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