88

$ 21,754.71

$ 19,057.13

$ 495,485.29

$ 1,812.89

76

$ 495,485.29

$ 22,522.06

$ 18,918.53

$ 491,881.76

$ 1,876.84

77

$ 491,881.76

$ 23,201.97

$ 18,747.19

$ 487,426.98

$ 1,933.50

78

$ 487,426.98

$ 24,011.18

$ 18,536.63

$ 481,952.44

$ 2,000.93

79

$ 481,952.44

$ 24,715.51

$ 18,289.48

$ 475,526.40

$ 2,059.63

80

$ 475,526.40

$ 25,429.22

$ 18,003.89

$ 468,101.07

$ 2,119.10

81

$ 468,101.07

$ 26,150.90

$ 17,678.01

$ 459,628.18

$ 2,179.24

82

$ 459,628.18

$ 26,878.84

$ 17,309.97

$ 450,059.31

$ 2,239.90

83

$ 450,059.31

$ 27,611.00

$ 16,897.93

$ 439,346.24

$ 2,300.92

84

$ 439,346.24

$ 28,344.92

$ 16,440.05

$ 427,441.38

$ 2,362.08

85

$ 427,441.38

$ 28,881.17

$ 15,942.41

$ 414,502.61

$ 2,406.76

86

$ 414,502.61

$ 29,397.35

$ 15,404.21

$ 400,509.47

$ 2,449.78

87

$ 400,509.47

$ 29,888.77

$ 14,824.83

$ 385,445.54

$ 2,490.73

88

$ 385,445.54

$ 30,350.04

$ 14,203.82

$ 369,299.31

$ 2,529.17

89

$ 369,299.31

$ 30,774.94

$ 13,540.97

$ 352,065.35

$ 2,564.58

90

$ 352,065.35

$ 30,882.93

$ 12,847.30

$ 334,029.72

$ 2,573.58

91

$ 334,029.72

$ 30,928.68

$ 12,124.04

$ 315,225.08

$ 2,577.39

92

$ 315,225.08

$ 30,904.42

$ 11,372.83

$ 295,693.49

$ 2,575.37

93

$ 295,693.49

$ 30,801.41

$ 10,595.68

$ 275,487.77

$ 2,566.78

94

$ 275,487.77

$ 30,273.38

$ 9,808.58

$ 255,022.96

$ 2,522.78

95

$ 255,022.96

$ 29,653.83

$ 9,014.77

$ 234,383.89

$ 2,471.15

96

$ 234,383.89

$ 28,936.28

$ 8,217.90

$ 213,665.51

$ 2,411.36

97

$ 213,665.51

$ 28,113.88

$ 7,422.07

$ 192,973.70

$ 2,342.82

98

$ 192,973.70

$ 27,179.39

$ 6,631.77

$ 172,426.07

$ 2,264.95

99

$ 172,426.07

$ 25,735.24

$ 5,867.63

$ 152,558.47

$ 2,144.60

100

$ 152,558.47

$ 24,215.63

$ 5,133.71

$ 133,476.56

$ 2,017.97

101

$ 133,476.56

$ 22,623.15

$ 4,434.14

$ 115,287.55

$ 1,885.26

102

$ 115,287.55

$ 20,961.37

$ 3,773.05

$ 98,099.22

$ 1,746.78

103

$ 98,099.22

$ 18,865.24

$ 3,169.36

$ 82,403.35

$ 1,572.10

104

$ 82,403.35

$ 16,817.01

$ 2,623.45

$ 68,209.79

$ 1,401.42

105

$ 68,209.79

$ 15,157.73

$ 2,122.08

$ 55,174.14

$ 1,263.14

106

$ 55,174.14

$ 13,136.70

$ 1,681.50

$ 43,718.94

$ 1,094.73

107

$ 43,718.94

$ 11,209.98

$ 1,300.36

$ 33,809.31

$ 934.17

108

$ 33,809.31

$ 9,137.65

$ 986.87

$ 25,658.53

$ 761.47

109

$ 25,658.53

$ 7,546.63

$ 724.48

$ 18,836.38

$ 628.89

110

$ 18,836.38

$ 6,076.25

$ 510.41

$ 13,270.53

$ 506.35

111

$ 13,270.53

$ 4,576.05

$ 347.78

$ 9,042.27

$ 381.34

112

$ 9,042.27

$ 3,477.79

$ 222.58

$ 5,787.05

$ 289.82

113

$ 5,787.05

$ 2,411.27

$ 135.03

$ 3,510.81

$ 200.94

114

$ 3,510.81

$ 1,671.81

$ 73.56

$ 1,912.56

$ 139.32

115 or older

$ 1,912.56

$ 1,006.61

$ 36.24

$ 942.19

$ 83.88

Some notable features of this withdrawal scenario: First, the nest egg actually grows to a higher amount of $501,400 by age 72. Second, the withdrawal provides $1520 per month before taxes at age 70. This amount increases every year to $2577 per month at age 91. The amount declines after that, but still provides $2471 per month at age 95. Third, even at age 95, $255,022 remains of the original $500,000 nest egg, and this can we passed to a beneficiary after death. Admittedly, the integrity of the withdrawal plan breaks down after age 100, but this will not be a concern with the majority of retirees who will die before then.

A fine point needs to be emphasized. The assumed growth rate of un-withdrawn funds is 4.00%. This 4.00% is assumed to be true AFTER fees are applied. It is believed that 4.00% is a modest, conservative assumption, achievable with a portfolio of 50% fixed income at 2.5% and 50% equities yielding 5.5% total return. Different assumed growth rates will result in different outcomes. For example, if a growth rate of 5% is assumed, the nest egg will continue to grow to $526,000 by age 78, and the monthly withdrawal net will grow from $1520 per month before taxes at age 70 to $3198 at age 93, with $386,000 still remaining for beneficiaries.

Another advantage of the RMD is that your tax-protected account custodian may do all the work. Many custodians (Vanguard, Schwab, etc.) have a program which will automatically compute your RMD and make appropriate distributions. It is possible to be put on "automatic pilot" for the rest of your life with one arrangement.

The above features seem to work for people retiring at age 70, but can legitimately question whether they will work for an earlier retirement. In most cases, people cannot withdraw from a tax protected account before age 59 1/2 years. Between age 60 and age 69, other withdrawal proportions can be used. The following are suggested: Age 60-63 2.75%; Age 64-66 3.00%; Age 67-69 3.25%.

The above features are believed to be accurate for most people, but there are a few situations in which they might not apply: 1) accounts which are inherited from somebody else; 2) accounts in which one's spouse is grossly different in age. Also, persons with health issues likely to compromise longevity might want to consider a more aggressive withdrawal plan. As with all things, readers should consult with their financial advisor or attorney in order to determine what is best for their unique situation.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.

Source: The Federal Required Minimum Distribution Schedule As A Retirement Savings Withdrawal Strategy