Required Minimum Distributions (RMDs) explained

What is an RMD?

RMDs are the minimum amounts you must withdraw from your retirement accounts (e.g. traditional IRA, SEP IRA, SIMPLE IRA) each year according to the IRS. RMDs must begin when you reach a certain age (73 as of January 1, 2023), but lawmakers may continue to change this age – so it is recommended to check with your advisor, and avoid incurring a penalty. You can choose to begin withdrawals at the age required, or you may decide to begin taking distributions sooner.

The AARP created a handy calculator that can help you estimate the required timing and amounts for your RMDs – but as always, check with your financial advisor and/or CPA for your specific situation.

What is your withdrawal strategy for your retirement assets?

Do you have a time frame in mind when you will begin taking withdrawals from your retirement accounts? For your IRAs, will you wait until you reach the age directed by the government, or begin taking withdrawals earlier? Much of this depends on when you want to retire, how much income you have from other sources, and how much you have planned and saved.

How do you know how much money to withdraw from your retirement investment accounts?

At Goodwin Investment Advisory, we consider many different factors, and we look at all of your accounts to create a tax advantageous strategy for distribution. We consider age, income sources, tax bracket (marginal tax rate), Social Security benefits and the potential portion that could become taxable, considering total “income” – which would include those distributions from pre-tax accounts. Based on your forecasted expenses and dreams, we can help determine the amount to withdraw at your desired retirement age and help you review & adjust when necessary. One rule of thumb does not work for everyone, and it is important to look at your entire financial picture.

What if your RMD is not enough to live on in retirement?

If you need more income than the RMD provides, then you’ll need to figure out where the rest is coming from. The remaining income could come from non-retirement brokerage accounts, real estate investments, part-time work, Social Security, pensions, or other income streams. (link to blog)

When can you retire?

Sometimes, you might determine the amount of money you need in retirement and our team of advisors can devise a plan to make it work. This could help you decide when you could retire, based on your expenses and desired retirement income.

You already have an age of retirement in mind

Alternatively, you might have a year in mind for your retirement, and our team of advisors can help determine how much you can spend in retirement based on your timeline and projected income. This shows your retirement allowance per year if you retire on the date you have in mind. Our advisors can include Social Security or remove it from the calculation when creating your retirement plan. Our goal is to help you to know how much you can spend with a high degree of confidence that you will not run out of money in your retirement.

General advice

A good place to start is a 4% withdrawal rate, i.e. withdrawing $40,000 per $1 million in investable assets. The 4% rule can work well if you want to retire with a long time horizon – based on industry experience there is a high probability you won’t run out of money. If your time horizon is shorter, you may be able to increase your percentage to 5% or 6%. Once again, every plan is specific to you and your needs.

A more dynamic approach

You might make changes to your distribution schedule depending on the market. One strategy is to reduce distributions to the minimum when the market is down. This is a way to preserve your investable accounts and allow your money to work more in your favor. During such times you could go back to part-time or even full-time work, or add another income stream. Then when the market recovers, you can reassess your situation, and increase your distributions again.