Someday, it will be appreciated for the beautiful thing it is. But for the moment, it will have to be a secret between you and me. It’s a wonderful secret because no matter how much you talk about it, few people will hear you or act upon it.
No, I’m not talking about a Grecian urn.
Good News for Retirees and their Retirement Income
I’m talking about the long, graceful upward curve of inflation-adjusted income that can be enjoyed by investing simply and taking required minimum distributions – as demanded by the Internal Revenue Service. The money you get from those distributions will vary from year to year, but the broad trend will be upward.
Nicely upward.
Inflation-beating upward.
This won’t be limited to a fortunate few. This isn’t a hit-the-jackpot kind of deal. Indeed, the figures I am presenting represent results that are likely to be bettered 90 percent of the time. So, you’ve got a 90 percent chance that your retirement income, measured in inflation-adjusted dollars, will be better.
For retirees, I call that good news.
Wby You Don’t Hear the Good News
Unfortunately, you probably won’t hear about this from the financial services industry. They would prefer, rather strongly, that you worry about your retirement in as many ways as possible.
- That you’ll run out of money long before you die.
- That your buying power will shrink year after year.
- That the ONLY way you’ll be safe is to pay them more.
But instead of assuming that the sky is falling and only Super Investor can save us, let’s examine the probable results for an incredibly cheap portfolio in a tax-deferred account. The only thing you need to do is limit your spending to your required minimum distribution. (Yes, you can spend your Social Security, too.)
Exploring the Probabilities
To research this I went to the www.portfoliovisualizer website and its Monte Carlo analysis tool. It helped me examine the probability distribution of taking RMDs from the most basic Couch Potato portfolio. That’s a portfolio that’s 50 percent Total U.S. Stock Market and 50 percent Total U.S. Bond Market. I also assumed that you started with a cool $1 million. I also assumed that you started taking required minimum distributions at age 70, not the newly legislated age of 72.
A Monte Carlo analysis is a way to examine the distribution of results when returns change from year to year. It is loved by MBA types, others trying to deal with uncertainty and people who like to pepper their speech with words like “stochastic.” (Note: Annual results vary from analysis to analysis, but less than 1 percent.)
- At the end of the first year, you withdrew about $36,000 in inflation-adjusted income.
- By the fifth year you withdrew about $38,500.
- In the tenth year, age 80, your distribution was $44,900.
- After the 15th year the distribution was $51,800.
- Two decades in, age 90, your distribution was $57,400.
- Distributions peak in the 23rd year at $58,100 for your 93rd
- At the 25th year, age 95, the distribution is down to $56,100.
- By the 30th year, the distribution is $47,900 when, and if, you reach age 100.
If you happen to live longer than that, you’ve still got some money left and you can still make required minimum distributions. Unless you get lucky and do better than performing in the bottom 10 percent, you’ll need to reduce your real spending power to below your starting level just before your 104th birthday.
The Kindness of the Angel of Death
Some people never catch a break, but there aren’t a lot of them.
While we’re talking about unlikely 99th birthday parties, let’s give a little attention to our Ultimate Friend, otherwise known as the Angel of Death. According to financial planner Michael Kitce’s life expectancy calculator, in the 23rd year (when real income peaks) there is a 73 percent chance that neither party in a couple will still be alive. There is only a 2 percent chance that both will be alive. (And if you want to look at the odds still further, there’s only a 10 percent chance a man will still be alive and a 19 percent chance that a woman will still be alive.)
By the 30th year, age 100, there is a 97 percent probability that neither will be alive and 0 percent probability that both will be alive. While purchasing power from distributions will have been declining for seven years, it will still be well above what it started at 30 years earlier.
No Wishful Thinking
Is this all pie in the sky? I don’t think so. It’s based on pretty low expectations. It isn’t rooted in a diet of those special gummy bears that are not yet legally available in Texas.
Needless to say, things could turn out worse. As any little boy will predict, we could be heading for an unimaginable confluence of asteroids, volcanos, hurricanes, returning dinosaurs and militant zombies.
In that case, all bets are off.
But if required minimum distributions and Social Security cover your retirement cost of living at age 70, the odds are you’ve got it made.
Don’t worry. Be happy.
Simulated annual withdrawals illustrate the kindness of RMD income vs. the certainty of death |
This chart shows the curve, in blue, of real purchasing power from required minimum distributions for a simple, low-cost Couch Potato portfolio that is ½ Total U.S. Stock Market and ½ Total U.S. Bond Market if results are in the bottom 10 percent of all likely results according to the Monte Carlo tool on the portfoliovisualizer website. Note that there is still a 10 percent probability that the results will be worse. The orange curve shows the odds that neither member of a couple will survive starting at age 70 and going to age 100. The odds that any individual, male or female, will survive are lower. You can access the chart by clicking on this link:
210620ChartPDF |
Sources: www.portfoliovisualizer.com and https://www.kitces.com/joint-life-expectancy-and-mortality-calculator/
Related columns:
Scott Burns, “Falling In Love with Required Minimum Distributions,” 6/29/2021 https://scottburns.com/falling-in-love-with-required-minimum-distributions/
Scott Burns, “Retirement Income: Easier than You Think,” 10/30/2016 https://scottburns.com/retirement-income-easier-than-you-think/
Scott Burns, “How to Overcome Fear of Required Minimum Distributions,” 9/28/2014 https://scottburns.com/required-minimum-distributions-not-such-a-bad-thing-after-all/
Scott Burns, “Required Minimum Distributions: Not Such a Bad Thing After All,” 3/3/2013 https://scottburns.com/required-minimum-distributions-not-such-a-bad-thing-after-all/
Sources and References:
Wei Sun and Anthony Webb, “Can Retirees Base Wealth Withdrawals On The IRS’ Required Minimum Distributions?”. October, 2012, https://crr.bc.edu/wp-content/uploads/2012/10/IB_12-19-508.pdf
Barton Waring and Laurence B. Siegal, “The Only Spending Rule Aticle You’ll Ever Need,” July 2014 https://larrysiegeldotorg.files.wordpress.com/2014/09/siegel_waring_only-spending-rule-article-youll-ever-need.pdf
Actuarial Life Table, Social Security https://www.ssa.gov/oact/STATS/table4c6.html
Michael Kitces, Joint Life Expectancy and Mortality Calculator https://www.kitces.com/joint-life-expectancy-and-mortality-calculator/
This information is distributed for education purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, product, or service.
(c) Scott Burns, 2021
2 thoughts on “The Graceful, Soothing Curve of RMD Income”
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Mr. Scott,
The RMD for the current year is based on the account value the prior 12/31, correct?
Do you take it at one shot based on the 12/31 unit price of the investment or do you spread it out monthly over the 12 months of the current year?
If you spread out the withdrawal over 12 months, you will need to sell fewer units if the investment unit price is rising over the year, and vice versa.
Any suggestions or articles on taking RMD at one shot vs. spreading it out over 12 months?
Thanks.
Yes, you’ve got that right. Your RMD is based on the account value at the end of the previous year. You need to withdraw that dollar amount over the following 12 months, either as a single withdrawal or in multiple withdrawals. If the markets are rising, it’s better to withdraw slowly. If the markets are sinking, its better to withdraw early and all at once.
As a practical matter, my preference is to make the entire withdrawal early in the year because some major expenses such as real estate taxes, insurance bills, etc. aren’t spread over 12 months but are paid on an annual basis. Also, things like vacations and major auto repairs at big “lumps” that require ready cash.