Congress, in its unrelenting wisdom, has given us all an amazing break. I refer, of course, to the SECURE Act. Passed in December 2019, the “Setting Every Community Up for Retirement Enhancement Act” allows every American with a retirement account to defer taking required minimum distributions until age 72.
Wow!
Prior to the act, we had to start taking required minimum distributions at the horribly inconvenient age of 70, forcing us to pay taxes on the cash we took. Some of the people who were forced to create this taxable event reluctantly used the after-tax cash to buy food, pay electric bills, rent and other silly expenses.
The fact that members of Congress actually touted the act as a great achievement may be the best proof yet that no member of Congress lives in the same country you and I live in.
The Reality of Retirement Age in America
In our country, the most common age for taking Social Security is 62. And the majority of all workers are taking benefits by age 67. Some do this because they have enough money to retire.
But most do it because they need the cash. And they need it now.
Rather than rail against The Witless 535 Who Live In Another Country, let’s be positive. Let’s empower our independent selves. Let’s see if we can use the required minimum distributions table to guide our retirement income starting at 67, 65 or even 62.
I’m serious.
The beauty of required minimum distributions and spending
Here’s the reality. While we are required to take distributions by age 72, we are entirely free to take distributions, in any amount, once we have reached age 59 ½.
The only problem with that much freedom? It makes it possible to run out of money long before we stop breathing.
That’s where the creative use of RMDs comes in.
RMDs Plan for a longer life than is likely
Required minimum distributions are conservatively based on joint life expectancy of two people with a 10-year age difference. So, it’s figuring a 27.4-year retirement. Meanwhile, the life expectancy of an individual woman or man at 70 is 16.6 or 14.5 years, respectively.
Big difference.
The percentage that must be distributed each year increases because each year our life expectancy decreases. (I apologize if this is news to you, but it’s the truth.)
The thing is, the standard table is quite conservative.
What that means, for one thing, is that you’re unlikely to ever run out of money. Indeed, you’ve got a good shot at leaving behind a substantial amount of your savings.
In an earlier column (you can read it here) I showed that if you started taking distributions at age 70 while invested in a low-cost Couch Potato portfolio, there was a 90 percent probability that your results would be a rising standard of living for 23 years (age 93) and that your purchasing power would still be higher than it was at age 70 after 30 years of withdrawals — when you turned 100. Only at age 103 would your purchasing power from RMDs decline below the level at age 70.
The clear message here is that using the standard RMD table from age 70, you have a 90 percent probability to have a rising standard of living for 23 years, and your standard of living will be above what you experienced at 70 for 33 years.
That’s longer than the vast majority of us live.
Taking distributions earlier
You also have an Ace in the Hole. The extra purchasing power could be used to pay for a higher standard of living. But it could also be put aside as a hedge against bad years. Indeed, the distributions are so conservative that I started wondering about what the same table could do for people who wanted to retire earlier than 70 or 72.
Also, since you are pretending to be older than you really are, you can shift to age appropriate RMDs whenever you please once you turn 70.
In other words, suppose that you retired and started taking distributions at age 65, but pretended you were 70 and followed the RMD table year by year, always taking the distribution required for a person 5 years older? Suppose you started at 62? Or 67?
There are good reasons to start at any of those ages.
- Age 62 is the earliest age to take Social Security benefits.
- Age 65 is when you are eligible for Medicare.
- And age 67 is the age to receive full Social Security benefits. That’s also the age range where many people actually want to retire.
Will it work?
It’s a good bet. To understand why, I’ll need to introduce you to something dark. I call it the Slam Dunk of Death.
The Slam Dunk of Death
As any actuary will happily tell you, death is a certainty. The vexing question of when remains unanswered, but our odds of survival diminish year after year.
So, while we never know exactly when, the actuaries can confidently tell us the odds of survival we have to different ages.
The actuarial tables can tell us about survival for 23 and 33 years from different starting ages. What we’re seeing here is survival probability after 23 years of rising real income or survival odds to 33 years when real income has declined to the starting level. (See tables below.)
Measuring the odds
A few observations on what we see:
First, whether we are talking about the 23-year period of rising real income or the 33-year period that includes a decade of decline to the starting level, the most likely event is the death of a spouse, an event that reduces annual expenses and opens the door to reducing shelter expenses and other economies. One consequence: RMDs are likely to go further.
Second, when we consider retiring at 62, the odds are that you can go 33 years before you’ll suffer a loss of purchasing power from your starting level because there is only a 1 percent chance that both will be alive and a 15 percent chance that either will be alive. So, it’s not likely anyone will live long enough to experience the decline.
The bottom line here is that whether you want to, need to or have to, retire before age 70, don’t be afraid to augment your retirement income by starting to take required minimum distributions as though you were 70. Chances are you’ll enjoy a modestly rising standard of living for the first 23 years of retirement.
The Slam Dunk of Death I:Survival Odds for 23 years From Different Ages |
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| The table shows the survival odds for a couple when both start at the stated age after 23 years. At the end of that period the figures show the probability both will be alive, neither alive and either alive. For example, if a couple starts taking RMDs at a 70-year-old’s rate at age 65, there is only a 10% chance both will be alive 23 years later at age 90, but there is a 54% chance that one will still be alive. | ||||
| Starting Age | Age +23 Years | Both Alive | Neither Alive | Either Alive |
| 70 | 93 | 2% | 73% | 27% |
| 67 | 90 | 6% | 57% | 43% |
| 65 | 88 | 10% | 46% | 54% |
| 62 | 85 | 18% | 33% | 67% |
| Source: https://www.kitces.com/joint-life-expectancy-and-mortality-calculator/ | ||||
The Slam Dunk of Death II:Survival Odds for 33 years From Different Ages |
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| The table shows the survival odds for a couple when both start at the stated age after 33 years. At the end of that period the figures show the probability both will be alive, neither alive and either alive. For example, if a couple starts taking RMDs at a 70-year-old’s rate at age 62, there is only a 1% chance both will be alive 33 years later at age 95, and there is only a 15% chance that one will still be alive. | ||||
| Starting Age | Age +33 Years | Both Alive | Neither Alive | Either Alive |
| 70 | 103 | 0% | 99% | 1% |
| 67 | 100 | 0% | 97% | 3% |
| 65 | 98 | 0% | 93% | 7% |
| 62 | 95 | 1% | 85% | 15% |
| Source: https://www.kitces.com/joint-life-expectancy-and-mortality-calculator/ | ||||
To learn more about this topic, read these earlier columns:
Scott Burns, “The Graceful, Soothing Curve of RMD Income,” 6/19/2021 https://scottburns.com/curve-of-rmd-income/
Scott Burns, “Retirement Income: Easier than you think,” 10/30/2016 https://scottburns.com/retirement-income-easier-than-you-think/
Scott Burns, “Live long and spend freely,” 3/20/2016 https://scottburns.com/live-long-spend-freely/
Scott Burns, “Life: How much will you leave on the table?” 4/8/2012 https://scottburns.com/life-how-much-will-you-leave-on-the-table/
Scott Burns, “How to Spend more now, less later,” 9/4/2015 https://assetbuilder.com/knowledge-center/articles/how-to-spend-more-now-less-later
Sources and References:
Michael Kitces’ Joint life expectancy and mortality calculator: https://www.kitces.com/joint-life-expectancy-and-mortality-calculator/
Portfolio Visualizer: www.portfoliovisualizer.com
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 “Another Way to Use Required Minimum Distributions”
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Scott, if I want to initiate my own RMD’s early, how would that be quantified? I.e., how to figure the value of an RMD?
Prior to age 72, the new age when RMDs become necessary, we are at liberty to withdraw any amount we choose to withdraw. So you can use the RMD table and start taking RMDs at age 65 or 67 as though we were 72. Then repeat the process in the following year by taking the RMD for age 73. The curve of income has the same shape, but the probable decline in income will occur earlier than it would if you had waited until the required RMD age.