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 that 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.
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.
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.