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By BuildMWell
November 20, 2006

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I have been meaning to write about my experience with the IRS for many years. Today I have the time. Caution, this is even longer than my normal posts.

I retired in 1994 at age 50 and needed to take an early withdrawal from my IRA to live. The alternative was to find another job. I visited my local IRS office to make sure that I could make equal withdrawals without a penalty. The guy there was kind enough to give me the proper IRS publication and, sure enough, I was fine with the early withdrawals. Most people do not know about this option. The IRS surely does not do anything to help us find it.

Then, I asked him about the correct annual withdrawal. He showed me how to use the "Survivorship Tables" in that same IRS publication, but he gave me really bad advice. That led me to actually call the IRS and discuss it with their expert. It's funny; the expert was surprised that I was able to understand the right way to do this. But, it involves the BMW Method and I actually believe I taught him a few things.

Here is what the local guy told me. I will use "make believe" numbers but the story is correct as is the math. Let's assume that the tables showed my life expectancy was 34.2 years. He told me to take my account balance at each year-end and to divide by the number from the tables.

So, if my account balance was $650,000, I would divide by 34.2 and get an annual withdrawal of $19,006. I could take a lump sum or I could take a monthly withdrawal of $1583.82. If you did not understand the BMW Method, you would do exactly that. I did not do that. I called the expert.

The IRS guru explained that I should hire a CPA to do the calculation, but that I could choose a constant percentage to take out and come up with the "real" withdrawal rate. But, he warned me that the calculation was very, very tough.

Next, I asked him what the IRS considered a reasonable choice for that rate? He said he always suggested 4% or less if he was asked, but he was seldom asked because most people merely divided by their life expectancy from the tables. It was much easier, he reiterated. I could tell that he preferred the easy way.

I then asked him what he thought of an 8% withdrawal rate? There was a prolonged silence. Then, he said he would not recommend that rate, but the IRS was not going to tell me what to do. The choice was mine. That is when our conversation got interesting.

I quickly took 8%, did the calculation and came up with an annual withdrawal of $46,754. I liked that number because I could live with it. That was well over double the rate I got from my local guy. I pointed that out to the expert.

He realized that I did not need a CPA to help me...I needed a psychiatrist. He agreed that the numbers were right, but I would be robbing my retirement account faster than I could replenish it using most investment vehicles.

I told him that I was expecting a return of 12% since the DOW returned 8% over time...plus the dividends. If I could beat the DOW by just a small amount, I could build my account up over time and still take enough to live fairly well.

So, I did the math again for him. I took the $650,000 and figured a 12% total annual gain. That drove my total account to $728,000 less the $46,754 annual "take" for me. That gave me a closing balance of $681,246 at the end of year one...an increase from the start of 4.8%! I pointed out that the gain was more than the withdrawal rate that he was recommending to everyone of 4%. I think he was impressed.

Next, I asked him what I should do at the end of the first year? Should I keep the percentage withdrawal constant and recalculate or keep the amount constant at $46,754? He said he had never been asked that question and the IRS was not clear about the answer. He agreed to check and call me back.

The next day he called to tell me the IRS recommended keeping the dollars level, but I could recalculate if I wanted to. That, by the way, is what I do.

Let's say my life expectancy is 33.4 years next year. My basis has gone to $681,246 (see above) but my expected "n" has dropped. I did not lose a whole year because I actually lived a whole year longer. I lost 0.8 years. That makes me feel better. The longer I live, the longer I live! The IRS taught me that...and I appreciate it.

Anyway, the calculation for year two gives a withdrawal of $52,114...an increase of 11.46% over year one. And, I can give myself at least a 10% raise forever. Isn't that math wonderful?

The only caveat is my personal CAGR...it has to be 12% or greater. If I have a really big down year, I will be screwed. But, I will still make the same year-end calculation based on the lower account balance. I will be forced to take a salary cut, but who can I blame?

The BMW Method is all about personal responsibility. I knew from the first that I had to figure out a way to make sure I could make 12%/year on my retirement funds. The BMW Method is what I invented to do it. I merely apply the same formula to my investments and look for ways to get that 12% minimum. It is really quite easy.

Some stocks give it to us consistently. You can buy a well rounded portfolio of them and never worry. The DOW won't do it, but a selection of the best DOW stocks will. Or, if you want to put a little more effort into your retirement, you can really apply the BMW Method as I do. Then, this becomes a real blast. If 12% will do what I said, think what 24% will do...how about 31%? Do the math...it is amazing!

And that is what I learned when I went head to head with the IRS using the BMW Method. Like I said, I think they were impressed. One thing for sure, they have never questioned my tax returns. I do not think they care what withdrawal rate I use so long as I pay the taxes.

Now, if you will do some of those calculations as I suggest, you will find the real problem. Without the BMW Method, you will be screwed by the IRS. If you use their recommendations, you will build your IRA until you are much older. At age 70-1/2 you will be forced to take the money out and pay taxes at the prevailing rate. Let's say I started in 1994 with $650,000 and worked to age 70-1/2 but used the BMW Method to make 12% on my money. I would have $6,635,640 by then and my life expectancy might be 15.6 years. My minimum withdrawal will be $425,361/year. Let me ask you, at 70-1/2 years of age, how can I spend that much money and enjoy it? Plus, that amount will surely be taxed at the very highest rates.

But, the story gets worse! If I use the BMW Method as I should, and use that 8% withdrawal rate, I would take out $1,997,433/year at age 70-1/2! And, at 12% growth I will still build up my account year to year. My heirs will surely be happy at my death, but that is not my goal. I want me to be happy today.

Please spend some time studying your own situation. The BMW Method will show you how to sort this all out. First, you need to hone your personal CAGR skills. You will need to find what you can actually do for yourself using your own investment knowledge. Maybe you will find that you can retire a lot sooner than you thought. But, please do not get trapped by the IRS. They have set a real duesy of a trap for you with the tax laws. Your best defense is the BMW Method. At least, it is my best defense. You may use it if it appeals to you...it is free.


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