Here’s a news flash: the IRS offers a calculation that actually helps consumers. Who knew?
Little surprise, Alicia Munnell, director of the Center for Retirement Research at Boston College, took to the pages of SmartMoney Tuesday to decry the standard 4% withdrawal rate. What is surprising is the alternative she offered—the IRS’ required minimum distribution.
Mostly seen as a nuisance for those who don’t need it, the RMD forces investors to begin taking a minimum amount of money out of a tax-deferred savings vehicle at age 70 ½. The reasoning is twofold: the IRS wants their tax revenue, and the larger government wants the money in circulation. However, if investors base their non-RMD withdrawal rate on the RMD itself, it acts as a good alternative to the standard (and controversial) 4% rate.
A new paper from the organization Munnell leads shows that the RMD approach “stacks up pretty well against the traditional rules of thumb. Up until now, the three most common rules of thumb have been relying on the income produced by the assets, calculating withdrawals based on life expectancy and adopting the so-called 4% rule. Each has significant problems.”
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With the first, she notes that using interest only can work for wealthy individuals, but has serious drawbacks for people who lack substantial retirement savings.
“One disadvantage is that people die with their initial assets intact, which may be fine for those who want to leave a bequest, but in other cases unnecessarily restricts retirement consumption,” she writes. “Another drawback is that the desire for income may lead retirees to over invest in high-dividend stocks, losing the benefits of portfolio diversification.”