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Do RMD's Endanger SWRs?
Old 08-09-2008, 09:02 AM   #1
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Do RMD's Endanger SWRs?

Now that all you semi-old farts have had your coffee.

From the current issue of the Journal of Financial Planning:

Do Required Minimum Distribution Endanger 'Safe' Portfolio Withdrawal Rates?

Quote:
Executive Summary

  • In the retirement planning literature, withdrawals of 4 percent of the starting portfolio balance, adjusted for inflation, are generally regarded as "safe." But the reality of required minimum distributions (RMDs) imposed by the Internal Revenue Code would appear to threaten this goal since required distributions could easily exceed the "safe" withdrawal amount.
  • This paper, a 2007 Financial Frontiers Judges Grant winner, uses a bootstrap algorithm incorporating RMDs to find the probability of running out of money and to determine the balance-remaining amounts under a variety of conditions.
  • Conditions include three different starting balances ($500,000, $1 million, $1.5 million), three withdrawal horizons (25, 30, and 35 years), and four withdrawal strategies: a "No RMDs" case (the benchmark) and three other coping strategies that might ameliorate the effect of the mandatory accelerated withdrawals. The coping strategies include reinvesting excess withdrawals into a brokerage account and converting tax-deferred IRA money to a Roth IRA, both before and during the required distribution process.
  • The brokerage account strategy results in portfolio runout rates that are indistinguishable from the runout rates that occur when there are no RMDs; that is, the runout risk is not increased by RMDs when using this coping strategy.
  • Coping strategies that use Roth conversions result in higher risks of runouts.
  • RMDs do have a large negative effect on the remaining balance, resulting in smaller estates for all starting balances and for all three withdrawal horizons used in the study.
Enjoy your Saturday reading. I'll be playing outside w/ the kids.

- Alec
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Old 08-09-2008, 09:19 AM   #2
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I hope to god that my primary problem in my 70's is too much money flying out of my retirement accounts and having to figure out where to reinvest it...
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Old 08-09-2008, 09:26 AM   #3
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Well, obviously, spending more than 4%, whether due to RMD's or just to voluntary withdrawals, will reduce portfolio survival odds. We didn't need a complicated statistical analysis to reach that conclusion. If the additional withdrawals are not spent, but rather are reinvested, then the only effects are due to timing of tax payments. Study seems like killing a gnat with a sledge hammer.
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Old 08-09-2008, 09:37 AM   #4
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My only real life data point is my FIL. His RMD goes right back into his Vanguard after tax account. None of it is spent and due to his medical issues he pays almost no income tax. Someday (soon?) half of it will become DW's.

I agree with CFB and hope my biggest problem after I start the RMD is figuring out what to do with all the money.
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Old 08-09-2008, 09:53 AM   #5
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Crap - I would rather have my first 15 years of ER to repeat - I had so much fun the first time around - irregardless of spending. Being reminded of old phartness within 5 years of RMD is no fun on a cool summer day.

I come away with - 'hey! I have a lot of wiggle room' with the RMD rules now in effect.

I'm feeling better about my Target in trad IRA with the sliding asset classes to damp SD as I march on in years.

And there is room for hormones - either in my brokerage account or another drawer in that last DRIP file cabinet I never totally threw away.

heh heh heh - messy but fun - RMD, SS, non cola pension, Roth, Dividends - badda bing badda boom - a little of this, a little of that.
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Old 08-09-2008, 10:49 AM   #6
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Why in the world would someone come up with this as an issue? And then have to dream up coping strategies - good grief.
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Old 08-09-2008, 11:14 AM   #7
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Quote:
Originally Posted by cute fuzzy bunny View Post
I hope to god that my primary problem in my 70's is too much money flying out of my retirement accounts and having to figure out where to reinvest it...
Definitely.

After reading the title, my first thought was: "You don't have to actually spend it."
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Old 08-09-2008, 11:52 AM   #8
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Quote:
Originally Posted by cute fuzzy bunny View Post
I hope to god that my primary problem in my 70's is too much money flying out of my retirement accounts and having to figure out where to reinvest it...
You could transfer investments "in-kind" from your IRA to your taxable account and not have figure out where to reinvest it or mess with your asset allocation.
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Old 08-09-2008, 01:22 PM   #9
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I still google up ORP, Optimal Retirement Planner and play - even though they have reprogramed - I live longer, leave less of an estate and now they have me convert more Roth before RMD than the scenario's I ran several years ago when I croaked at 85 and left a mil on the table.

If you are going to what if - as good a play toy as any other I've run across.

Helped me become a semi-cheap bastard instead of the really cheap one I knew and loved in my early ER days - don't want to leave too much on the table when the time comes.

heh heh heh -
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