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I am often asked by my clients who are over 70 about RMDs or Required Minimum Distributions. I can understand why RMDs could cause concern. Let’s take a quick overview of the subject, so we are all on the same page.
What is RMD, or Required Minimum Distribution?
Once you turn 70-½, the IRS requires you to begin taking money from your retirement accounts. (I don’t know why it’s 70-½; it’s just one of those strange bureaucratic choices we all have to live with.) Basically, the government doesn’t want to let you defer taxation on these accounts forever.
The amount you are required to take out depends upon your age. The portion increases each year. Here is a table giving you an idea of how much you need to take out:
|Required Withdrawal (%)
So if you are 75 years old and you have $100,000 in your IRA, you are required to take out $4300 during that year. If you don’t, the IRS imposes a 50% penalty.
That’s not a typo.
There is a 50% tax penalty on the monies you should have taken out but didn’t.
So the combination of severe tax penalties and the seemingly unfair practice of being forced to pay taxes on your retirement savings gets a lot of attention.
But I’m here to tell you that RMD planning for most people is a distraction from the real issue: When should you begin to spend your retirement savings?
When should you spend your retirement savings?
I ask the same question to everyone who comes into my office. When do you plan to spend the money you saved specifically for retirement?
The most common answer I hear? “When the government says I have to.”
Does that make sense to you? Does it really make sense to let the government dictate when and how much money you spend from your savings?
As I discussed at length in the past, America is a country full of oversavers. Retirees, falling back on a scarcity mentality that comes from their parents (which comes from living through the Great Depression) are waiting too long to spend their savings.
Instead of looking at generic government tables, doesn’t it make more sense to do a little planning and determine how much you can safely spend from your retirement accounts as soon as you retire?
Personally, I strongly subscribe to the 5% rule. If you have your money invested in a diversified portfolio of stocks and bonds (with at least half of the money in stocks), the reality is that between now and the end of your life, the portfolio should return an average of at least 5%.
Minus the Great Depression Part 2, you are going to be fine.
So if you are 65 years old and you have $100,000 invested in your IRA and you begin to withdraw $5,000 a year, great! You should be! Enjoy that money. Spoil those grandkids! Take that dream vacation!
And guess what, when you turn 70-½ and you start hearing warnings about RMDs, you don’t need to worry! You are already, naturally, satisfying the requirement by simply withdrawing a sustainable and reasonable amount of money each year.
Remember, the government doesn’t say that you need to spend 3.6% of your principal at age 70.5. If your investments make 3.6% and you withdraw that money- it satisfies the RMD!
YOU need to be determining how to get the most LIFE out of YOUR money. You certainly don’t want to hand that job over to Uncle Sam.
Stop asking the question: “When and how much money does the government force me to take from my retirement accounts?”
Start asking, “When and how much money can I safely spend on an annual basis from my retirement accounts?”
Instead of saying, “I don’t want to take out 3.6% of my account value when I turn 70.5 and pay taxes.” Say, “I am going to find the perfect balance between spending too much and spending too little from my savings. It’s not up to the government to determine when I can enjoy my money.”
Instead of being frustrated that you can’t continue to defer all of your retirement savings indefinitely, empower yourself to discover how to live your best life NOW.