A RMD-rule Based Asset Distribution Strategy
This strategy calculates the annual distribution amount by dividing total asset balance by the life expectancy factor listed for the retiree's age, as shown in IRS Publication 590-B.
This strategy addresses the major flaws associated with the two traditional asset spending strategies as we discussed in the last blog post. First, it does not use a fixed amount, rather it considers each year's portfolio balance, thus avoid making a bad year worse by taking out too much during that year. Second, its withdrawal percentage increases with age, allowing retirees to use more of their portfolio as their life expectancy decreases. This strategy is not perfect, though. It may result in withdrawal rates that are too low, particularly in early retirement years.
While no simple rule is ideal, retirees may incorporate an RMD approach into a broader plan for covering expenses. A 2010 Vanguard Group paper found that combining an immediate inflation-adjusted annuity with an RMD approach produced stable cash flows that grew at a faster rate than those of other rules of thumb.