Retirement Withdrawals: Can You Base Them on RMDs?
by Wei Sun and Anthony Webb
As 401(k) plans have largely replaced traditional pensions, baby boomers have become the first generation that must decide how much of their savings to spend each year in retirement. Boomers must find a strategy that best balances the risk of outliving their wealth against the cost of unnecessarily restricting their consumption.
This article, which is adapted from our recent paper and originally published on the Center for Retirement Research at Boston College’s website, explores the possibility of basing withdrawals on the Internal Revenue Service’srules for required minimum distributions for 401(k) retirement plans and individual retirement accounts ( . The analysis compares an RMD strategy with existing rules of thumb and with a pattern of optimal withdrawals.
In this article
- Rules of Thumb for Asset Drawdown
- An Optimal Drawdown Strategy
- The Horse Race
- Making Good Better
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The first section details the rules of thumb, including the proposed RMD strategy. The second section defines an optimal strategy, which serves as a benchmark for comparing the rules of thumb. The third section provides the results of this comparison. The fourth section suggests a way to modify the RMD strategy to bring it closer to the optimal strategy. The final section concludes that the RMD strategies offer retirees a reasonable trade-off of the benefits and risks inherent in spending down one’s retirement savings.
Rules of Thumb for Asset Drawdown
People adopt rules of thumb for drawing down their assets because rules are relatively simple to follow. This section describes the traditional rules of thumb and then discusses the potential for an RMD strategy.
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Anthony Webb is a research economist at the Center for Retirement Research at Boston College.