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Can Retirees Base Wealth Withdrawals on the IRS’ Required Minimum Distributions?

Listed author(s):
  • Wei Sun
  • Anthony Webb
Registered author(s):

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 brief, which is adapted from a recent paper, explores the possibility of basing withdrawals on the Internal Revenue Service’s rules for Required Minimum Distributions (RMD) for 401(k)s and IRAs. The analysis compares an RMD strategy with existing rules of thumb and with a pattern of optimal withdrawals. The discussion proceeds as follows. 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. 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.

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Paper provided by Center for Retirement Research in its series Issues in Brief with number ib2012-19.

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Length: 8 pages
Date of creation: Oct 2012
Date of revision: Oct 2012
Handle: RePEc:crr:issbrf:ib2012-19
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