In our previous blog posts, we showed 3 options for retirees to spend down assets, and the trade-offs of the first two options.
Now we will discuss the RMD-based spend option.
First, what is RMD?
RMD refers to required minimum distributions, it is the amount that the US government requires you to withdraw annually from traditional IRAs and employer-sponsored retirement plans.
The RMD is calculated by dividing the year-end balance by a life expectancy factor listed in IRS publication 590.
What is the RMD-based spend strategy?
It borrows the RMD calculations by simply dividing your total year-end portfolio balance by the life expectancy factor listed for your age.
Some academic studies have shown that the RMD strategy outperformed the spend the interest & dividend and the 4% rule, given a typical retiree's asset allocation. It is responsive to investment returns, and the withdrawal percentages increases with age, allowing retirees to use more of the portfolio as the life expectancy decreases.
Drawback of the RMD-spend strategy
It may result in withdrawal rates too low, particularly in early retirement time, so you might spend less you should during that time.
Also, no rule fits all. A 2010 Vanguard study found that combining
a) an immediate inflation-adjusted annuity with
b) an RMD approach
produced stable cash flows that grew at a faster rate than those of other rules of thumb.
Now we will discuss the RMD-based spend option.
First, what is RMD?
RMD refers to required minimum distributions, it is the amount that the US government requires you to withdraw annually from traditional IRAs and employer-sponsored retirement plans.
The RMD is calculated by dividing the year-end balance by a life expectancy factor listed in IRS publication 590.
What is the RMD-based spend strategy?
It borrows the RMD calculations by simply dividing your total year-end portfolio balance by the life expectancy factor listed for your age.
Some academic studies have shown that the RMD strategy outperformed the spend the interest & dividend and the 4% rule, given a typical retiree's asset allocation. It is responsive to investment returns, and the withdrawal percentages increases with age, allowing retirees to use more of the portfolio as the life expectancy decreases.
Drawback of the RMD-spend strategy
It may result in withdrawal rates too low, particularly in early retirement time, so you might spend less you should during that time.
Also, no rule fits all. A 2010 Vanguard study found that combining
a) an immediate inflation-adjusted annuity with
b) an RMD approach
produced stable cash flows that grew at a faster rate than those of other rules of thumb.
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