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IRS Guide For Retirement Payouts

Sunday, November 4, 2012 - 5:08 AM
From the Wall Street Journal
The Internal Revenue Service isn't usually a place that retirees turn for help with their financial planning.

But it turns out the agency's rules for required withdrawals from retirement accounts could provide a framework for retirees trying to calculate how much of their savings they can safely withdraw every year and minimize the risk of running out of money.

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2
Ken TuminKen Tumin5,472 posts since
Nov 29, 2009
Rep Points: 125,708
1. Sunday, November 4, 2012 - 6:38 AM
One hiccup in the "modified RMD" strategy (the subject of the article) is the choice of longevity table. RMD tables are overly optimistic (hey, we all live to 97!), Social Security a bit more realistic. Using S/S tables and adding dividends and interest could result in super-charged withdrawals early in retirement, leaving inadequate resources later on. Heck, even using the RMD tables can get you in trouble.

Example: assuming 30 years left to live, per RMD, a person would start by withdrawing 1/30 of one's retirement portfolio in retirement "year one" and add to that the interest and dividends generated by said portfolio the prior year. Since dividends and interest are generally in the 2% range these days, your total withdrawal "%" for year one would be 5.33%, which most economists agree is pretty aggressive. And that's using the RMD table. If you use 20 years left to live, per S/S, you'd be withdrawing 7% that first year.

Bottom line: this is a very aggressive withdrawal strategy, and assumes the retiree will "bank" (save) a goodly amount in "boom" years to smooth consumption in "bust" years. I suspect most retirees lack this discipline.

  

Extensive discussion on this concept (and the academic paper from whence it comes) over at Bogleheads.
3
BozoBozo137 posts since
Feb 14, 2011
Rep Points: 944
2. Sunday, November 4, 2012 - 6:51 AM
Ken:  Your post and the article are confusing to me.  You refer to the withdrawals as "required withdrawals" but if this is the same as the Required Minimum Withdrawals we all have to take at 70 1/2,  we don't have a choice about how much to withdraw.  We have to use a certain table which gives us the amount for each year.  Frankly, I have never calculated what percentage of the total we are withdrawing but it's not like we have a choice since we have to pay taxes on the RMD no matter what.
1
paoli2paoli21,405 posts since
Aug 10, 2011
Rep Points: 6,149
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