I believe we are slightly talking past each other.
I understand how RMDs are calculated. As do you. An e.g. 78yo will have the same RMD percentage that year whether their balance is $1K or $10M. The RMD amount will differ by a factor of 10K, but the percentage will be identical.
Whether their balance is large or small does not matter to my point. What does matter is how they invest that balance. If the $10M person puts it all in passbook savings, their total will decline year over year: the RMD bite rate materially exceeds the passbook savings APR.
Whereas if the $1K person suddenly achieves idiot savant status in stock picking and obtains 200% ROI year after year after year, the age-based RMDs are simply not big enough to offset the burgeoning growth. At least not until very late (e. g. >age 100) when the RMD percentages finally exceed any conceivable ROI acheiveable except by winning the Powerball regularly.
Now realistically, it’s far more likely the $1K balance person also flunked / flunks investing and the $10M person has that game petty well figured out. So RMDs quickly deplete the poor person’s IRA/401K but are merely a planning nuisance to the $10M person.
But my point remains that it’s ROI, not balance amount, that determines how soon after RMDs kick in that they begin to accomplish their intended goal of whittling the balance to zero within your statistical lifespan.
And of course to the degree any person over- or under-performs their life expectancy, that will greatly affect how big their post-death balance to be inherited will be. Due to both RMDs, and as you say, other withdrawals simply to eat, buy a roof over their heads, and pay for medical care.
I wouldn’t say that’s too small to do much with . I mean, it’s less than I have, it’s less than I would ever want to have - but it might be fine for someone who retires earning 40K a year. To make the math easier, let’s say they got raises that exactly matched inflation , so SS will be around $19K a year at full retirement age. Add $5K in 401 withdrawals and now you are up to $24K - which is probably not a whole lot less than the take home when working. And even if it was , that 5K is a substantial increase over the SS alone. I think a lot of people here have never been low-income or else it was so long ago that they have forgotten that $5K a year can be a big difference.
Well, it is true that the IRA is depleted, and that you are forced to pay tax on what you are forced to take out, but if you put it in a Roth. Paying the taxes is a pain, but it is not like the money goes away or even has to be converted to cash or taxable investments. Of course the Roth rules apply.
Is your 401K not registered with the IRS via social security number? - so if you have an abandoned one, wouldn’t they come after you for penalties for failing to make RMD withdrawals - which should alert you fairly soon to the existence of your lost-in-space account?
These accounts have your SS number on them but I’m not sure if their mere existence is shared with the IRS - contributions and payments are. And even if the IRS knows that my SS has a retirement account - they don’t know how old I am. My birthdate is not on my tax return
I think we both know what’s going on, we’re just phrasing it differently. The 4% person’s BALANCE drops faster, but it doesn’t zero out any faster. That happens at age 119 or 120; the RMD there is 50% and if you make it another year, I guess they send someone out there to off you
I argue the RMD whittles the balance down basically independently of your ROI (except, of course, at a steeper curve). If you are getting crap returns, your investments won’t yield as much in a given year, so your RMD for that year would be a lower dollar amount. Looking at two people starting with 1M, but one getting 5% and the other getting 4%, at age 80 the 5% person is just starting to drop below the initial figure, while the 4% person does so 3 years earlier. And the 4% person is taking home 5K less from the RMD. At age 119, Five Percent has 1500 left while Four Percent has 870.
And yeah, planning nuisance versus depletion is very, very true. The 5% person is taking out 15K more a year, after 20 years, than the 4% person. And he has about 160K more in principal. If the two people have the same basic needs, Five Percenter has that much more money every year to spend on luxuries, save for heirs, etc.
As far as money market rates etc. - oh yeah. It’s better than not saving at all, but we have some personal examples of how that can devastate spending power. Length of time saving is also huge. My kids do not get why I am SUCH A BROKEN RECORD about putting 10% aside into a retirement account of some kind.
My quip, every time we talk with a planner, is “Just tell me when I need to die”. Supposedly I can afford to live a couple more decades…
When my mother died, the bank she had one IRA at tried claiming that there were no beneficiaries, so as you note, the money would have been added to her state. The division of funds (equal among the 4 kids) would have been the same, but the tax implications would have been a pain in the neck. So let this serve as a reminder: make sure you have beneficiary designations on your accounts!!
Then of course we had to decide how to take the distributions on the inherited IRA. All at once, over 5 years (I think), or over our lifetimes. I chose the latter. I get a tiny RMD every year, anywhere from 600 to a thousand or so, depending on how it has performed. The value in question is actually in line with that 70K figure - quite a bit less, really, and I just leave it be aside from that RMD. Of course it’s not a major source of our retirement savings and we are still working.
My daugher apparently had a small balance from the job she held back in 2015 through 2018. At some point, they tried to send a distribution; she never cashed the check (we may well have misplaced it, oops!), and it is now in the hands of our state’s lost-and-found-money department. I need to make sure she claims that.
Odd. Canadian tax returns have a plethora of infomation, including name, primary residence address, birth date, etc. Plus contributions to a registered plan are part of the tax return (so they know how much room of your limit you have). Also any contributions to a company pension plan, and/or payouts.
I can’t imagine the IRS having less than that level of information. I presume the bank or whatever must have your age in order to properly administer the plan?
Just to be clear, the RMD applies each year to that year’s opening balance, so all that happens is at some point RMD percent exceeds ROI and the balance starts declining?
That’s 90% the case. Tbe RMD percentage itself is indexed to your age. Its essentially 1/(your life expectancy in years).
It starts at age 75 where the percentage is a bit less than 4. Eaay enough to have a higher ROI than that. By the time you’re in your 90s and the percentage is in the 20s, it’s implausible your ROI beats that.
Lots of money to be recovered that probably has SSNs associated with them. I regularly check with missingmoney.com to find forgotten bank accounts for myself and family (it’s good to have a unique last name). I have no idea why they can’t find the people who own many of those accounts.
In many cases, they aren’t actually looking - often, the only requirement is to mail a couple of notices to the last known address. And in some cases, people know about the account and for one reason or another can’t or don’t claim it. There are two accounts listed for my grandmother, ( who died in 1988). At some point (around 2010), I found out about them and started the process for my father to claim them as his brothers were already deceased. My father died before the claim was complete and that meant it was going to take a lot more work - more work than it was worth as there could have been a total of $25 to be split among the nine grandchildren.
It’s typically money that someone tried to pay, but failed (e.g. my daughter had a small retirement distribution from the job she left, and the check never got cashed), and the intended recipient doesn’t know to look for it.
My husband once got a hundred bucks or so from the state - we looked, based on something someone posted here, actually. There was a listing that looked like it was for me, but when I looked into it, was for someone else with my same name. And my daughter DOES show up on that site.
Yep. That’s a moving target, sort of. Looking at the calculation tables for a 73 year old, that factor is 26.5 (assuming a 73 year old is going to make it to 99.5??). For an 83 year old, it’s 17.7, assuming they are going to live to 100.7. For a 93 year old, it’s 10.1 (will live to 103.1).
It does generally work out that you won’t have a lot of absolute dollars left over by the time you hit an advanced age. And of course if you are someone who doesn’t actually NEED those funds, it means you can’t leave them in the account for someone else to inherit. You have to withdraw them and find some other way to save them for your heirs. Nice problem to have, actually.
My aged MIL died at 96 a couple of years ago. Despite the hefty RMD percentages the last few years for somebody that old, the balance in the account when she died was bigger than it was when her RMDs started 24 years previously when she was 72. Strong returns in the early years can overwhelm even the late RMDs. The gross total was not a very impressive number, but it was striking that she managed to defeat the RMD scheme so thoroughly. Being the right age(s) versus the various booms in the stock market is key.
Those assets that don’t get removed by RMDs are of course inheritable, just like assets in a now-qualified account. Inherited IRA/401Ks have some weird rules on withdrawals by the heirs that aren’t germane to a summary for our Canadian friends.
When my mother died, I opted to take it in annual chunks based on my lifespan. IRAs inherited since 2020 must be fully withdrawn within 10 years (though there’s no annual RMD). Those inherited by a spouse are different; the spouse can roll the whole thing into his/her own IRA.
I’m not sure what happens if you inherit an already-inherited IRA - e.g. if I pass on, obviously my husband gets my mother’s IRA, but I can’t find anywhere what the rules would be for him. Does he have to take it within 10 years? RMDs based on my lifespan? Or can he treat it as his own?
I researched that once. I have one inherited from my mother and was considering what would happen to it if I pre-deceased my wife.
I think the answer is it stops being an IRA at that time and the whole balance must be withdrawn and taxed that year. But I’m not real confident of that.
This has changed so often that my correction will probably be wrong as well, but there are RMD requirements. It’s just that the IRS has waived penalties for not taking the RMD for 2021, 2022, and 2023, effectively making the RMD not required. My dad passed in 2020, and I will make my first RMD for my inherited IRA in 2024.
That just means I’m scrimping way too much in retirement.
Still scrimping too much.
This is the goal - not regarding the size of the 401k but regarding the consumption rate. Leave enough for a reasonable amount in my daughter’s Special Needs Trust (not a whole lot based on the limitations on what a Special Needs Trust can pay for), the rest is mine (well, and Mrs. Martian’s). We earned it, we saved it, we should be the ones to spend it. I do not understand those who want to preserve their life’s savings in order to leave it to their children.
