Let’s talk about Required Minimum Distributions (the money the government forces you to start taking from your retirement accounts at age 72).
Marilyn and Billy Noel sit at their kitchen table, distressed. “This is ridiculous, now that we are getting older, the government is requiring us to start taking money from our IRAs. We don’t need the money! They are forcing us to pay taxes. Thanks a lot, Uncle Sam.”
“What are we supposed to do with this cash?” Marilyn laments, “It’s been making a lot of money in our IRA. Now what? CD’s and savings accounts are paying basically nothing.”
Let’s take a look at how they are approaching this situation incorrectly.
I’m often reminded by concerned clients, “I need to start taking out money at 72 from my retirement accounts or I will get a big tax penalty.”
This is true. The IRS can levy a 50% penalty on any money not withdrawn. There is quite a bit of confusion around this topic, and often a certain level of unease. Let’s get rid of that fear!
The Required Minimum Distribution (RMD) was instituted by the government to stop retirees from deferring their retirement accounts forever (without needing to pay taxes). Uncle Sam doesn’t like that.
RMD’s are required from IRA’s, 401k’s, or any other retirement account on which you have never paid taxes.
Many of you believe that the RMD withdrawal is a large portion of your retirement account. It’s not.
At age 72 you are only required to withdraw 4% of the account value.
Age 73– 4.15%
As you see, during your retired years you will probably never need to take out more than 10% per year and even that is way down the road.
If you both pass and your kids get the money, they have ten years to empty out the account (using something called a “beneficiary IRA”).
So don’t let RMD’s be too scary. Just make sure you take out enough. If you are working with a financial advisor it’s something they should be doing for you.
Now let’s get philosophical. According to the Employee Benefit Research Institute, only 18% of Americans take out more than their RMD. This flies completely in the face of the Retirement Revolution lifestyle.
Why are you letting the government tell you how much money to spend?
As you know by now, as long as you invest your money in a diversified portfolio of stocks and bonds (with at least half the money in stocks), you can safely spend 5% of the account each year.
If that is the case, as you take your monthly distributions, you automatically fulfill your RMD. Your RMD doesn’t have to be from the principle, it can be from the growth as well.
Even more importantly, why are retirees waiting until age 72 to start using their money? And when they do, why are they reluctantly being “forced” to do so? Your retirement accounts are for your retirement. Many of you should start using 5% the first year of retirement.
Another note. Some people genuinely do not need the money they receive from their RMD distribution. Like Marilyn complained, “What do we do with this money now?”
The answer is simple but often misunderstood: You invest the money right back into the same portfolio. Notice I didn’t say, “put it back into the same account.” You can open up a non-retirement brokerage account and invest your money exactly the same as it was inside the IRA. You are not restricted to CD’s and money markets. You can invest the money however you want.
So to review:
1. Don’t wait until 72 to start spending your retirement savings.
On a related note, this week I met with a wonderful couple in their mid-eighties, and after speaking to them for a while they said, “I wish we met you twenty years ago! We have more money than ever. What were we waiting for?”
Why did they live like they were broke with money in the bank? Fear. This is why I write these articles each week. I am attempting to battle the overwhelming tide of negativity to empower you to stop hoarding. Within the confines of a well-developed plan, you can enjoy life, be more generous and live confidently that everything will end up okay.