This follows my column from last week on Minimum Payouts Required (RMDs) returning in 2021 after a 2020 waiver.
If you’re wondering whether you’re making the right decisions about withdrawing your retirement account, it can be helpful to know what other people are doing.
A recent survey of members of the American Association of Individual Investors (tinyurl.com/y4l7fbxu) can serve as a guide. The AAII is a not-for-profit organization that helps individuals manage their wealth through research, information and educational programs.
Note that withdrawals from retirement accounts are required by law after a certain age (70 1/2 if you were born in the first half of 1949 or earlier; 72 if you were born in the second half of 1949 or later ). The size of the payout is determined by a formula that sets the minimum you must withdraw each year to avoid a heavy penalty – a 50% excise tax on the amount that should have been withdrawn but not.
It’s interesting to note that the most popular answer (45%) when asked about their payout strategy to AAII survey respondents was to “just take the minimum amount required by the tax code”. Two in five respondents gave their reason for their current strategy: “A desire to limit withdrawals to what the government requires.”
This is not a surprise, as taking more than the RMD, which is always an option, increases the amount reported as taxable income to the IRS on your Form 1099-R. There are a few exceptions. For example, Roth IRAs do not incur income tax when you withdraw funds (and the Roth IRA owner is also not subject to the RMD requirements for the Roth IRA).
Forty-one percent of respondents only withdrew their RMDs, nothing more. This could be a good strategy as long as the retiree realizes that he or she should think twice before relying on the RMD to cover the cost of living over the years.
If you look at how RMDs are calculated you will understand that the goal of the RMD tables that drive the payout calculations is to deplete the IRA over time. This means that the older you are, the higher the percentage payout.
If you are 75 years old, the RMD divisor is 22.9 (which is 4.4%). If you are 85 years old, the divisor is 14.8 (6.8%); at the age of 95 the divisor is 8.6 (11.6%); and at the age of 105 the divisor is 4.5 (22.2%). The older you are, the higher the percentage payout.
These dividers are listed on an IRS worksheet at tinyurl.com/nby6fxh, which is how most people use to calculate RMDs. (There is another worksheet that you would use if your spouse is your sole beneficiary of your IRA and he or she is more than 10 years younger than you.)
Let’s see what the dividers could mean for you in dollars.
For example, suppose your worth on December 31st is $ 1 million and you are 75 years old. Your RMD for 2021 is $ 1 million divided by $ 22.9, or $ 43,668 (4.4% of $ 1 million).
To see the effects of the dividers over time, assume that your IRA 1) is not growing and 2) is reduced by the RMD of the previous year each year.
At the age of 85, your payout would be a little more than $ 39,000 based on your previous year’s figure of $ 579,634. At the age of 95, your RMD would be around $ 27,000. At the age of 105, the RMD would be around $ 9,400. This again shows how RMD percentages work when the IRA is not growing. It also shows you the importance of investing your IRAs wisely to keep the IRAs from becoming depleted over time.
When respondents to the AAII survey were asked how confident they were of leading a comfortable lifestyle for the rest of their retirement, 75% said they were “very confident” and 15% said they were “somewhat confident”.
The trust is good, but make sure it is backed by a strong RMD strategy.