The investment community has been looking for the “best” formula to determine how rapidly a retiree should withdraw income from their retirement assets to avoid running out of money. This study by the Center for Retirement Research at Boston College suggests that using the IRS RMD (Required Minimum Distribution) formula may be better than the “4%” rule that has been the most widely used.
The RMD tables are based on an individual’s estimated lifetime. For example, according to the table, a 55-year-old will live to 84.6. At 65, or life expectancy is 21 years.
The success of the RMD strategy lies in its simplicity and the fact that it reduces the temptation to chase down dividends, according to the paper.
However, its use of actuarial data is also a factor.
The IRS intended IRAs — at least at the very beginning — to help people save for and live in retirement, and not for savers to turn the accounts into estate-planning vehicles, according to Eric Smith, an agency spokesman.
There is no one “perfect” formula, and one should avoid assuming that adjustment don’t need to be made based on circumstances. It is important to understand the role of guaranteed income flows, market volatility, taxes and longevity in setting up a withdrawal plan that meets your individual needs.