Market Volatility?

Over the past couple of months, several of our clients reached out and asked if they should take their Required Minimum Distribution (RMD) as soon as possible. This question was certainly understandable and even expected given the market turbulence we experienced in April.

Very briefly, for those who are not familiar, once you turn 73, the IRS requires you to take a portion of your retirement funds out and pay taxes. This is why it’s called a Required Minimum Distribution or RMD.

I will make it simple for you if you don’t want to read much today. For most people, the best course of action is to wait until the end of the year to take their RMD, regardless of market conditions.

So why is this the case?

At the very least, assuming no growth, the funds in your retirement accounts will likely generate tax-deferred income. We are talking about anywhere between 3% to 4% in income, which can be significant if your RMD is a five- or even six-digit number.

But what if the markets go down in the second part of the year?

This is possible, but it still should not impact your RMD decisions. If you have a financial plan in place, even the most basic version of it, at least a portion of your retirement account should be in short-term bonds or even cash. In the case of a market decline, you would simply sell some of your bonds or use cash for the RMD.

So you won’t need to be selling your stocks “low” in this case, which is something you certainly want to avoid.

But what if my entire retirement account is in stocks?

To me, and please don’t take this the wrong way, that would be an indication of a lack of planning. The best suggestion I have is to reach out to a financial planner and discuss the most optimal approach for you, especially if your RMD amount is rather sizable.

If you don’t want to take this option, I would consider dollar-cost averaging out throughout the year.

So if your RMD is $30,000, I would take $10,000 now, $10,000 in a couple of months, and then the remaining funds at the end of the year. At the very least, this “time diversification” method removes potentially negative consequences of trying to time the market.

As a side note, our approach would certainly be different for those of our clients who actually need the funds from their retirement account for living expenses or want to donate a portion to charity.