It is normal to think that once you retire, you no longer need to save or invest for retirement. Although many may switch from an accumulation to a distribution mindset when retirement starts, it is important to keep your money working for you as much as possible.
One consideration is managing distributions from tax-favored accounts, such as traditional IRAs.
Eventually, the tax preferences for retirements savings come to an end. It happens slowly, over the end of one’s life, through periodic required minimum distributions (RMDs) geared to one’s life expectancy. Two big changes have occurred for RMDs recently.
The more important one is that they don’t begin until the year one reaches age 72 (formerly the age was 70 ½). The second is that the IRS has updated the actuarial tables for RMDs to reflect our increasing lifespans.
The table below compares the factors in the old and new tables for some sample ages. The percentage reduction in the RMD is shown also.
| Sample Changes To the Uniform Lifetime Table | |||
|---|---|---|---|
| Age | Old Table | New Table | Percentage Reduction |
| 72 | 25.6 | 27.2 | 6.25% |
| 75 | 22.9 | 24.6 | 7.42% |
| 85 | 14.8 | 16.0 | 8.11% |
| 95 | 8.6 | 8.9 | 3.49% |
| 100 | 6.3 | 6.4 | 1.59% |
Source: IRS; M.A. Co.
Some observations:
- The factor for the first RMD was 27.4 at age 70 in the old table, and it will be 27.4 at age 72 in the new table, a coincidence.
- The RMD from a $1 million IRA at age 75 was $43,668 under the old table, and will be $40,650 under the new table.
- Assume a steady 4% total return on a $1 million IRA, with RMDs paid at the end of each year.
Before the changes took place, total RMDs paid through age 100 from a $1 million IRA would have come to $1.69 million, and there would be $295,750 left in the account. Under the new table there will be two fewer RMDs by age 100. Total RMDs come to $1.62 million, and there will be $333,858 left in the account.
- Under the new table, if the rate of return is boosted to a steady 6%, the RMDs will be paid from income for much longer, the IRA will have an extended period of tax-deferred growth. That $1 million IRA would pay some $2.23 million in total RMDs through age 100, with $606,255 remaining in the account.
The purpose of these changes to RMD rules is to make it less likely that retirees will outlive their money. The RMD is only a minimum; there is no cap on distributions from an IRA during retirement.
If you’d like to calculate your RMD for the upcoming year, Investor.gov has a simplified calculator tool on their website here. Ensuring you don’t outlive your money during retirement is about more than just knowing how much you can spend, and which accounts to draw from. It involves facing new types of first experiences, and planning ahead can make things easier.
At Garden State Trust company, we can provide a comprehensive overview of your financial situation to help you assess your retirement readiness, and help you explore the possibility of a work-optional lifestyle. Just as saving and investing for retirement doesn’t end when retirement starts, neither do our services. We can provide full investment management of your assets, or just handle administrative tasks within a living trust to give you more time to enjoy with family.
Beyond conventional trust services, we understand that retirement is a long road with many unexpected bumps and first experiences. Some of them pleasant, such as seeing a grandchild’s first steps or making a sizable charitable gift, and others harder to deal with such as finding an assisted living facility. That is why we take our services a step further with Lifestyle management services.
We’d be pleased to help with your retirement too, or provide a second opinion on ways to help ensure a lasting legacy.
