RMDs a Viable Draw Down Strategy
The alternative strategy is to follow the IRS’s required minimum distributions, a strategy that is easy to follow, the brief said. The IRS stipulates withdrawal percentages based on life expectancy tables. Furthermore, it allows the percentage of remaining wealth consumed each year to increase with age, as the retiree’s remaining life expectancy decreases. Since the consumption is not restricted to income, the household is less likely to chase dividends and more likely to have a balanced portfolio. Additionally, consumption responds to fluctuations in the market value of the financial assets, because the dollar amount of the drawdown is based on the portfolio’s current market value.
A potential criticism of the RMD rule is that it results in relatively low consumption early in retirement. This outcome might be optimal for some households, particularly those fearful of rising health care costs, but others might prefer greater consumption at younger ages when they are better able to enjoy it. This can be achieved through a modification of the RMD rule, or to consume interest and dividends but not capital gains, plus the RMD percentage of financial assets. For example, a 65-year-old couple with financial assets of $102,000 who received $2,000 of interest and dividends in the last year would spend $5,130 (the $2,000 in interest and dividends plus the 3.13% annual RMD of $100,000). In contrast, a household following the unmodified RMD rule would spend just $3,130.
Rather than attempt the complicated calculations for drawing down and spending retirement savings, retirees rely on easy-to-follow rules of thumb such as the 4% rule, the brief said. The IRS’ RMD rule may be a viable alternative, the brief suggests, and a modified RMD strategy performs even better.
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