make your retirement savings outlive you – part ii

7/29/2019 Make Your Retirement Savings Outlive You Part II

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Make Your Retirement Savings Outlive You Part II

Strategies to Re-Invest Your Retirement Withdrawals

Two Fridays ago, I spoke about retirement savings and how to manage withdrawals from yourIRA, 401(k) and savings accounts so that your retirement savings do not run out while you arestill alive. Now, I chose this topic because many Americans just do not have enough saved forretirement and underestimate retirement living expenses by restricting their math simply to living

and vacation expenses but ignore rising medical costs and cash-strapped government and stateMedicare budgets that are increasingly passing medical costs on to individuals. Yet, we can stilllive financially comfortable retired lives if we follow a few simple retirement budgeting and taxsavings rules.

In my previous commentary, I spoke about the 4% Rule that retirees who withdraw about 4% oftheir total retirement savings annually had a very low probability of running out of money over30 years or so of retirement, with portfolios that were roughly half stocks and half bonds, withinterest income and dividends included in the 4%. Many experts today are lowering thatwithdrawal percentage to 3% because of ultra-low interest rates.

I also addressed the IRSsrequired minimum distributionrule which is called the RMD, forshort-hand, which requires you to start withdrawing money at age 70 . The amount ofdistribution is based on a life expectancy table distributed by the IRS. I have included the table atthe end of this blog.

Here are some simple strategies to reinvest your usable and unusedRMDs in simple, tax-efficient ways.

Strategies to Re-Invest Your RMDs

The IRS mandates that you withdraw a certain minimum amount from your retirement savings

each year starting at age 70, primarily so they can finally recover taxes that they let you defer onyour IRA and 401(k) to encourage retirement savings.

They need this minimum withdrawal done by year-end (December 31) so if you dont need themoney, wait until the last week of the year to make your RMD withdrawals. This way youeffectively gain one more year of compounded growth. Even if you need the money, withdraw itin a phased manner, taking out only what you need while making sure the total through the yearequals the RMD minimum.
http://www.irs.gov/Retirement-Plans/Plan-Participant,-Employee/Retirement-Topics---Required-Minimum-Distributions-(RMDs)http://www.irs.gov/Retirement-Plans/Plan-Participant,-Employee/Retirement-Topics---Required-Minimum-Distributions-(RMDs)http://www.irs.gov/Retirement-Plans/Plan-Participant,-Employee/Retirement-Topics---Required-Minimum-Distributions-(RMDs)http://www.irs.gov/Retirement-Plans/Plan-Participant,-Employee/Retirement-Topics---Required-Minimum-Distributions-(RMDs)


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Now, if you save diligently and responsibly for retirement, you could well be in a situation whereyou just do not consume the money that you mandatorily withdraw from savings. Where, ineffect, you save from yourrequired minimum withdrawalswhat I call yourunused RMDs. Itsimportant to note that while the IRS has mandates on withdrawal, they care little about what you

do with this money, provided its all legal.

Here are four simple strategies addressing the unused RMD theme.

1) Reinvest your savings in a Roth IRA

In retirement, many Americans may qualify for Roth IRAs if they have earned incomewhichcomes either from a salaried job, your own business or farm income. While you cannot invest ina traditional IRA beyond the age of 70 , consider putting your unused RMDs into Roth IRAs -where there are no age limits and where withdrawals are tax free. This is considered a rollover,so consult your tax advisor before doing this.

2) Convert your IRA into a Roth IRA

If youre further fortunate in that you will not really need your RMD assets and would like topass them on to your heirs as inheritances, consider converting all or a large portion of your IRAinto a Roth IRA where you cough up taxes on conversion but grow your money tax-freethereafter so your heirs inherit it with minimal tax consequences.

3) Invest to mimic the tax efficiency of an IRA

If you do not qualify for or otherwise do not want to invest in a Roth IRA, choose investmentsthat let you defer taxessuch as long term non-dividendstock investments where you decidewhen and how to sell your shares down the road and minimize taxes. T keep things simple, youcan invest in Exchange Traded Funds that suit your level of risk while keeping a lid on taxablegains; or invest in tax-managed mutual funds such as those that invest in tax-free municipalbonds, for example.

4) Invest to balance your asset allocation

Okay, so say, at year end, you sell a bunch of small stocks from your portfolio to meet yourRMD needs. Your retirement portfolio is now under-weight small stocks. So to make sure yourasset allocation is balanced, consider re-investing unused RMDs back into small stocks through aregular brokerage account. And consider investing RMDs that you likely will needfor routineexpenses or a vacationinto liquid assets like short-term bonds.

And 5) Save taxes by being generous!

Benevolence pays, literallybecause donations to qualified charities are tax exempt. Soconsider donating unused RMDs to qualified charities because you will not owe taxes on thisamount. Say you withdraw $1,000 to meet RMD requirements - youd then pay taxes on the


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entire $1,000. But say you only need $600 and redirect $400 straight from your IRA to a charitythis way you only pay taxes on the $600 you put your hands on, pay no taxes on the balance$400 that went to charity and still meet RMD requirements. The only catch here is that to notpay taxes, you should not take possession of this moneyso speak to your tax advisor orbrokerage firm about directly transferring this to qualified charities. This direct transfer also

lowers your Adjusted Gross Income and brings you closer to qualifying deductions, credits andthe newMedicare Surcharge that are based off of your AGI.

Dont forget to consult a qualified advisor before taking any significant actions regarding taking

distributions from your retirement accounts.

Steve Pomeranz is a Managing Director for United Capital Financial Advisers, LLC, "United Capital", and owner

of On The Money. On The Money is not affiliated with United Capital.


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Required Minimum IRA Distribution

Current Age Distributionperiod (years)

Percent Current Age Distributionperiod (years)

Percent

70 27.4 3.65% 93 9.6 10.42%

71 26.5 3.77% 94 9.1 10.99%

72 25.6 3.91% 95 8.6 11.63%

73 24.7 4.05% 96 8.1 12.35%

74 23.8 4.20% 97 7.6 13.16%

75 22.9 4.37% 98 7.1 14.08%

76 22.0 4.55% 99 6.7 14.93%

77 21.2 4.72% 100 6.3 15.87%

78 20.3 4.93% 101 5.9 16.95%

79 19.5 5.13% 102 5.5 18.18%

80 18.7 5.35% 103 5.2 19.23%

81 17.9 5.59% 104 4.9 20.41%

82 17.1 5.85% 105 4.5 22.22%

83 16.3 6.13% 106 4.2 23.81%

84 15.5 6.45% 107 3.9 25.64%

85 14.8 6.76% 108 3.7 27.03%

86 14.1 7.09% 109 3.4 29.41%

87 13.4 7.46% 110 3.1 32.26%

88 12.7 7.87% 111 2.9 34.48%

89 12.0 8.33% 112 2.6 38.46%

90 11.4 8.77% 113 2.4 41.67%

91 10.8 9.26% 114 2.1 47.62%

92 10.2 9.80% 115 & > 1.9 52.63%

make your retirement savings outlive you – part ii

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