Is there a best way to take Required Minimum Distributions from IRA accounts?

Q. Have any general views been established concerning exactly how to take Required Minimum Distributions (RMDs)? Suppose, for instance, that you have three or four mutual funds in an IRA. How do you decide which ones to take the distributions from? Should you take the annual distribution on January 1? Or should you take them throughout the year? Is there an optimal method? --N.M., by e-mail from Round Top, TX

A. I think there are two ways to do this to greatest advantage. One is to take the withdrawal once a year (or twice at most) when you rebalance your portfolio's asset allocation. This way, you can reduce the asset (fund) that has outgrown its allocation by redeeming shares and using the cash for your expenses.

Suppose, for instance, your portfolio goal is to be 60 percent equities, your actual allocation has grown to 70 percent equities after a big market rise, and your RMD is 4 percent. Then part of your reallocation will be to make a 4 percent distribution from equities.

Another line of defense is to use a ladder of individual bonds rather than a bond fund. This will provide you with a stream of cash that is free of interest rate risk. A 5-year ladder of TIPS (Treasury Inflation Protected Securities) would insulate you from any interest rate risk for five years. It would also protect you from a falling stock market by helping you avoid the need to sell stocks in a down market.

According to Ibbotson Associates, for instance, 66 of the 76 five-year periods since 1926 have produced positive equity returns. That's 86.8 percent of the time, a good deal better than the 71 percent of single-year periods.

Build the investment period out to ten years and equities have positive returns in 69 of the 71 periods, or 97 percent of the time.

With starting RMDs in the vicinity of 4 percent, this means you can increase your portfolio safety by holding 20 to 40 percent of your portfolio in a bond ladder. That, by the way, is the "sweet spot" in the studies of portfolio survival after you have begun making regular withdrawals. To learn more, check the "portfolio survival" reader on my website, Access to the site is free but requires registration.

Will we have an economic collapse due to rising energy prices?

Q. What is your take on some recent warnings about a coming economic crisis due to the escalating price of oil? Billionaire Richard Rainwater talked about this in a December 2005 interview. Stephen Leeb warns of "The Coming Economic Collapse" in his book by that title. These people are "serious Wall Street types," at least to my uninformed eye, and what they're saying sounds very dire. --J.H., by email from Salem, OR

A. You've got plenty of company in that worry. Readers who want to get up to speed on the issue should Google "peak oil." Then follow the links. My personal belief, backed by having a 20 percent allocation to energy stocks in my personal investments, is that oil and natural gas are in a long period of supply/demand imbalance, with great vulnerability to the Middle East. While the "peak oil" debate may go on for years, the bottom line is that the value of BTUs is going up relative to the value of paper currencies. And this will continue for the foreseeable future, barring a global collapse from some other problem.

That doesn't mean "the world as we now know it" is ending. The cost of energy plays a far smaller role in our lives and economy than it did during the 1973 OPEC embargo. As we did back then, we will slowly, reluctantly, adjust to rising energy prices by changing the vehicles we drive and making other changes in our energy consumption habits.

Even the alarmingly large crowd of people who would rather show off than conserve will change their habits when energy consumption becomes an instant indicator of stupidity and social indifference.


[tag]Scott Burns[/tag] is the Chief Investment Strategist for AssetBuilder, Inc. and his columns are syndicated across the country. Readers can register at and post questions/comments or send directly to Questions of general interest will be answered in future columns and remember to click on the "Archive" navigation to see other columns. All comments are welcomed and appreciated.