Readers of this blog will be familiar with the many gems of retirement planning wisdom attributed to my actuarial buddy, Steve Vernon. In his post of July 23rd, Steve outlines what he considers to be a smart way to make retirement savings last (actually a series of decisions). Steve has his hypothetical 65-year-old woman buy a Qualified Longevity Annuity Contract (QLAC), work half-time in retirement until age 70, defer Social Security commencement until age 70 and use some of her accumulated savings from age 65 until she commences Social Security to supplement her employment income until then.
At age 70 she will have a much larger Social Security benefit than if she had commenced at age 65 ($33,936 per annum in Steve's example). Despite buying the QLAC and making withdrawals over five years, her accumulated savings at age 70 is expected to be almost as much ($450,000) as when she retired. So far, so good. But then Steve inexplicably has her run off the train tracks on her smart retirement train ride by using the RMD rules to determine her annual withdrawals from her accumulated savings. The RMD rules just don't coordinate well with her decision to buy the QLAC.
So, her spending budget for her first real year of retirement is only $50,361 ($33,936 from Social Security and $16,425 from accumulated savings). Had she been real smart and used the Actuarial Approach, the spreadsheet and recommended assumptions would have indicated that she could spend $30,871 from accumulated savings in addition to her Social Security of $33,936 for a total spending budget of $64,807, or about 29% higher. And, if all the recommended assumptions been realized in the future (and she spent exactly her budget each year), she would expect her total retirement budget (Sum of withdrawals, annuity payments and Social Security benefits) to remain constant from year to year when measured in inflation adjusted dollars .
While Steve may be right that most IRA and 401(k) administrators will calculate the RMD for you, that fact by itself does not make it a particularly good systematic withdrawal strategy:
- As noted above, it may not coordinate well with other sources of retirement income such as QLACs
- It will not provide produce smooth spending budgets from year to year as it immediately and fully reflects actual experience during the previous year.
- It does not target a relatively constant real dollar spending budget from year to year
- As an IRS minimum, It tends to under-budget in the early years of retirement and over-budget in the later years, with a higher tendency to leave more money than desired to heirs.