I know…RMD’s don’t actually stand for that. They stand for Required Minimum Distributions. Anyone over age 70 ½ knows what they are. It’s when the IRS requires you to take a mandatory withdrawal from your IRA’s so they can tax you on it.
The percentage you have to withdraw starts at around 4% of the value of your IRA on the closing date of the prior year.
Sounds simple enough, right? But let’s consider this scenario. Let’s say your IRA closing value on December 31st, 2014 was $100,000.
Fast forward 12 months. It’s now December 2015 and you have to take your RMD before the end of the year. Here’s the calculation:
4% RMD withdrawal rate multiplied by your $100,000 IRA value at the end of 2014 equals a $4,000 RMD amount. So you withdraw $4,000.
Now, here’s the really BIG problem if you were invested in the market. Between the end of 2014 and now, the S&P 500 is down around 10%. Which means when you take that $4,000 withdrawal, your IRA isn’t worth $100,000, it’s only worth $90,000.
Then after you subtract your $4,000 RMD, your IRA is only worth $86,000. The effect is the same as if you took a $14,000 RMD!!
That’s what I meant when I called it Required Maximum Destruction. How many years like that can your IRA survive and still provide you the income you need in retirement?