Don't Run Out of Money in Retirement
This spend-down strategy based on RMD rules will help you cover retirement expenses with less risk.
Most retirees face the same conundrum: how to spend down assets without completely depleting them. One popular strategy is to apply the 4% rule -- withdraw 4% of your initial retirement balance and adjust the dollar amount annually to keep pace with inflation. Another rule of thumb is to spend only your portfolio's interest and dividends.
Some academics aren't fans of either strategy. A retiree who spends only his interest and dividends may load up on, say, bank stocks -- and that's "the tail wagging the dog," says Anthony Webb, research economist at the Center for Retirement Research at Boston College. Leaving the principal untouched may fit with a desire to leave money to heirs, but it could put a crimp in your lifestyle.
As for the popular 4% rule, it doesn't respond to actual investment returns, Webb says. Retirees drawing fixed dollar amounts from a sinking portfolio will soon run into trouble.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
The RMD strategy. A third option may work better for many retirees: Base annual spending on the required minimum distribution rules that apply to traditional IRAs after you turn 70 1/2. Retirees of any age can use RMD calculations as a spending guidepost by simply dividing their total year-end portfolio balance by the life-expectancy factor listed for their age in IRS Publication 590.
In a recent study, Webb and coauthor Wei Sun, of China's Renmin University, found that the RMD strategy outperformed the spend-the-interest strategy and the 4% rule, given a typical retiree's asset allocation. Because the RMD approach calculates the annual withdrawal as a percentage of the remaining portfolio, it is calibrated to investment returns. And the withdrawal percentage increases with age.
The strategy isn't perfect. It may result in withdrawal rates that are too low, particularly early in retirement, causing retirees to leave behind money that they might have preferred to spend. But if we're entering an extended period of low returns, as many advisers predict, you may want to err on the side of conservative spending rates.
A hybrid approach. Although no simple rule is ideal, retirees may incorporate an RMD-inspired strategy into a broader plan for covering expenses. A 2010 Vanguard Group paper, for example, found benefits from combining an inflation-adjusted immediate annuity with an RMD approach. This strategy produced stable cash flows that grew at a faster rate than those produced by other rules of thumb.
Given the surprises that can crop up in retirement, any rules of thumb that appear to put spending plans on autopilot may be dangerous. The key is to reassess spending constantly and make adjustments as necessary, says Vanguard principal John Ameriks.
Eleanor Laise is Associate Editor for Kiplinger's Retirement Report.
Get Kiplinger Today newsletter — free
Profit and prosper with the best of Kiplinger's advice on investing, taxes, retirement, personal finance and much more. Delivered daily. Enter your email in the box and click Sign Me Up.
-
Stock Market Today: Stocks Pause as Investors Assess Fed Policy
The Federal Reserve met expectations with a quarter-point rate cut.
By David Dittman Published
-
Fed Cuts Rates Again: What the Experts Are Saying
Federal Reserve The central bank continued to ease, but a new administration in Washington clouds the outlook for future policy moves.
By Dan Burrows Published
-
457 Plan Contribution Limits for 2025
Retirement plans There are higher 457 plan contribution limits for state and local government workers in 2025 than in 2024.
By Donna LeValley Published
-
What Does Medicare Not Cover? Seven Things You Should Know
Healthy Living on a Budget Medicare Part A and Part B leave gaps in your healthcare coverage. But Medicare Advantage has problems, too.
By Donna LeValley Last updated
-
13 Smart Estate Planning Moves
retirement Follow this estate planning checklist for you (and your heirs) to hold on to more of your hard-earned money.
By Janet Kidd Stewart Last updated
-
Medicare Basics: 11 Things You Need to Know
Medicare There's Medicare Part A, Part B, Part D, Medigap plans, Medicare Advantage plans and so on. We sort out the confusion about signing up for Medicare — and much more.
By Catherine Siskos Last updated
-
Six of the Worst Assets to Inherit
inheritance Leaving these assets to your loved ones may be more trouble than it’s worth. Here's how to avoid adding to their grief after you're gone.
By David Rodeck Last updated
-
SEP IRA Contribution Limits for 2024 and 2025
SEP IRA A good option for small business owners, SEP IRAs allow individual annual contributions of as much as $69,000 in 2024 and $70,000 in 2025..
By Jackie Stewart Last updated
-
Roth IRA Contribution Limits for 2024 and 2025
Roth IRAs Roth IRA contribution limits have gone up. Here's what you need to know.
By Jackie Stewart Last updated
-
SIMPLE IRA Contribution Limits for 2024 and 2025
simple IRA The SIMPLE IRA contribution limit increased by $500 for 2025. Workers at small businesses can contribute up to $16,500 or $20,000 if 50 or over and $21,750 if 60-63.
By Jackie Stewart Last updated