Boston College Research Finds IRS Mandated Withdrawals At Age 70 1/2 Work Better Than 4% Rule

Friday, October 19, 2012 07:02
Boston College Research Finds IRS Mandated Withdrawals At Age 70 1/2 Work Better Than 4% Rule

Tags: investing for income | IRA | retirement income

The original purpose of an IRA was to give retirees without a company pension plan a simplified option for saving for retirement. Retirement withdrawals from IRAs are mandated to begin at age 70 ½.
Boston College’s Center for Retirement Research says that the IRS formula used to calculate minimum withdrawals actually works better than the standard 4% rule.

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That rule makes an assumption that retirees can spend 4% of their funds annually adjusted for inflation and not run out of money.
But the IRS’ required minimum distributions works better and also works well with traditional strategies like stock dividends and interest.
So a retired husband who gets $12,000 worth of annual Social Security benefits can enable his wife to get $6000 from a spousal benefit for a total of $18,000 per year.
Let’s say they also have a $250,000 investment portfolio. The bonds have an assumed real interest rate of 3% and the stocks return 6.5%.
If they start withdrawing 3.13% at age 65 and gradually increase withdrawal rates over time, they may go as high as 15.87% by age 100.
A measure called Strategy Equivalent Wealth (SEW) represents the factor by which the dollar value of their wealth at age 65 would need to multiply so they do well as a household from an optimal strategy.
Researchers give the SEW a value of 1 in the optimal strategy and a greater value for sub-optimal strategies. The success of the IRS strategy comes from its simplicity and its encouragement for people to save for retirement.

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