The RMD Withdrawal Strategy

Previously I discussed the 4% Rule, a popular and well-known method of withdrawing money from retirement accounts. I noted then that the rule – developed by William Bengen – posits that if a retiree takes out 4% of their nest-egg the first year in retirement, and then adjusts that rate to account for inflation in each subsequent year (e.g. if inflation rises 1% during the first year of retirement, 5% would be taken out during the second year in retirement), they will not run out of money for at least three decades. You can read more about the rule in the Develop Your Withdrawal Plan post.


More recently I discussed the Sequence of Returns Risk. This risk notes that two retirees with identical wealth can have drastically different financial outcomes, depending on when they start retirement. A retiree starting out at the bottom of a bear market will have better investing success in retirement than another starting out at a market peak, even if the long-term averages are the same.

This phenomenon can be viewed and understood in a couple of different ways. An article by John Hancock illustrates different potential outcomes when two retirees retire ten years apart when all else (e.g. portfolio value, rate of return, etc.) is equal. A second article by BlueCreek Investment Partners illustrates a possibility when all factors are the same, except in this case the rates of return are identical, just flipped over a 15-year period.  At the end of that blog post I noted that individuals needed a solid withdrawal plan and should be aware of Sequence of Returns Risk; and in a response to a comment from long time reader Brian, I mentioned the RMD Withdrawal Strategy as one that is being discussed more.

Here is the rule summarized, straight from the IRS RMD webpage: You cannot keep retirement funds in your account indefinitely. You generally have to start taking withdrawals from your IRA or retirement plan account when you reach age 70½. Roth IRAs do not require withdrawals until after the death of the owner. Your required minimum distribution is the minimum amount you must withdraw from your account each year.

In place of a 4% based withdrawal rate, some have simply taken to using the withdrawal rates outlined by the RMD even before they reach age 70½. I don’t want to get too far down in the weeds on RMD calculations, as this post is not about those calculations, but using the percentages derived from them as a guide. Specifics about RMD can be researched easily on the IRS site. However, I will note that the percentages in the RMD tables equal 100 divided by the life expectancy of a couple in which one spouse is 10 years younger. As an example, the life expectancy of couple aged 70 and 60 is 27.4 years. Therefore, the RMD for a 70-year old is 100/27.4 or 3.65 percent. A recent book I read – a recent SavvyRecommendation – Falling Short: The Coming Retirement Crisis and What to Do About It, offered the following table:

RMD Percentage Table

Using it as a guide, I plugged in 3.00% (see table below) for the years 2025 – 2029 when the husband, who turns 60 in 2025, would be aged 60 – 64. Here are the other factors that would play into establishing a retirement income withdrawal plan for this example couple:

  • They enter retirement with a $1,000,000 portfolio from which they will draw portfolio income
  • Let’s assume their Net Return (investment gains minus fees – cell C4) is 3.5% each year
  • The husband will a receive pension (defined benefit) from his current job [cell 33 shows the projected income]
  • The couple determines they will wait until 65 – 2030 [cell E34 – projected income] for the husband and 2031 [cell E35 – projected income] for the wife to draw Social Security benefits
  • Note this scenario does not account for taxes

The table below illustrates their total retirement income  (cell F4, the combination of portfolio and passive income) each year starting with $1,000,000 in their portfolio (i.e. 401(k)s, IRAs, savings, brokerage accounts, etc.) after the difference between gains and fees are accounted for; and the different sources of passive income are added each respective year. Therefore, 2025 – 2029 is portfolio income + husband’s pension; 2030 is portfolio income + husband’s pension + husband’s Social Security; and 2031 and beyond is portfolio income + husband’s pension + husband’s Social Security + wife’s Social Security.

RMD Withdrawal Plan I

So what happens if we change some of the early returns, make them lower or even negative during the first five years? You can see the impact below. While this couple would be alright, they will still have $608,816.97 in 2050, you can see that they would have less in 2050 than they would in the first scenario and  – all other factors staying the same – their retirement income would be less each year. As I preach in my book Rendezvous With Retirement: A Guide to Getting Fiscally Fit and as I have noted on this blog numerous times, you have to know and track your numbers … not only during the accumulation phase but during the withdrawal phase also. By creating a spreadsheet such as the one illustrated here, you can see what impact changes to the various factors will have on your financial well-being.

RMD Withdrawal Plan II

Blogger-in-Chief here at RetirementSavvy and author of Sin City Greed, Cream City Hustle and RENDEZVOUS WITH RETIREMENT: A Guide to Getting Fiscally Fit.


  1. Interesting thought on stepping up the RMD timetable as a strategy. Personally, I’m sticking with the 4% rule as my guide (although hopefully I can get to a point where my lifestyle is completely covered by dividends and other passive income streams). The 4% works better for me as a way of projecting and planning expectations. As I get older I may add some RMD planning as well who knows.

    I agree that the main insurance that people can have is being flexible and knowing about sequence of return risk. Having the ability to see that the market had an extremely rough year and then spending a little less that year, is an important discipline for people who do not have a margin of safety already built in.

    Nice article with numbers to back everything up.

    • I have played around with both methods, playing around with the numbers for each. Fortunately, it looks like I will be in a position where it is moot; I should have the income from defined benefit plans (pensions) to meet my needs and won’t really need to adopt a withdrawal rate for my retirement plans. However, if it did come to that, I suspect my withdrawal rate would be in the 3 – 3.5% range.

      Thanks for sharing your thoughts, my friend.

  2. Another Google+ reader notes …

    “I think that adjusting your expenditures to be less than your lifetime withdrawal rate is best. Four percent may be a good start but if your expenditures are a lot higher or a lot less, changes need to be made.”

    • As I note in my book – and in some past blog post probably – while many say the 4% rule is outdated, I believe it is as good a place to start as any. The key is to develop some method (e.g. Excel spreadsheet) where you can track & monitor (and understand the impacts of various changes to) your portfolio … and as you note, be prepared to make changes. Getting locked into a set withdrawal rate and/or a specific retirement income, without paying attention to the various factors that might impact your portfolio, is dangerous.

  3. A Google+ reader notes …

    “Hi James,

    The RMD strategy is one that I would ignore. Here is why… for most people, when they retire, they are looking for 2 key criteria from their pensions.

    1. In retirement there is consistency of returns (income withdrawal figures not investment returns). Ideally this should grow with inflation.
    2. That they outlive their pension.

    This strategy abjectly fails on the first test. Using your figures the investment drops just over 17%. However, this is the least of the retiree’s problems. Their income has dropped almost 23% by year 5 to just under $22,000 from $28,425. I am ignoring the social security payments because some people will solely rely on their pension to provide an income (i.e. nothing from the state, final salary pensions etc).

    The RMD strategy simply reduces income to prevent it from running out. The difference in pot value at the end is down to the different growth rates (about 43% – initial 17% drop vs just under 19% gain). If someone doesn’t want to take this risk then they can buy an income for life (annuity) which increases with inflation.

    PS the 4% rule allows a pension pot to last 30 years as long as the real growth rate is over 1.4% p.a.
    PPS Small matter but your note on inflation is misleading as it’s based on the percentage of the pot rather than the income. So $1 million pot giving $40,000 in year 1 would allow $40,400 in year 2 with 1% inflation not 5% or $50,000 as mentioned.

    I have written an article on pension withdrawal rates explaining the variables. Have a look as it explains how different inflation, growth & withdrawal rates affect how long you can expect your pension to last.

    It’s good, though, to have discussions on these matters as there is no universally correct withdrawal rate so thanks for bringing the info to light as I hadn’t heard of RMD strategy before.”

    • Great feedback. A few points. First, the strategy is not focused on pension (aka passive) income. As noted in the post, the RMD strategy is applied against a fictional $1,000,000 portfolio (e.g. 401(k)s, IRAs, brokerage accounts, etc.) which will generate portfolio income. The withdrawal rate in each respective year is not applied against passive income (i.e. husband’s defined benefit plan, husband’s Social Security pension and wife’s Social Security pension). The totals for passive income are noted at the bottom of the illustration. The withdrawals from portfolio income are combined with income from pensions — which as you are aware, most are indexed to inflation, via COLAs, thereby providing consistent income relative to inflation — giving a total income.

      Second, while I do not believe Social Security benefits should be the centerpiece of a retirement plan, I don’t believe they should be casually dismissed. While it is likely that benefits will be reduced going forward, and/or eligibility ages extended, particularly for younger individuals, it is highly unlikely the program is going away; therefore, they should absolutely be part of a retirement plan.

      Third, I would suggest people think twice and approach buying an annuity very carefully. There is price to be paid for guaranteed income with inflation protection.

      Agreed that these conversations are good. For my own planning, I have sketched out and developed withdrawal strategies based on the 4% Rule as well as the RMD method, applying both to my projected portfolio value in 12 years, when I plan to retire. As I have done in the examples, I evaluate expectant portfolio income – and the withdrawal from their respective accounts – separately from anticipated income from passive sources. Ultimately, as I note in the blog post, individuals must know and develop some method for tracking their numbers during both the accumulation and decumulation, or withdrawal, phases. That is the only way they can both monitor and track progress; and determine how changes to any of the various factors (e.g. rate of return, inflation, COLAs, taxes, etc.) will impact their plan.

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