Now almost 20 years into what was an early retirement funded by a modest nest egg, I am turning 70 this year and entering a new phase requiring a new investment strategy. The good news is that I haven't exhausted the retirement accounts that have supplied our cash flow since turning 55 and that the account values have grown over that time. There really is no "bad" news, but the unwelcome news, because it isn't my idea, is that the amount of my distributions will increase next year when I turn 70½ and become subject to Required Minimum Distributions (RMDs).

**Life is Simple Before 70½**

It took only the first 5 years of our retirement to blow through the rather small initial stake that we had in a regular brokerage account. Since then, we have relied on regular IRA distributions for cash. So, I have been quite spoiled for the past 15 years because I haven't had to consider tax costs in my investment returns and my tax returns have been simple to complete. I could manage and bookkeep the portfolios without so much as a passing thought about what portion of every single profitable transaction would go to the government. That's about to change.

Until now, my distributions have matched the money we've needed to live on and no more. The formula couldn't have been simpler:

Cash Expenditures (including tax) = Distributions from IRA

My distributions have gone directly from one of two IRA brokerage accounts to our joint checking account. The cash flow statement has been simple:

Beginning checkbook balance

-Cash Expenditures

+IRA Distributions

Ending checkbook balance

**Things Get More Complicated At 70½**

Once an investor turns 70½, it's time to start paying up for all the taxes that weren't paid by the trust funds he established in the form of Individual Retirement Acts. That's done by forcing him to distribute a mandatory portion of the IRA every year. The Required Minimum Distribution ("RMD") is determined by two factors:

- The value of his tax-deferred account(s) at 12/31 of the year prior to his turning 70½ and at the end of each succeeding year;
- The IRS-mandated Distribution Period that corresponds to his age.

I am not complaining, but unless the market values of my IRAs shrink precipitously between now and the end of this year, my RMDs next year will be more than my voluntary distributions have been and measurably more than we need to cover expenses.

As a result, I will be challenged with investing the excess ordinary income. I have residual balances in two regular joint brokerage accounts where my IRAs are held. I plan to deposit my RMDs into those joint brokerage accounts, with Social Security payments that I will start receiving next month going directly into the regular checking account. Some cash will be transferred from the joint brokerage accounts to the checking account on a regular monthly schedule. Additional cash will be transferred to checking "as needed" from time to time.

Cash flow tracking and balance forecasting now become more complicated. I have prepared spreadsheets for new annual cash flow forecasts that cover 30 years to age 100. (*Optimistic? Maybe, but Dad lived 4 months beyond his 102nd birthday and Mom lived 11 months past her 97th birthday. It's unlikely, but if I should be blessed with good health and survive to the century mark, mine will have been a 50-year retirement. If only my retirement accounts survive as long!)*

Now, instead of IRA distributions coming at the bottom of the cash flow worksheet as a remainder after deducting expenditures from other income, they come at the top. And because the RMD is based on the account value at a definite point in time, I will have no control over how much cash needs to come out of the IRAs each year.

So, because the amount of my IRA distributions is a legal requirement, it is important that I know what the amount will be and, more importantly, that I make sure that there is enough cash in the IRA to make the required distribution on time. *(**Some investors will opt to make "in kind" distributions, and there are pro and con opinions on the subject. This article assumes distributions are made in cash.)*

Planning ahead will help me and will help any investor determine

- how closely dividend and interest income will match the RMD amount;
- when and
- how much of the portfolio will need to be sold for cash when dividend and income don't provide all the cash needed to fund the minimum distribution.

**The "In-IRA" Cash Flow Forecast**

Since the amount of the RMD is determined by the market value of the trust (yes, an IRA is a trust) at the end of the year prior to the distribution year, a cash flow forecast needs to start with projections of the year-end account balance. For example, I turn 70½ in 2017 and therefore the account balance at 12/31/16 will determine my first RMD amount, which must be distributed by 12/31/17. (Actually I could wait until the first quarter of 2018, but then I would have to make two distributions in 2018.) The investment returns of the trust during 2017, less the RMD, will determine the account value at the end of that year. And so on, year after year, until there are no more assets in the trust.

The way the IRS looks at it, the trust's income includes the change in the market value of the assets during the year, along with dividend and interest income. The rules force the trust to recognize unrealized capital gains and losses by including them in the calculation of the RMD and taxing that portion required to be distributed. But, as long as total dividend and interest income is equal to or greater than the RMD, no asset sales are required and the following year's dividend and interest income will be unaffected by the RMD.

**Constructing the Spreadsheets**

The following table reflects the construction and formulae of a simple Excel spreadsheet that any investor can use to forecast the cash needs of the IRA. The format assumes just one IRA account, but many households have more than one. A separate spreadsheet could be constructed for each trust or the spreadsheet could include data for all IRAs. (Note: As I understand it, if there are multiple IRAs, it is not necessary to make a distribution from all of them. The investor just needs to calculate the total value of the whole group and take his total RMD from at least one of the accounts.)

A -------------------------------------B---------------------------------C

1 Year | 2017 | =B1+1 |

2 Age at Year End | 71 | =B2+1 |

3 Distribution Period | 27.4 | 26.5 |

4 IRA ACCOUNTS | ||

5 Prior Year-end Balance | 1000 (example) | =B13 |

6 Beginning Cash | 25 (example) | =B12 |

7 Dividends and Interest | 30 (example) | =C5*0.03 |

8 Total Cash Available | =B6+B7 | =C6+C7 |

9 Cash Required for RMD | =B5/B$3 | =C5/C$3 |

10 Ending Cash | =B8-B9 | =C8-C9 |

11 Asset Sales Required | =IF(B10<0,0-B10,0) | =IF(C10<0,0-C10,0) |

12 Final Ending Cash | =B10+B11 | =C10+C11 |

13 Ending IRA Value | =SUM(B5-B9)*1.03 | =SUM(C5-C9)*1.03 |

The contents of Cells B3-AE3 are input from the Distribution Period table at the link above. Cells B5, B6 and B7 would contain the investor's actual numbers, under the assumption that the final run of the forecast is prepared near the end of the year prior to the first RMD and the investor can closely estimate his dividends and interest the following year. (The spreadsheet should, of course, be updated annually.) The formulae in column C are copied to the cells to the right for the number of years the investor chooses to forecast. In my illustration, the formula in C5 assumes a 3% annual capital gains rate and C7 assumes a constant interest and dividend yield of 3% on the beginning balance (which is the same as the balance at the end of the previous year.) Of course, things won't turn out that way: changes in the prices of the portfolio securities won't change at a constant rate and neither will dividend payments. But, if everything did indeed proceed exactly the way the projection assumes, the forecast in the above example would look like this: (presented in 10-year increments to save space)

| 2017 | 2027 | 2037 | 2047 |

| 71 | 81 | 91 | 101 |

| 27.4 | 18.7 | 11.4 | 6.3 |

Prior Year-end Balance | 1000.00 | 1180.42 | 1101.09 | 621.50 |

Beginning Cash | 10.00 | - | - | - |

Dividends & Interest | 30.00 | 35.41 | 33.03 | 18.64 |

Total Cash Available | 40.00 | 35.41 | 32.54 | 18.64 |

RMD Cash Required | 36.50 | 63.12 | 96.59 | 98.65 |

Ending Cash | 3.50 | (27.71) | (63.55) | (80.01) |

Asset Sales Required | - | 27.60 | 63.55 | 80.01 |

Final Ending Cash | 3.50 | - |

This scenario shows the investor still has, at age 101, an account value more than 60% of what it was 30 years earlier. Over time, asset sales eat into the principal value of the IRA and, consequently, with no change in yield, dividend and interest income decline from age 85 on.

Preparing a forecast similar to this one forces the manager of the IRA to evaluate the reasonableness of his assumptions. The investor may sensitize the forecast to accommodate a range of assumptions, perhaps creating "best case" and "worst case" scenarios that bracket what he feels are reasonable. Important variables, such as the amount of cash the investor wishes to maintain year after year; the timing of the changes in the portfolio market values; and the yield he expects to get on his portfolio.

For example, even if in the first year dividend income is sufficient to fund the RMD, it is unlikely to be sufficient throughout a long retirement. That's because the "distribution period" becomes shorter each year - another way of saying that the ratio of the RMD to the prior year's ending balance gets bigger each year. The initial distribution must be 1/27.4 (3.65%) of the prior year-end balance, but that percentage increases by over 3.4% (to 1/26.5 or 3.77%) in the second year and increases each successive year. By age 80, the rate of increase is 4.3% and the RMD is 1/18.7 (5.35%) of the prior year end balance. By age 90, it is 8.87%. That means that, even if the account value doesn't increase, the *yield* on the investor's IRA portfolio needs to increase in lockstep with the rate of increase in the distribution ratio if dividend income is to be sufficient to fund the entire RMD. In the scenario depicted in the model above, the investor needs to start selling assets in 2018 in order to raise cash to pay the RMD and asset sales will be needed each year thereafter.

**Managing the IRA Cash Flow Objectives**

Can the investor structure his IRA portfolio to maximize the length of time that dividend income will provide all the cash needed to fund the RMD? Obviously, it helps if annual dividend income at age 70½ is significantly higher than the RMD to start, i.e. if the current portfolio yields well in excess of 3.65%. For example, using the forecast model above and adjusting assumptions so that dividend income is 60 (6% of the beginning balance) in the first year and that a 6% dividend yield is maintained on a portfolio value rising 3% each year thereafter, the investor doesn't have to sell shares to raise cash until 2038 when he is 92. In short, the answer to the question is readily apparent: the higher the dividend yield, the less reliance there will be on asset sales to fund the RMD.

Investors entering the RMD stage should give serious consideration to upping the portfolio yield if they want to delay as long as possible the need to sell shares. There are many opportunities to do so and not all of them are particularly risky. Just for kicks, I checked the back pages of the current issue of Value Line, which lists 80 stocks yielding 4.8% or more. All but 21 of them have a safety rank of "3" or better. My own portfolio includes names on the list: BGCP at 7.7%; WPC at 5.6%; KSS at 5.6% and GME at 5.6%. My largest single investment, T, has a 4 handle. No BDCs, no MREITs, no weak operating histories in the portfolio. While I generally consider that high-than-average yields suggest a fair amount of financial risk, I don't consider all "3" ranked issues to be too risky for a conservative retirement portfolio. Needless to say, there are many more opportunities than these for the investor to find yields higher than the initial RMD percentages. A successful effort to assemble a portfolio of them that is safe and offers reasonable growth potential can extend the time that dividends alone can fund the RMDs. Adjusting the assumptions in an Excel worksheet can illustrate the effect.

Nonetheless, while a dividend growth investor may prefer that his dividend (and, perhaps, interest) income cover the RMD forever, the savvy DG investor will realize that selling shares is not as big a negative as some might believe. First, to the extent that the entire RMD amount isn't needed to pay expenses, the shares he sells in his IRA can be easily and inexpensively reinvested in his regular brokerage account (or, alternatively transferred in kind.) There need be no loss of dividend income in the process.

Second, if selling shares is necessary, a strategy of selling the *right* shares can actually increase the mileage the investor gets out of his dividend income. If a higher portfolio yield in the IRA enhances the length of time that dividends will cover the RMD, then selling lower yielding shares in the IRA and repurchasing them in the regular brokerage account will raise the portfolio yield in the IRA. This wouldn't affect the yield of the two portfolios considered as a whole, but it would raise the yield of the Retirement Account. A secondary benefit would be realized if the lower yielding shares happen to be shares with above average appreciation potential, because unrealized appreciation isn't taxed in the regular brokerage account, but would increase the RMD (which is based on the IRA value) and thus slightly raise the tax bite of the distribution.

In fact, at some point in time, perhaps when market sentiment is negative or when money market accounts actually pay something meaningful, it may be wise to hold excess cash in the IRA and generate all of the distribution cash via sales of marginal holdings. Excess cash, especially if it is paying interest, is a simple hedge an investor can prudently employ, particularly later in life, if and when his portfolio has significantly outperformed expectations and when the need for yield may have been reduced.

At bottom: forecasting the cash flow dynamics within the IRA gives the investor at least a murky glimpse of the future and puts him ahead of the curve where he can proactively ponder, plan and execute an intelligent cash generating strategy. Starting the process early can give the investor time to adjust concentrations in the portfolio on favorable terms, like taking advantage of trading "richly valued" securities with resulting low yields for more reasonably valued shares with higher yields.

**The Checking Account Cash Flow Forecast**

It's important to take a fresh look at the cash requirements of the household because they are going to drive the activity in the brokerage account. Projecting total expenditures, or budgeting, is the first step in quantifying how much of the RMD is required to fund the investor's lifestyle:

*Note: While I'm inserting a narrative break between the forecasts, all three forecasts could be on a single worksheet. For that reason, cell numbers reflect a unified spreadsheet.*

--------------A------------------------------------B----------------------------- -C

14 CHECKING ACCOUNT | ||

15 Beginning Cash | 10 (example) | =B21 |

16 Social Security/Other Income | 35 (example) | =B16*1.01 |

17 Cash Available | =SUM(B15:B16) | =SUM(C15:C16) |

18 Household Expenses | 60 (example) | =B18*1.03 |

19 Income Taxes | =SUM(B9+B16)*0.18 | =SUM(C9+C16)*0.15 |

20 Transfers from Brokerage Required | =B18+B19-B16 | =C18+C19-C16 |

21 Ending Cash | =B17+B20-B18-B19 | =C17+C20-C18-C19 |

The annual rate of increase in Social Security and other income and applicable income tax brackets are factors largely outside the investor's control, as are future medical expenses that may become a larger component of household expenses. These are key areas of risk to the financial health of the retiree. At best, they can only partially be mitigated by the size of the retirement nest egg and personal behaviors. In my own case, I delayed taking Social Security until age 70, because doing so added a greater amount of theoretically "risk-free" income that hedges some of the other uncertainties.

**The Brokerage Account Forecast**

Remember: one investment account, the IRA, is being incrementally and involuntarily defunded, but another investment account, the regular brokerage account, is being funded. True, all things equal, taxes on the distribution cause the funded amount to be less than the defunded amount. That fact will be reflected in the increase in the cash requirements of the household. But, that alone doesn't mean that the total asset base needs to be reduced by more than the taxes that are levied against the distributions. For example, $50,000 defunded from the IRA can provide the regular brokerage account with a net of, say, $37,500, depending on the investor's tax bracket. To the extent that all of the RMD is not needed to pay household expenses, the regular brokerage account has the potential to increase in value over time as the IRA account decreases in value.

A spreadsheet along the lines of the following is a helpful tool in forecasting the evolution of the relative importance of the regular brokerage account to the investor's total financial assets:

--------------A------------------------------B--------------------------C

22 BROKERAGE ACCOUNT | ||

23 Beginning Securities | 0 | =B33 |

24 Beginning Cash/MMkt | 2.5 (example) | =B31 |

25 Cash from IRAs | =B9 | =C9 |

26 Dividends/Interest | 0 | =C23*0.03 |

27 Total Cash In | =B25+B26 | =C25+C26 |

28 Disburse to Checking | =B20 | =C20 |

29 Excess Cash Flow | =B27-B28 | =C27-C28 |

30 Securities Purchased | =B29*0.8 | =C29*0.8 |

31 Ending Cash/MMkt | =B24+29-B30 | =C24+C29-C30 |

32 Change in Securities Value | =B23*0.03 | =C23*0.03 |

33 Ending Brokerage Value | =B23+B30+B32 | =C23+C30+C32 |

34 Total Financial Assets | =B13+B21+B33 | =C13+C21+C33 |

In the example above, the investor is forecasting adding only 80% of his excess cash flow to his investments in securities, perhaps to have a growing pool of liquidity that is eventually tapped for non-recurring or unexpected purchases or expenses. That is an approach perhaps way too conservative for most investors. A less conservative approach would be to invest all excess cash flow in to stocks or bonds. In any event, the forecast shows the securities held in the regular brokerage account behaving just as they would if held in the IRAs.

It is within the investor's ability to populate his regular brokerage portfolio with securities that he does not expect to perform like those in his IRA. In my own case, I plan to populate my brokerage account with lower yielding shares in faster growing earnings and dividend growth rates. Stocks that may come to dominate my regular brokerage account include names like ROST, ROP, CASY, V, and MA. Stocks like those make it more likely that the greater share of my total return will come in the form of capital gains, sheltered against the tax man, helping a bit to reduce the amount of cash leaving the brokerage account.

Each investor will develop his own strategy based on his individual goals, financial situation and temperament. Having a tool to help forecast the effects of his investing decisions can enhance his outcome. A spreadsheet program helps me "think" about the future, unknown, ultimately, though it is.

**Conclusion and disclaimer**: Turning 70½ marks a milestone. If you're blessed with good health and relative financial security, you are fortunate; some of your closest friends and family members may have neither. If you're reading this, you've probably assumed responsibility for your own financial health and the financial well being of anyone else you care about. In this article, I've tried to provide some insight into how I approach planning for a future of uncertain length. I hope it will provide you some guidance as you plan your own strategy for financing the rest of your life.

*Please beware: I am just some guy who handles his own investments. I am not licensed to do anything but drive and fish. I am not a certified financial planner, certified financial advisor, investment advisor or retirement consultant; not a certified public account or attorney or tax specialist. I am not even an expert Excel user. In fact, I have no professional credentials at all that should give the reader any comfort whatsoever that this article or anything contained in it is of the same or greater value than, or a substitute for, whatever value a professional may provide for a fee or just to be nice. This article is one of a few occasional gifts from me to Seeking Alpha and you. I don't ask for or receive any compensation from Seeking Alpha or anyone else.*

**Disclosure:** I am/we are long CASY, MA, ROST, ROP, KSS, BGCP.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.