Things change. Ten years ago the most common reader question about IRA accounts was this. “How can I avoid the penalty for withdrawals taken before age 59 ½?” Today the most common question is: “What can I do to avoid the Required Minimum Distributions I must take after age 70 ½?”
How could this happen?
Honk if you think our economy has changed and become less secure. Honk again if you noticed the market crash of 2008-09. So people are working longer. They are deferring retirement— often well beyond age 70.
You can confirm this by taking a look at labor force participation rate figures from the Bureau of Labor Statistics. Many retired as early as possible in the 1990s. Back then corporations fattened pensions and wrote big checks to retire 55 year olds. Today the trend has reversed.
The percentage of those 65 and over in the workforce bottomed in the 1990s. It has been rising ever since. From 1992 to 2012, for instance, the participation rate rose from 11.5 percent to 18.5 percent. BLS projects the rate will grow to 23 percent by 2022. That’s a doubling of worker participation in 30 years.
Get more specific and you find that the work force participation of 70 to 74 year olds grew from 11.1 percent in 1992 to 19.5 percent in 2012. That’s a dramatic shift in 20 years. It also means a lot of older workers will be surprised by their tax bills. They’re going to pay employment and income taxes on their work income. They will pay income taxes on their Social Security benefits. Some will pay higher premiums for Medicare parts B and D. Working from 66 to 70 is a no-brainer. But the post-70 tax hit will be enough to make some reconsider the benefits of leisure. It will also be enough to make working seniors an angry bunch.
But lets not carp and complain. Let’s look on the bright side. Required Minimum distributions have a near mystical beauty. They work to provide aging Americans with a rising and durable income. They do this at no expense and with no effort.
I’m not kidding. You’ve been reading the “safe withdrawal rate” debate in this column since it started. You know the conventional wisdom of the 4 percent withdrawal rate is under attack—even though most people would rather think about a 5, 6 or 7 percent withdrawal rate. Well, you can have it. You can age into it.
Just follow the annual increases dictated by the Internal Revenue Service. Do it and you may enjoy a lifetime of rising income.
The best way to understand this is to play with the more elaborate online RMD calculators. They ask you to input your retirement account assets, your date of birth, your spouses’ date of birth and your assumed rate of return. Then press, “calculate.”
You’ll see your estimated distributions each year, and the amount of assets remaining in your account. The AARP website calculator includes graphs of both, but calculates no further than age 100. The Fidelity Investments calculator has no graphs. But it figures distributions and remaining assets to age 115.
Spend a half hour playing with either calculator and you’re likely to feel a lot better about your retirement future. You may pay more in income taxes, but there is an upside. The IRS distribution method will provide a smooth path of distributions. Without any complicated machinations.
Honk if you think simple is good.
Here’s an example. Suppose you have $100,000 in your IRA and can get a long-term return of 6 percent. (Not that many years ago, 6 percent was a modest expected return.) What would happen?
Your first withdrawal would be $3,650, according to the AARP calculator. It would rise every year until you were 96 years old. Meanwhile, your assets would peak at age 82. But you’d still have $56,014 at age 100. And your age 100 withdrawal would be $9,865. The compound annual growth rate for your income from age 70 to 100 would be 3.37 percent. All these figures improve if your long-term return is 7 percent. (See table below for more figures)
And what about after age 100?
Well, there is still some money, but 98.3 percent of us won’t be around to worry about it.
The Sublime Comfort of Required Minimum Distributions
This table compares the results for making minimum required distributions from a $100,000 portfolio with a beginning distribution of $3,649.64 at age 70. The 30 year income growth rate is calculated from the beginning and end distributions.
|Peak Assets Age||72||78||82||85|
|Peak Income Age||93||93||96||98|
|Income Growth Rate, 70-100||1.27%||2.32%||3.37%||4.42%|
|Source: http://www.aarp.org/work/retirement-planning/required_minimuum_distribution_calculator/ , author calculations|