A recent study suggests most retirees are shortchanging themselves on spending money saved in traditional 401(k)s and individual retirement accounts.

JP Morgan studied more than 30,000 retirees between 2013 and 2018 and found that 80% didn’t touch their 401(k)s and IRAs until they reached the age when the federal government insists you make small annual withdrawals, known as requirement minimum distributions (RMDs).

Moreover, more than eight in 10 retirees withdrew only the bare minimum required by law.

It seems many retirees have interpreted the RMD rule as a guideline for what they should withdraw, when in fact it is only the minimum they must withdraw.

And given the way the government calculates RMDs, limiting yourself to just the RMD is likely limiting what you could be safely withdrawing each year in the early years of retirement — which, let’s face it, are the years you likely will be best able to enjoy spending that money.

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The government isn’t suggesting a spending ceiling

Anyone who has stuffed away money in traditional 401(k)s and traditional IRAs made a tax deal with the federal government. You got a tax break on the money you contributed to the accounts, with the understanding that you would pay tax when you withdrew the money in retirement.

And that bill starts coming due at age 72 when the government insists you must start to take RMDs. (Prior to 2020, the age at which RMDs had to begin was 70 1/2.)

But age 72 should not in any way be interpreted as when you should start taking withdrawals from your retirement accounts. It’s just the latest date you must start, and from that age on, you will be expected to withdraw at least your RMD each year.

It’s really just the minimum

The government isn’t playing financial planner and suggesting what a smart or safe withdrawal rate is. It just wants to make sure it gets to collect some tax after waiting all those years while your money was growing untaxed.

Your RMD beginning at age 72 is a small percentage of each retirement account, based on your life expectancy.

The official life expectancy tables used by the IRS are changing slightly in 2022 (to reflect longer life expectancies). The age 72 RMD will be 3.65%. At age 75 the RMD is 4.07%. At 85 it is 6.58%. At 95 it is 11.24%.

The 4% rule vs. RMDs

Anyone nearing retirement probably has heard about the rule of thumb that suggests you start withdrawing 4% of your retirement accounts and then give yourself an inflation adjustment each year.

The 4% rule is not gospel, but a decent starting point to think about withdrawal rates. It’s important to understand that one of the underlying assumptions of the 4% rule is that you are aiming to make sure your money doesn’t run out over a 30-year span.

If you aren’t touching your retirement accounts until age 72, that means you’re planning for the possibility of living to age 102? That might be overly conservative, which suggests you could start withdrawals earlier — or, if you wait until age 72 to start, consider a higher withdrawal rate than the 3.65% the government sets as a floor.

The case for taking more than your RMD

We’re all justifiably stressed that our retirement accounts outlive us. And that makes it rational to latch on to a withdrawal rate that can easily be seen as having the backing of the government.

To be clear, there is nothing wrong with sticking to the RMD, if that’s a conscious choice. But it’s not something you should assume you must limit yourself to.

For starters, if you have your living costs covered by guaranteed income, such as Social Security and a pension, then you surely can afford to spend more from your retirement accounts, if you want to.

And how much you can withdraw is also a function of what happens to the markets in your early years. If your sequence of returns in the early years is solid, you can afford to withdraw more than 4% adjusted for inflation. If you run into poor returns in the early going, that’s where being flexible and withdrawing less can become very important. Again, if your fixed costs are covered by guaranteed income, you will have the flexibility to withdraw less.

Talking it through with a pro

In a far better retirement system, we wouldn’t be expected to become our own pension managers in retirement. But that’s exactly what the world of 401(k)s and IRAs has hoisted upon savers.

This is where working with a financial planner can be your best pre-retirement decision. Even if you don’t want ongoing help, there is great value in paying for a thorough evaluation of your retirement income sources and getting advice on sustainable withdrawal strategies based on when you start (62? 65? 72?), and the mix of stocks and bonds you are comfortable with. A solid retirement income analysis will also take into account the potential for needing later life income to pay for long-term care. You can hire a fiduciary financial planner and adviser who will work on a project basis.

And even if you rocked the DIY stage of building those retirement accounts, hiring ongoing help can make sense at this life-stage pivot. Building savings is one skill. Managing them in retirement requires a whole different set of skills.

Hiring a pro to help you manage your retirement income strategy (and investment portfolios if you want) can be especially smart if you are married, and you both aren’t equally eager to manage things. If the less-interested party is the surviving spouse, the worst retirement strategy is to potentially leave them solely in charge of figuring it all out, alone. Hiring help now ensures a smooth financial transition.

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