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Follow the RMD and Your Clients Won’t Go Broke in Retirement

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Advisors should not worry about clients running out of money if they use a required minimum distribution (RMD) for withdrawals from retirement accounts, according to Craig Israelson, executive-in-residence in the financial planning program at Utah Valley University.

“The RMD is not your enemy. It provides sound guidance” for withdrawals, said Israelson, who spoke at one of the many academic sessions at this year’s FPA annual conference. “If the RMD is the driver of withdrawals we know we’ll have success. That should give retirees comfort.”

(Related: New Strategy to Navigate Market Volitility, Sept. 21 webcast with Michael Finke)

He added that the purpose of the RMD is to insure that the government collects taxes on the money that’s never been taxed. 

Israelson showed charts of retirement plans using different investment allocations with withdrawals starting in 1970 for retirees at age 70-1/2, the required age for distributions from tax-advantaged retirement funds except Roth IRAs. Each account had $1 million in assets, and the initial RMD was 3.65%. (It rises as the divisor declines to account for the remaining years for the retiree.) 

(Related: 3 Common RMD Errors Advisors Must Avoid)

Even the portfolio with 100% in cash had $850,000 left after 25 years.

Not surprisingly, a conservative portfolio with 25% stocks had $2 million left after 25 years, and a more diversified account with seven different asset classes rebalanced annually had about $3 million remaining.

”The general fear that pervades retirement land that portfolios can’t persist for 25 years is a notion not supported by the index data,” said Israelson.

Whether a retirement portfolio will provide enough to live on is the challenge, and that is a function of the starting balance and its investments. “The sequence of returns becomes crucial,” said Israelson, noting that it’s important to study rolling periods of returns over 25 years that take into account changing portfolio performance. 

Using 25-year rolling returns, he showed that the slope of portfolios continued to rise beyond 10 years, then eventually peaked and reversed downward.

Retirees won’t run out of money before age 95 so long as they don’t withdraw much more than the required distribution, according to Israelson.

(Related: RMDs Drive IRA Withdrawal Decisions: EBRI)


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