How Much Should You Take from Your Retirement Funds Every Year?

Category: Financial and taxes in retirement

October 13, 2014 — Their are plenty of theories for the perfect amount to take from your retirement assets like 401(k)s and IRAs. They all try to solve the problem that if you take out too much too soon you will run out of money late in retirement, but if you are too cautious you miss out on a richer life, leaving too much of your assets to someone else, possibly the government. In contrast to some of the more complex theories, some experts suggest using a simpler measure and one that is widely in use. Their idea is to use the Required Minimum Distribution (RMD) that the federal government requires retirees to take from their retirement assets beginning in the year at which they turn 70 and 1/2.

The old standard theory was that 4% (sometimes 3% or 5%) was the right number to take out of your retirement funds. The idea was hat you could take those percentages and live off the income, yet not run the danger of running out of money before you died. It was predicated on the typical strong returns in the stock and bond markets of the 2nd half of the 20th century. Even if your investment returns didn’t always match the 4 or 5% annual amount you were taking out, at least made up enough so that they would not be likely to run down to zero before you went on to your greater reward.

RMD percentages
Many experts like the federal Required Minimum Distribution as a better theory. It is certainly safe, since the distributions start relatively low in the first few years and steadily increase with age. The required distribution percentage starts at 3.65% at age 70 and goes to 15.87% at age 100. Since the formula starts low and gets higher over time, it offers built in safety over plans that take out steady amounts over time – as you age you have fewer years to worry about funding. One issue to consider is what to do if you have to start taking money out of your IRA/401(k) before age 70.5. – how much you start taking out under that circumstance? Using the RMD theory, a conservative approach would be to apply the same yearly percent increase (decrease in this instance) that the government applies in its formula.

Bottom line
Deciding how much to take from your retirement accounts and savings is a complex matter, one worthy of some study because of how it can affect your financial future. Speak with your investment advisor, if you have one, to get their ideas on the subject. But feel free to probe the reasons behind their recommendations, and make sure they make sense to you. There are many possible theories – make sure you are comfortable with the decision that you make!

For further reading
Topretirements has published a number of other articles on this topic. They explain a variety of other distribution approaches along with permutations on the ones explained here:
You and Your IRA and 401(k) – An Owner’s Manual
Not So Much – A Million Dollars for Retirement?
Goodbye 4% Retirement Spending Rule Eclipsed by New Theories
What Is Your Number?
Elaine provided this link to an RMD Calculator that is really nifty

Comments? What is your theory about how much to take out of your retirement accounts on an annual basis? Please share your ideas, and your reasons why, in the Comments section below.

Posted by Admin on October 12th, 2014

14 Comments »

  1. Before I hit the magic number, 70-1/2, I took out no more than 2% per year from my IRA. And fortunately before the big crash in 2008-2009 I was 100% cash. I am now in RMD mode, and my withdrawals are more than what I need, so more it being saved for later in taxable accounts.

    by jrandyb — October 15, 2014

  2. Thanks for the article. I am 63½ and have started to look at this issue seriously. Given that the market is down over 1,000 points in the past 2 weeks I may have to lock in now to preserve my gains. I have about $150,000 in an IRA with good pension income. Thoughts anyone?

    by Patrick — October 15, 2014

  3. Don’t dump your stocks because the market is down. It ALWAYS comes back. It might take some time, but it will and you would miss any comeback. Remember, you don’t lose or make money until you sell.

    by Bill — October 15, 2014

  4. Patrick, I agree with Bill — don’t lock anything now. 63 is a young age compared to the 20 or more years you should expect to live. In 2007/8, I made the mistake of, not locking but, tightening my 401K investments while my wife let hers ride out the fall. That cost me $50K in potential gains even though I got back into stocks within 3 months. My wife on the other hand, got a BIG boost from the market comeback. Sure this is an individual case, but it is one that all market experts cite as continually repeating historically.

    We have not reached the RMD age, but like jrandyb, we must take out 1% – 2% to meet the gap between expenses and pension/SocSec. The RMD plan is generally consistent with my own long-term budget plan (and obviously I have no choice after 70).

    I think you have to look at it this way: If the markets were to completely fail — that is, they have losses or no gains for an extremely long term (say 10 years or more), then everyone is in trouble. We would all be facing a completely new economic environment to live in that is not predictable based on past experience. But looking back since stocks and investments were originated, that has not happened. In living memory, it took a war, but economies even recovered from the Great Depression.

    by Rich — October 15, 2014

  5. Although RMDs is a simple withdrawal method, it causes one of the problems cited at the beginning of your article…missing out on a richer life. This is because RMDs minimize withdrawals/spending at the beginning of retirement, when most retirees in their “go-go” years and typically want to spend more. So, simple does not always = good and, conservative does not always = good.

    There are other methods for staying on the conservative side but, that don’t require such a dramatically conservative approach in early retirement. And, I would also note that there are many well respected experts who have not completely abandoned Bill Bengen’s “4% Rule”, which is not precisely 4% anyway.

    This subject is too important and too complex for a short article and a few comments. I’d suggest those who want to learn more visit some of the excellent websites that exist. I’d recommend these two to start: Early Retirement and Financial Independence, and Bogleheads.

    by Mark — October 15, 2014

  6. U.S. markets have experienced plenty of overreaction on the upside. We are now probably experiencing overreaction on the downside: Weakness in Europe, a slowing in China, and the Ebola threat to the U.S. November and December usually bring the Santa Claus effect to U.S. markets which is a positive on the upside.

    by Bubbajog — October 16, 2014

  7. Bubbajog, here’s hoping. This downturn has been distressing, to say the least!

    by ella — October 17, 2014

  8. For all,

    I suggest looking into this site–very well researched and explained–developed by an actuary. It has altered our plans.

    http://howmuchcaniaffordtospendinretirement.blogspot.com/

    by Joe G — October 17, 2014

  9. Mark and Joe, Thanks for the interesting financial sites. My favorite was the calculator on the
    Early Retirement and Financial Independence web site. All were useful.

    by Elaine — October 18, 2014

  10. Patrick, don’t dump stocks. September and October are the most turbulent months for the market based on history. You should make sure you are diversified in the market. I have some funds that were up during this correction. You you look at if you need money in the next two for three years from your IRA, then keep some in cash. Just some thoughts for you.

    by Kevin — October 18, 2014

  11. Here is an interesting tool for RMD. You put in your age as of Dec 31. It works for under 70.5 years olds…it does assume that you do not take out before 70.5…it will just show 0 for those years. But it allows you to assume a growth rate (estimated rate of return) of your IRA accounts. It lets you check a box if your birth day is after June 30 and has something for a sole spouse beneficiary which is not relevant for me. You can change assumptions and look at a graph of you RMDs over time. You can also see your estimated account balances over time with varying assumptions. If you end up with very high amounts…take some extra out!
    http://www.bankrate.com/calculators/retirement/ira-minimum-distribution-calculator-tool.aspx

    by Elaine — November 1, 2014

  12. Thanks, Elaine. You always have the best information!

    by ella — November 2, 2014

  13. […] The study that inspired us The online survey was conducted among 1000+ respondents ages 60-75 during June, 2014. The respondents had to have at least $100,000 in investable assets, not including their primary residence. The Study was done by the American College: New York Life Center for Retirement Income. It provides a number of interesting questions and facts that could improve anyone’s financial literacy. (adsbygoogle = window.adsbygoogle ||[]).push({}); For further reading: Squared Away – Winging It in Retirement Are You Ready for Retirement Quiz – Part I The Worst Case Scenario About Social Security: Surprise Our Social Security Quiz: A Learning Curve for All How Much Should You Take from Your Retirement Funds Every Year […]

    by » How Ready Are You for Retirement – A Quiz - Topretirements — March 17, 2015

  14. […] further reading: How Much Should You Take from Your Retirement Funds Each Year You and Your IRA and 401(k): An Owners […]

    by » Rival Theories to The 4% Withdrawal Rule Under Debate - Topretirements — May 29, 2015

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