One of the trickiest things in financial planning is to decide how much of your investments to spend each year in retirement.
If you pull out too much, you could run out of money before you run out of time. Withdraw too little and you wind up without enough annual income.
There are a number of popular approaches out there….most notably the so-called 4 percent rule (live on the interest plus 4% of the capital each year.)
But an article over at SmartMoney caught our eye when it suggested that the best approach might be to follow IRS guidelines.
The IRS makes no claim that the RMD (required minimum distribution), which is designed to recoup deferred taxes, is the basis of an optimal draw-down strategy. Yet an RMD approach satisfies four important tests of a good strategy. First, like other rules of thumb, it is easy to follow. The IRS stipulates withdrawal percentages based on tables of life expectancies. A withdrawal schedule at younger ages — percent of assets withdrawn, by age — can be based on the same life tables used for the RMD rules. Second, it allows the percentage of remaining wealth consumed each year to increase with age, as the retiree’s remaining life expectancy decreases. Third, as consumption is not restricted to income, the household is less likely to chase dividends and is more likely to have a balanced portfolio. Fourth, consumption responds to fluctuations in the market value of the financial assets, because the dollar amount of the drawdown is based on the portfolio’s current market value.
Who’d have thunk it? They’re from the IRS and they are here to help you!