Whenever I speak with investors about the 4% rule for retirement-plan distributions, I invariably get a question about required minimum distributions, or RMDs. How, they ask, can they possibly adhere to a 4% withdrawal rate--or even lower--when their RMD amounts are well over the 4% threshold?
They have a good point. Individuals begin withdrawing less than 4% of their IRA balances in the year in which they turn 70 1/2, and that percentage quickly steps up from there. By the time someone hits 73 years old, RMDs will amount to more than 4% of the total RMD balance, and at age 85, RMDs will consume a whopping 6.8% of the retirement balance.