I hear a lot of clients talk about how well the stock market has been doing since the crash of 2008. “Oh, yeah! Ive made all the money back and then some!”… the same ole story. But let me ask you this: What if you were having to take income during those down years? What would that have looked like? Beginning this year, the Required Minimum Distribution for Qualified Money age was raised from 70 1/2 to age 72.
That means that if you have a retirement account such as an IRA that money has been tax deferred all these years (never taxed). Well, the Government wants their cut so at age 72, you HAVE to make withdrawals so they can get their tax cut!
Now let us suppose that all your retirement is in the market, mutual funds, etc. and you reach age 72, you take your mandatory withdraw. The market is up- great you are still winning! Market is down- uh oh! You are selling when the market is down. BAD but Mandatory !
In all actuality since the year 2000, the total return has really only averaged 3.40%. So over a 20 year period, you have earned an average of 3.4%.
Now lets look at an example:
$100,000 Qualified Money from an IRA
Not to get too deep in the weeds here, let’s just look at the RMD calculation at age 72. For simplicity sake, the IRS gives a number for each age. That number it age 72 is 27.4. So to calculate your “RMD” so $100,000 divided by 27.4 equals $3,774. The percentage you are having to withdraw form your account is 3.8% (roughly). Now if you earned 8%, great! You took your withdraw and still added 4.2% to your account value- $104,200! Conversely, the market is down 9% at the point you have to take your withdraw. Let’s look at that. Your $100,000 has is worth $91,000 at the time you have to take your RMD so take $91,000 and divide by the 27.4 that comes to $3,321. So now your total account value is $87,679.
Lastly, I want to illustrate the sequence of returns:
The risk of receiving lower of negative returns early in a period when withdrawals are made from an investment portfolio is known as sequence of return risk. If you are taking withdrawals from your portfolio, the order or the sequence of investment returns can significantly impact your portfolio overall value.
Consider the following hypothetical investment scenario for Mr. Singletary and Mr. Bice.
Mr. Singletary and Mr. Bice started with $1 million investment portfolio at age 65. Both averaged annual returns that grows to the same value after 25 years, but they experience their annual returns in an inverse order from each other. See chart below demonstrating their different paths from each other.
Now let’s look at how the sequence of returns can impact a portfolio when taking distributions:
Mr Singletary and Mr Bice still start with an initial $1 million investment portfolio. But in this example, they start taking 5% withdrawals (of the initial value) beginning immediately at age 65. Mr Singletary begins taking withdrawals in an up market, giving him the optimal environment to maintain his portfolio value long-term. Unfortunately for Mr Bice, he starts taking income in a down market and depletes his entire portfolio before reaching age 83.
Heres the alternative: Income Riders provide guaranteed income that satisfy your RMD…. and best yet, it never goes away!
Source: Lincoln OptiBlend 10
Example: You retire at age 65 with the same $1,000,000 investment that you had rolled over into a Fixed Indexed Annuity with an income rider that begins paying income at age 65. The income percentage is 4.50% so you will receive $45,000 guaranteed for life while satisfying all RMD requirements. FINALLY, it is not affected by market down turns. You are participating in the market upturns, with no downside risk! So, Yes! you are sacrificing $5,000 per year in comparison to Mr Singletary with income in an “up-market” but keep in mind, you are also guaranteeing $45,000 per year for the rest of your life so you are not like Mr Bice with Income running out at age 82…..and you are still participating in the market up-swings!
If you have any questions about planning for the future and focusing on preservation of growth, capital appreciation, and income, please feel free to call (828) 513-5045.
Article by Beau Singletary