Many retirees face a similar challenge once they retire. How much money can they withdraw from their investment accounts for spending without running out of money in retirement?
Nobody wants to run out of money. But what is a safe withdrawal rate? Some people only spend portfolio interest and dividends, leaving the principal intact. Another strategy is to withdraw 4% of the initial retirement balance and adjust the dollar amount annually for inflation. There are both pros and cons for each of these strategies.
There is another idea right under our noses that may have some real benefits. How about using the IRA required minimum distribution rules? Owners of IRA accounts are required to take minimum distributions once they reach the age of 70½ using a formula dictated by the government. The year-end balance of the IRA is divided by a life expectancy factor listed in IRS Publication 590.
The idea is that retirees of any age can use the RMD calculation as a spending guidepost by dividing their total year-end portfolio balance by the life expectancy factor for their age. A recent study indicates that this strategy outperformed both the “spend only interest and dividend” rule and the “4% withdrawal” rule.
Because the RMD rule is calculated as a percentage of the annual year-end portfolio balance, it is responsive to changes in portfolio returns. And because the withdrawal percentage increases with age, it allows retirees to use more of their portfolio each year as their life expectancy decreases.
No simple rule of thumb works for everyone. It may be best to have an independent professional prepare a detailed analysis to take into account of your investment allocation, your age, and your family history of longevity.
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