How to Deal When Required Minimum Distribution Rules Conflict With the 4% Rule

As a basic guideline for retirement spending, the so-called 4% rule isn't a bad place to start. It's premised on the idea that if you withdraw and spend only that percentage of your portfolio each year -- adjusting upward for inflation -- the chances are extremely good that you won't outlive your assets. But for a number of reasons, it's not a one-size-fits-all solution.

And in this segment of the Motley Fool Answers mailbag episode, a listener for whom it may not fit has a question about his options a few years down the road. He's 69, and has most of his retirement assets in accounts that will force him to take steadily increasing fractions as required minimum distributions -- and those will eventually exceed 4%. Hosts Alison Southwick and Robert Brokamp are joined by Buck Hartzell, the Fool's director of investor learning and operations, to try to put his mind at ease.

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This video was recorded on April 30, 2019.

Alison Southwick: The next question comes from Kevin. "I enjoy your podcast and listened attentively to the episode on the relevance on the 4% withdrawal rule for today's retirement portfolio. I'm 69 years old and am anticipating future events that may impact my retirement income strategy. Do you have any thoughts of the impact that required minimum distributions have when a retiree has most of their retirement assets in an account that requires RMDs? The first years don't have much impact on a planned withdrawal strategy, but when one is in their 80s, some serious percentages are required to be withdrawn and taxes paid."

Robert Brokamp: Kevin's talking about when we had Wade Pfau on the show a few episodes ago talking the so-called "4% rule." One thing that's important to know is that is for people who are retiring when they're around age 65. So if you are in your 70s, you could actually take out more because you'll have a shorter retirement.

He's talking about [the fact that] with requirement minimum distributions, you have to start taking those at age 70 and a half. What's the percentage of withdrawal at that first year when you're 70? It's only 3.65%. It's pretty low, but it does creep up, so by the time you're age 85, you're required to take out 6.76%. Again, we're talking about from traditional retirement accounts and 401(k)s, not from your regular taxable account.

That does get to be higher, but the interesting thing is there's more and more research showing that RMDs are really good guidelines for withdrawal rates and that at 85, you can safely take out 6.7% from your account and feel pretty comfortable it's going to last as long as you do.

I'll give you one example. That was a study by the Stanford Center on Longevity, which looked at 292 retirement income strategies. The one they decided was the best [was the one that] relied on several factors, but one thing was delay Social Security until age 70 and then use the requirement minimum distribution withdrawals as guidelines for how much you could spend. It may sound like a lot if you're told you have to take 6-8%, but I think you'll probably save based on your age.

Now, if you don't need the money, you don't have to sell the investment, take out the cash, and then rebuy it. You can actually withdraw the investment from your account. It saves you some commissions, there; but, unfortunately, you are going to have to pay the taxes.