Why You Should Embrace RMDs - and Start Them Early

RMDs > SWRs

Required Minimum Distributions, or RMDs, get a lot of hate. Endless financial articles and forums bemoan them, most retirees dread them, and younger financial optimizers spend years, if not decades, trying to minimize them in advance with complex spreadsheets, paid software and Roth conversion strategies.

Honestly, a reframe is sorely needed.

At worst, taking RMDs should be a non-event. By the time you are in your 70s and they kick in, you should already be happily withdrawing a healthy chunk of the funds that you spent decades accumulating. If you’re grudgingly taking them against your will, reinvesting your largess into taxable investments, and continuing to compound your fortune while openly griping about your tax burden, then you might be a crotchety old Boomer who needs a reality check you probably aren’t spending enough.

Wasn’t the whole point of deferring gratification and saving to be free in your older age to lavish some rewards on yourself, your family, and your favorite causes? It’s kind of a bummer if your scarcity anti-tax mindset is so ingrained that you need the government to try to force you to live a little.

Taxes ≠ The Devil

Sure, paying taxes stinks. But it’s simply part of the whole “making money” thing in the modern economy we are lucky enough to be living and (if you’re bothering to read this) prospering in. I’m all for minimizing taxes where possible, but it shouldn’t become an obsessive retirement hobby or personality trait.

RMDs aren’t a punishment. They’re just a sign you’ve saved so much and lived so long that the tax deferral opportunity the government bestowed upon you has begun to gradually expire. Unfortunately, due to a fun little cognitive bias called loss aversion, we hate the tax bill today much more than we appreciate the mathematically equal (or larger, if you did it right) tax deduction we received on our contributions.

The psychological aversion to taking money out of traditional retirement accounts is one reason I’m not as big a fan of them as I once was. The incentive to defer taxes by contributing to retirement accounts can often work too well - and then become a trap.

People would literally rather give their money away than pay taxes on it (cue the Qualified Charitable Distribution explanation I will gladly punt for now). They’d rather die with bloated untapped portfolios than pay taxes. They’d rather keep crappy rental properties and foolish stock concentrations than pay taxes (a tangential topic, but while I’m on the subject!).

People would rather bless their sons-in-law with inheritances that will be freely spent on luxuries they responsibly eschewed than pay taxes. (This last point encouraged my dad to loosen his padded purse strings enough to replace some decades-old clothing and start buying meat that isn’t on sale).

When taxes are withheld from your paycheck, they are a normal part of life; most workers couldn’t even guess how much they paid in taxes last year. But when you have to write a check to the IRS each quarter in retirement, taxes become an agonizing atrocity to be minimized at all costs.

It’s understandable, if irrational.

RMDs = Party Time

What if we celebrated taking RMDs? “Having to take” them implies that you don’t need the money. You have enough income from other sources that your IRA has become superfluous. In other words - you’ve definitively won the game.

So why not treat those funds like a lottery win, bonus, or surprise inheritance? Make the annual exercise fun! Reframe taking your RMDs as not just an excuse but a legal obligation to USE some of your wealth.

Blow it on a family vacation and invite everyone. Donate it anonymously to a local charity (do look up that whole QCD thing if you go this route). Buy up the inventory of a friend who is struggling to get a business off the ground. Take a class. Buy your spouse a frivolous gift. Get that cosmetic procedure you judge others for but secretly want.

In other words, direct the extra funds toward something that will make you feel alive. Bonus points if the mere idea of it makes you feel a bit giddy or unhinged. I can feel you starting to warm up to the idea. This is extra money you don’t need, after all. Sure - let’s have some fun with it.

PLOT TWIST! What if we extended this mentality to the rest of your investments too? Even younger retirees can benefit from embracing the concept of RMDs and implementing it across all their assets.

RMD vs. SWR

Most investors focus on their Safe Withdrawal Rate (SWR), or the amount of money you can draw from your portfolio without running out. I won’t be declaring the official, correct SWR in this post, but for the uninitiated, 4% is the starting point based on Bill Bengen’s original research. Anxious investors push it down from there, though recent research indicates 5%+ may be just as safe.

Feel free to dive into that endless debate elsewhere. The point is that most retirees and financial advisors are preoccupied by the “safe” part and strive to keep portfolio distributions below whatever conservative number they land on.

But what if we flip that idea, characterize all withdrawals as a required minimum distribution instead, and make an effort to spend at least that much?

Tactically, your withdrawal amount might be similar in either framework in early retirement, but the mindset shift of reframing your withdrawal rate as a minimum instead of a ceiling can be powerful.

The SWR context is limiting, scarcity-focused, fear-based, and success implies spending or giving less - even as little as possible. It encourages worst-case assumptions to minimize risk and rewards being frugal, embracing contentment, and “not needing much.”

The RMD framing is more expansive, exciting, and success means hitting or even exceeding your spending targets. It encourages you to consider the most likely scenarios with regard to longevity and other variables. It is rooted in abundance, generosity, and embracing more audacious spending and giving goals over time.

Compare your SWR to your imputed RMD

The IRS publishes an RMD table for people of all ages due to inherited IRA rules. No retirement software or actuarial research required. Simply look up the chart, find your age, and divide your investment portfolio by the life expectancy number provided.

This RMD figure is effectively the amount of money you can spend each year without running out. It sounds a lot like the SWR calculation, but there are three main differences.

1. It doesn’t factor in any investment growth or inflation. So functionally it assumes your investment returns will equal the inflation rate. This makes it a very conservative measure.

2. It assumes your lifespan will correspond to actuarial averages (last updated in 2022). Whether this is conservative depends of course on your personal health, luck and genetics.

3. It changes every year based on your age and portfolio value. By comparison, the SWR generally remains fixed (except for inflation adjustments). RMDs drop if your balance does; on the flip side they are biased toward getting you to spend down the balance, so they rise as you age and as your portfolio grows.

Spoiler - age 62.5 on the IRS’s Single Life Expectancy table is exactly where the RMD equates to the classic 4% SWR. The older you are, the more likely it is that your RMD would be greater than whatever you’re withdrawing and that you can should safely raise it.

Here are a few other examples of RMDs and their corresponding withdrawal rates to save you from having to navigate the cluttered IRS site and do your own math:

Most retirement plans assume everyone will live until 105 and that spending will rise gradually each year. In actuality most people die well before that, and spending has been shown to decline if you’re lucky enough to live into your 70s or later, even after factoring in increased medical costs.

In addition, most portfolios keep growing throughout retirement; the SWR is designed to withstand the worst historical market periods. By definition most of us won’t face the worst case scenario.

As you age, you become far more likely to die (or to have more money than you started with) than to run out of money, as this wonderful Rich, Broke, or Dead? chart illustrates. This shows a 40 year old female using a 4% withdrawal rate with an 80% stock / 20% bond allocation. The red sliver is her chance of running out of money in any given year. Gray is her chance of being dead.

Yet people tend to stick to the same (usually conservative) spending target even as their time horizon (a.k.a. life expectancy) and risk shrinks and their portfolios swell. We can all easily grasp that a 95 year old with $2,000,000 can safely spend a lot more than $80K a year, or 4% of her portfolio. The same holds true but is less intuitive starting at much younger ages.

The best - and most enjoyable - strategy to avoid this scenario is to spend more earlier, avoid One More Year Syndrome, and try to stay ahead of the compounding.

TLDR: RMDs rise over time, and your withdrawals probably should too - especially if your wealth is still growing.

Adjustments and Regrets

Yes, you may want to leave a legacy. Maybe you truly believe you’ll live to 105. Fine - tweak the rates to your heart’s content. But if you’re over 60, it’s worth checking the RMD chart each year and comparing that to whatever your SWR strategy tells you to spend. Challenge yourself to at least maybe meet in the middle.

Remember the RMD figure doesn’t take into account investment growth, so it’s inherently conservative. (This is why it’s not practical for younger retirees; I personally am comfortable using a 4% SWR as a baseline regardless of age/time horizon.)

Most people worry they’ll get old and regret not having more money available. That’s rare. People are very good at rationalizing whatever circumstances they find themselves in and making do. We are far more likely to regret the things we didn’t do when we had the chance, as Daniel Pinker’s work has shown.

Take that trip. Quit the job. Make memories. Give it away. Use your wealth.

Worst case you’ll live it up a little during the best 12 years of your life and end up having to pull back a bit later (which you’ll probably want to do anyway).

In any case, it may be helpful to think of your withdrawals as an RMD, like something you have to do. Even if you can’t think of anything better than to give it away or reinvest, you’ll be making an active choice. Otherwise it’s all too easy to avoid your money and passively kick the can down the road (or to your heirs).

Calculate your withdrawal amount first, whatever it may be, and then treat getting to it like a fun goal instead of something to stay below. This subtle reframing may inspire you to see how many options you really have - and dream a little bigger.

---

I help people get organized and use wealth to design a life that feels secure and aligned. A former Wall Street banker and CERTIFIED FINANCIAL PLANNER™, I act as an unbiased advocate without selling products or managing investments directly. To learn more, visit my website.

---

DISCLAIMER: I love writing about the personal, emotional, and practical sides of money, but please remember that my Substack is strictly for educational and coaching purposes. The insights shared here are general in nature and do not constitute specific investment, tax, or legal advice. While I am a CFP® certificant, reading this does not create an official advisory relationship, and any comments or likes should not be interpreted as client testimonials. For personalized investment advice, please consult a registered financial professional.