Required Minimum Distribution Strategies

Most retirees spend years building their retirement nest egg, but very few spend enough time planning how they will distribute those assets once retirement begins. One of the most overlooked risks retirees face isn't necessarily the stock market—it's the combination of Required Minimum Distributions (RMDs) and sequence of returns risk.

Without proper planning, these two factors can significantly reduce the longevity of a retirement portfolio.

If you have money in a traditional IRA, 401(k), 403(b), or TSP, the IRS generally requires you to begin taking Required Minimum Distributions (RMDs) beginning at the applicable RMD age under current tax law.

The purpose is simple: the government has allowed your retirement savings to grow tax-deferred for many years and eventually wants to begin collecting income taxes on those funds.

While RMDs are mandatory, they create several challenges for retirees.

Many retirees don't actually need their RMDs to meet their monthly living expenses.

However, whether you need the money or not, the IRS requires that it be withdrawn.

This can create several problems:

• The withdrawal is generally taxable as ordinary income. 
• Larger withdrawals can push retirees into higher tax brackets. 
• Increased taxable income may increase Medicare IRMAA premiums. 
• More of your Social Security benefits may become taxable. 
• Most importantly, once money leaves your IRA, it is no longer growing tax-deferred inside the account. 

Every dollar withdrawn today is one less dollar that can continue compounding for the future.

Many investors make the mistake of thinking, "The market always comes back."

Historically, broad stock markets have recovered from every major decline.

However, retirees face a challenge that younger investors do not.  RMD withdrawals!!

When you're 45 years old and still working, market declines can actually benefit you because you're continuing to buy investments at lower prices.  Retirement changes everything.

Now you're taking money out of your portfolio instead of putting money into it.

If the market declines 30% and you're forced to withdraw money for living expenses or RMDs, you're selling shares when prices are depressed. Those shares are permanently gone.

Even if the market fully recovers several years later, the shares you sold during the downturn are no longer there to participate in the recovery.

This is known as SEQUENCE OF RETURN RISK, and it can have a dramatic impact on how long your retirement savings last.

Imagine two retirees each begin retirement with $1 million.

Both earn exactly the same average annual return over the next 25 years.

The only difference? 

One experiences poor market returns during the first five years of retirement withdrawals such as RMD's.  The other experiences those same poor returns during the last five years.

Although their average return is identical, the retiree who experienced losses early in retirement may end up with significantly less money—or even exhaust the portfolio sooner—because withdrawals during the downturn permanently reduced the number of invested shares.

This is why financial professionals often say:

It's not just the average return that matters in retirement. It's the order in which those returns occur!!
 

Absolutely.

A $1 million retirement account may sound like more than enough, but retirement success depends on much more than your account balance.

Factors such as:

• Market performance 
• Inflation 
• Taxes 
• Longevity 
• Withdrawal rates 
• Required Minimum Distributions 

all play a role in determining whether your assets last throughout retirement.

A retiree experiencing significant market declines while taking annual withdrawals may permanently reduce the portfolio's ability to recover.

One strategy that many advisors recommend is using a portion of their retirement assets to purchase a hybrid income-focused fixed indexed annuity that provides guaranteed lifetime income. 

Instead of relying solely on investment withdrawals each year, guaranteed income payments from the annuity may provide cash flow that can be used to help satisfy all or part of a retiree's annual RMD obligation.

Depending on the product selected and how it is structured, this strategy may:

• Create a predictable lifetime income stream. 
• Help reduce reliance on selling market-based investments during downturns. 
• Help manage sequence of returns risk. 
• Allow a portion of the remaining retirement assets to stay invested without having to liquidate as many investments to generate cash flow. 
• Provide principal protection for the annuity portion of the portfolio, subject to contract terms. 
• Potentially improve overall retirement income planning. 

For retirees who are concerned about market volatility, this type of strategy may provide greater confidence knowing that a portion of their retirement income is guaranteed regardless of market performance.

No single investment is appropriate for everyone.  Some retirees may choose to keep a significant portion of their assets invested in the stock market to pursue long-term growth.

Others may prefer to combine market investments with guaranteed income strategies designed to reduce volatility and create more predictable cash flow.  The goal isn't to eliminate market exposure—it's to build a retirement income strategy that balances growth, income, tax efficiency, and risk management.

Building wealth and preserving wealth require different strategies. During your working years, your objective is often maximizing growth. During retirement, the objective shifts toward generating sustainable income while managing the risks that can threaten your financial security.

Required Minimum Distributions and sequence of returns risk are two of the most important retirement planning issues many investors overlook.

With thoughtful planning and a diversified income strategy, retirees may be able to reduce these risks while creating a retirement plan that is better positioned to provide income throughout their lifetime.