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Could Required Minimum Distributions Cause You to Withdraw Too Much?

The withdrawal rules are pretty conservative, but couples with a big age disparity should be more cautious.

This article previously appeared on Aug. 6, 2021.

When I'm speaking to individual investor groups about retirement and safe withdrawal rates, a hand inevitably shoots up. "What about required minimum distributions?" the question would go. "They're higher than safe withdrawal rates!"

My usual answer? I'm not worried. For one thing, actual spending is within retirees' control, and there are strategies that retirees can employ to hold their withdrawals within their self-determined maintainable spending parameters regardless of RMDs.

But the nub of the question remains: Are the withdrawal amounts that are required to come out of tax-deferred accounts at age 72 too aggressive? Could they cause premature asset depletion?

The short answer? It's possible, but not likely.

Don't Let This Happen to You!

The easy part of the question is that there is no way RMDs could cause you to overwithdraw because you're always at liberty to reinvest the money. The mandatory withdrawals that must commence from tax-deferred accounts at age 72 are called required minimum distributions, not required minimum spending. Yes, you have to take the money out of the tax-deferred account and pay taxes on it, but there's nothing saying you can't reinvest the funds back into your portfolio. If you have earned income, you can put the money back into a Roth IRA or even a traditional IRA; one-time age limits on traditional IRA contributions have been lifted, though RMDs will still apply to traditional IRA assets. (Why put the money in if it's going to have to come right out, though?) Alternatively, you can put the RMD proceeds into a taxable brokerage account, where you can invest tax-efficiently in exchange-traded funds, for example.

In addition, while most Americans do hold the bulk of their retirement savings in tax-deferred accounts like IRAs and company retirement plans, many retirees hold their assets in other accounts, too, such as Roth and taxable accounts. Those accounts aren't subject to RMDs. It's total portfolio withdrawals that matter to portfolio durability, so if you're concerned your RMDs are too high, you can hold down your total portfolio withdrawal rate by withdrawing limited sums from your non-RMD-subject accounts.

A Conservative Calculation

The bigger question, though, is whether the RMD calculation you must use to determine how much to take out is too aggressive and could cause you to prematurely deplete your funds if you turn around and spend the money. RMDs start at a comfortable 3.6% but ramp up to about 5% at age 80 and are at 6.3% at age 85. At age 95, the retiree taking RMDs is at an 11% withdrawal rate. Those levels might be disturbingly high to retirees who have internalized the 4% guideline as a percentage they should stick with year in and year out.

But remember, unless your goal is to leave substantial assets to charity or to heirs, your withdrawals should step up as the years go by and your life expectancy declines. In fact, retirement researcher David Blanchett of QMA found that an RMD-based approach to retirement portfolio withdrawals was highly efficient because it tethers the retiree's withdrawals to portfolio performance and remaining life expectancy.

It's also important to understand the assumptions that underpin the distribution periods for RMDs on the Uniform Lifetime Table, which is what the IRS requires most people to use to calculate their RMD. The RMD tables were updated for 2022 to reflect increases in life expectancy, resulting in at least slightly smaller RMDs for RMD takers starting this year. But the RMD calculations were conservative even before that change, meaning that they assume your life expectancy plus a fat margin of safety.

For example, for a 72-year-old just starting RMDs, the distribution period is 27 years. At age 80, the distribution period is more than 20 years. (As with all actuarial tables, the longer you live, the longer you're expected to live.) Those periods are longer than life expectancy: For example, the average life expectancy for a 72-year-old male in 2019 was 13 years, according to the Social Security Administration's website, and 15 years for women. At age 80, the average life expectancy for men is eight years and 10 for women.

Why the disconnect? For one thing, the Social Security figures are based on a single person's life expectancy, whereas the Uniform Lifetime Tables are based on joint life expectancies. The distribution periods for the Uniform Lifetime Table seem relatively long because they're meant to account for two lifetimes.

In addition, the formula now used to determine an IRA account owner's distribution period makes the very generous assumption that the beneficiary spouse is 10 years younger than the account owner, even though that may well not be the case. (There's a separate table for IRA owners whose spouses are more than 10 years younger; the distribution periods on that table are longer still.) The net effect of this assumption, especially for single people or spouses who are close in age and have similar life expectancies, is that RMD-based withdrawals are quite conservative.

Take a 75-year-old husband and a 72-year-old wife, each of whom owns a $1 million IRA. The 75-year-old is using a 24.6-year distribution period, whereas the 72-year-old is using a 27.4-year distribution period. The 72-year-old's spouse is three years older (he’s 75), but her distribution period is calculated with the assumption that he's 10 years younger. Even if both partners have reason to believe their life expectancies will exceed the averages, there's still plenty of wiggle room built into their withdrawals. The 75-year-old would have an RMD of $40,650, or less than 4.1% of his balance, whereas the 72-year-old's withdrawal would be $36,496, or 3.6% of her balance. Those amounts might be too aggressive if their portfolios don't grow at all over their retirement time horizons (for example, if they invest too conservatively) or if they both live a very long time. But overall they're sober, reasonable withdrawal amounts given their ages.

Mind the (Age) Gap

The people who should be more conservative with respect to spending RMDs are spouses with a bigger age gap. In that instance, the Uniform Lifetime Table is a more accurate depiction of their actual life expectancies. (As noted above, there's a separate table for use by IRA account owners whose spouses are more than 10 years younger; it takes into account both partners' actual life expectancies.) If one or both such partners believe they'll exceed average life expectancies, it's reasonable to reinvest a portion of RMDs as a safeguard against premature asset depletion.

For example, let's take a 75-year-old account owner and a 66-year-old spouse, with the older spouse's IRA account making up most of the couple's assets. They don't have a more than 10-year gap, which would necessitate use of the separate table for calculating RMDs, but it's still a significant age discrepancy. The 75-year-old account owner's distribution period on the Uniform Lifetime Table is 24.6 years, and the average life expectancy for a 66-year-old woman is about 20 years. If the younger spouse believes that she'll live longer than average, that's a good case for reinvesting a portion of the RMDs into the portfolio as a guard against prematurely depleting assets for the younger spouse. In a similar vein, retirees who have a strong bequest motive or those who are invested very conservatively (that is, their portfolios have very limited return potential) would do well to reinvest a portion of their RMDs, so as to not overwithdraw.

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