Managing retirement income has never been easy. Those who retired in the early 1970s saw interest rates rise dramatically, then fall the same way – all within about a 15-year period. When interest rates were going up, it made them feel good; but, few paid attention to inflation or tax implications. During one period, interest rates were in the double-digits, but so was inflation, which meant their “increased” income wasn’t really increasing at all. Money is worth only what it buys at the checkout counter.
So, the retiree who felt great about a 15% interest rate during 15% inflation (yes, it really happened and could happen again, blindsiding people who didn’t live through it before), weren’t really getting a raise at all – and that was before taxes!
The real problem, of course, came when interest rates began to fall. During the period that interest rates (and inflation) dropped to 12% from 15%, retirees were seeing their incomes drop by 20% (a 3% drop in rates from 15%) while still seeing prices rise by 12%.
How do you manage income in retirement? It ain’t easy.
Naturally, you could consider a basic withdrawal sequence using a straightforward strategy to take money in the following order:
- Required minimum distributions (RMDs) from IRAs, 401(k), or other qualified retirement accounts.
- Taxable accounts, such as brokerage and bank accounts.
- Tax-deferred traditional IRAs, 401(k), and other similar accounts
- Tax-free money – from Roth IRAs for example
This sequence can provide an order of withdrawals; but, other than the RMDs, it doesn’t tell you how much!
But wait! (as they say on tv).
How much? And, how can you be sure you won’t run out of money?
RMD can provide a clue!
The RMD calculations can provide sound guidance for your entire portfolio! Using the IRS formulas, Craig Iraelson, executive-in-residence in the financial planning program at Utah Valley University, did some back-testing with hypothetical portfolios invested in different investment allocations with RMD withdrawals starting in 1970 (the beginning of a relatively flat ten-year stock market). Using beginning values, and even with a portfolio invested in 100% cash, there was still $850,000 left after 25 years! And, a portfolio that was 25% stocks had $2 million left.
RMDs appear to address longevity risk pretty well; but, there’s another question. Is the income level provided by the RMDs enough to preserve the pre-retirement lifestyle – or anything close?
There’s the rub. In the back-tested portfolios, the initial RMD was 3.65% of assets… and that falls within the widely-accepted 4% rule… but, that’s only $36,500 of pre-tax income. Even if the retiree family has an additional $30,000 from Social Security, that’s still just $66,500 before taxes; and, for many successful individuals, that isn’t enough.
So, there’s the trade-off: Sacrifice income for longevity, or accept longevity risk in order to take increased income.
Maybe there’s another way. How can a couple have more freedom to take greater income early while still addressing the risk of running out of “late-life income”?
My “Late Life Income” report shows how many couples have addressed this issue. You can access it here!
By the way, when you get my report, you’ll also receive a subscription to my ezine. If you decide you don’t want the ezine when you receive it, you’ll be able to unsubscribe immediately with a single click and, of course, your email is never shared with anyone.
Enjoy the report! Hope you find it helpful.
Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and An Accredited Investment Fiduciary® serving private clients since 1991. Jim is Founding Principal of The Independent Financial Group, a registered investment advisor with clients located across the U.S.. He is also licensed for insurance as an independent agent under California license 0C00742. The Independent Financial Group does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.