New Here? Get the Free Newsletter

Oblivious Investor offers a free newsletter providing tips on low-maintenance investing, tax planning, and retirement planning. Join over 17,000 email subscribers:

Articles are published Monday and Friday. You can unsubscribe at any time.

RMDs and Retirement Spending Strategies

After last week’s article about retirement spending strategies, several readers wrote in with questions about the interaction between required minimum distributions (RMDs) and such strategies.

The most common question was whether RMDs would get in the way of implementing a retirement spending strategy.

To be clear, the RMD rules say that you have to take money out of the account in question, but they do not force you to actually spend the money. Nor do they force you to change your asset allocation in any way. (That is, after taking the money out of your retirement account, you can re-buy the very same asset in a taxable brokerage account, if you want to.)

That said, there is some interaction between RMDs and spending, simply in the fact that if your RMDs are going to cause your tax bill to increase over time, that’s something you have to budget for — much as you might budget for, say, increasing health care expenses over time.

In other words, if increasing RMDs cause your tax bill to make up a larger and larger portion of your annual spending amount, it can force you to cut other expenses in order to stay within the spending range you’ve set for yourself.

RMDs Affecting Spending by Reducing Returns

One reader asked whether RMDs would eventually have a downward effect on portfolio returns (because more of the portfolio will be in a taxable account as time progresses) and whether that should be factored in when determining an initial spending rate.

It’s true that once the money is reinvested in a taxable account, the rate of growth will (generally) be lower than it would have been in a retirement account. But this would have a very minor effect on a person’s achievable level of spending through an entire retirement, given that:

  • RMDs have no effect whatsoever until age 70.5,
  • RMDs only affect a portion of your money (i.e., accounts that require RMDs have pretty small RMDs in the first several years, and RMDs have no effect at all on money that was already in a taxable account or a Roth IRA),
  • Even once the money is in a taxable account, you will still get to keep most of the earnings (especially with stock holdings, given the favorable tax treatment of dividends and long-term capital gains), and
  • Much of your ability to spend in retirement comes from the fact that you can spend principal as well as earnings.

RMDs as a Spending Strategy

One reader asked about the strategy of using RMD tables as a means of calculating your spending each year (i.e., each year, calculating what the RMD would be if your entire portfolio were in a traditional IRA, and using that amount as your annual spending amount).

A study by David Blanchett, Maciej Kowara, and Peng Chen found that such a strategy was more efficient than either the “percent of portfolio each year” strategy or the “inflation-adjusted spending” strategy that we discussed last week. And a study by Wei Sun and Anthony Webb had similarly positive findings for an RMD-based spending strategy. In other words, based on what I’ve read, I think that’s one of several reasonable approaches to selecting an annual spending amount.

Retiring Soon? Pick Up a Copy of My Book:

Can I Retire Cover

Can I Retire? Managing a Retirement Portfolio Explained in 100 Pages or Less

Topics Covered in the Book:
  • How to calculate how much you’ll need saved before you can retire,
  • How to minimize the risk of outliving your money,
  • How to choose which accounts (Roth vs. traditional IRA vs. taxable) to withdraw from each year,
  • Click here to see the full list.

A Testimonial from a Reader on Amazon:

"Hands down the best overview of what it takes to truly retire that I've ever read. In jargon free English, this gem of a book nails the key issues."
Disclaimer: By using this site, you explicitly agree to its Terms of Use and agree not to hold Simple Subjects, LLC or any of its members liable in any way for damages arising from decisions you make based on the information made available on this site. I am not a financial or investment advisor, and the information on this site is for informational and entertainment purposes only and does not constitute financial advice.

Copyright 2017 Simple Subjects, LLC - All rights reserved. To be clear: This means that, aside from small quotations, the material on this site may not be republished elsewhere without my express permission. Terms of Use and Privacy Policy