Have you ever heard of the 4% rule? That’s the traditional percentage of your retirement savings you can spend each year and not run out of money because you were unfortunate enough to live too long. Given changes in investing strategies and market returns some people question the validity of that benchmark today, but nevertheless it’s in the ballpark.
However, there are caveats. For example, if your investments take a nosedive in one year, taking the 4% may cause your plan to go off track. That means you may need to take less that year and to have other resources to make up the difference.
But back to the required amount you must take from your IRA, 401k plan or other qualified retirement plan once you reach age 70-1/2 which by the way, has a lot to do with the 4% rule.
Simply put, as you age the IRS requires that each year you must take more than 4% from you retirement accounts. That means you need a plan. Will you just spend the excess thereby jeopardizing your long-term income or will you put any excess you must withdraw in an account for a rainy day (or down stock market)?
And don’t forget all this money is taxable as ordinary income. So when planning on what you need to pay your bills in retirement, don’t just look at the amount you will withdraw, but the amount you get to keep after the Feds and perhaps your state get their share. Keep in mind too that a large RMD in a year could cause more of your Social Security to become taxable, raise your Medicare premium or even put you in a higher income tax bracket.