Q: I would like to get your opinion regarding the "Modified RMD Withdrawal Strategy'' that appeared on the Boston College Center for Retirement Research website. The study was done by economists Wei Sun and Anthony Webb and compared various withdrawal strategies including the popular 4 percent method. They found withdrawals that included a required minimum distribution, or RMD, plus any interest or dividends were the most efficient method.


A: If you thought it was hard figuring out how much of your retirement savings to put into stocks, bonds, cash and other assets while working, the withdrawal calculation is even more complicated. And the stakes are higher.

Here's the dilemma: If you live too high on the hog off savings early in retirement, you might be forced to make drastic lifestyle cuts later. However, if you spend too little, the danger is that you'll die with plenty of money and a long list of regrets. An additional twist is most of us don't know how long we'll live.

So the search has been on for a relatively simple yet financially safe rule of thumb to help retirees figure out how much they can withdraw every year. The best known recommendation is the so-called 4 percent rule, where a retiree adds up all the components of his or her long-term savings, such as 401(k)s, 403(b)s and IRAs. The typical portfolio is assumed to be invested 60 percent in stocks and 40 percent in bonds at retirement. The first withdrawal is equal to 4 percent of the portfolio's overall value. The next year the retiree takes out another 4 percent, plus the consumer rate of inflation (CPI), and so on.

But should you have 60 percent of your portfolio in stocks at retirement? For many, the answer is no. What if the historic market performance supporting the 4 percent rule doesn't hold going forward? You might want to think about a rate of, say, 2 percent.

Economists Sun and Webb offer an intriguing formula based on the IRS' required minimum distribution rules for 401(k)s, IRAs and similar plans. The RMD is a percentage of assets individuals are required to withdraw each year starting at age 70 ½. The RMD has nothing to do with a safe withdrawal rate. It's a policy for recapturing deferred taxes. Yet in their study "Can Retirees Base Wealth Withdrawals on the IRS' Required Minimum Distribution?'' the scholars find it a useful benchmark. The gauge is easy to follow; it allows the percentage of remaining wealth consumed to increase with age since you have less time to live; and your spending responds to fluctuation in the market since withdrawals are based on the market value of assets.

The scholars note that the RMD withdrawal approach means you'll withdraw smaller sums early on. That is the time you might want spend a bit more since your healthy enough to enjoy your leisure time. The modification they offer is to spend your RMD plus interest and dividends (no capital gains, however).

But actually figuring out a safe withdrawal rate is immensely complicated. Coming up with a safe number involves judgments about your health, your desires during retirement, your lifestyle, the importance of leaving a financial legacy to the kids, the willingness to put money into stocks and other risky assets, and so on. The safe withdrawal rate isn't a static number. It's dynamic and it can be adjusted. Nevertheless, you have to start somewhere.

Chris Farrell is economics editor for "Marketplace Money." His e-mail is cfarrell@mpr.org.