Do Required Minimum Distributions Endanger 'Safe' Portfolio Withdrawal Rates?

Spitzer, John J.
August 2008
Journal of Financial Planning;Aug2008, Vol. 21 Issue 8, p40
Academic Journal
• In the retirement planning literature, withdrawals of 4 percent of the starting portfolio balance, adjusted for inflation, are generally regarded as safe." But the reality of required minimum distributions (RMDs) imposed by the Internal Revenue Code would appear to threaten this goal since required distributions could easily exceed the "safe" withdrawal amount. • This paper a 2007 Financial Frontiers Judges Grant winner, uses a bootstrap algorithm incorporating RMDs to find the probability of running out of money and to determine the balance-remaining amounts under a variety of conditions. • Conditions include three different starting balances ($500,000, $1 million, $1.5 million), three withdrawal horizons (25, 30, and 35 years), and four withdrawal strategies: a "No RMDs" case (the benchmark) and three other coping strategies that might ameliorate the effect of the mandatory accelerated withdrawals. The coping strategies include reinvesting excess withdrawals into a brokerage account and converting tax-deferred IRA money to a Roth IRA, both before and during the required distribution process. • The brokerage account strategy results in portfolio runout rates that are indistinguishable from the runout rates that occur when there are no RMDs; that is, the runout risk is not increased by RMDs when using this coping strategy. • Coping strategies that use Roth conversions result in higher risks of runouts. • RMDs do have a large negative effect on the remaining balance, resulting in smaller estates for all starting balances and for all three withdrawal horizons used in the study.


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