15 Sep Think slow: Selling strategies for your RMD

Q. I’m over 70 1/2, and I accumulate a cash cushion through the year to satisfy next year’s Required Minimum Distribution (RMD). Then at the very first chance in the new year, I take the withdrawal from my IRA so that I am not at risk of market reversals during the year. This year, it appears to have been a tactic that may pay off with the market reversal which seems to be occurring. Is there a better way to prepare for withdrawals?

A. You’re correct that taking a distribution in the beginning of the year may offer protections from market movements, but it’s not that simple.

“If you take the distribution in the beginning of the year and the market performs well, you will have missed out on some gain,” said Kim Viscuso, a certified financial planner with Stonegate Wealth Management in Oakland. “Alternatively, if you wait until December to free up and distribute cash, and the market is down for the year, you took on more losses.”

That means your strategy depends on how the market does. Viscuso said with the market varying so much from year to year, it’s not possible to suggest a good strategy.

She said some advisors also recommend withdrawing a portion of your RMD each month.

“The caveat to this is trading fees,” she said. “If enough cash is freed up and made available for three to six months — a common practice to reduce costs — then the money is already out of the market.”

It has been nearly four years since the S&P 500 has corrected 10 percent or more, and it was the fifth longest such correction-free streak we have experienced, said Matthew DeFelice, a certified financial planner with U.S. Financial Services in Fairfield.

He said as of Aug. 24, the S&P 500 declined nearly 12.5 percent from the intra-day high set on May 20.

So anyone who cashed out equity positions in the first quarter has clearly benefited – this year, he said.

However, professional traders and money managers have a difficult enough time trying to time the market successfully. For an individual investor who is dependent upon his retirement accounts for cash flow, it would be a near impossible task to pull off consistently, he said.

“And if you are over 70 ½ and are still trying to figure out when to liquidate equity positions for income, you are likely holding an asset allocation that is too aggressive for someone at this stage of the game,” he said.

Ideally, you would want to have a broadly diversified portfolio including cash, bonds, and stocks that balances growth and stability which is designed to provide income as needed to satisfy your Required Minimum Distributions, or the additional amount needed above that, DeFelice said.

“When clients are at or nearing retirement age, we always recommend a cash flow analysis be completed before determining how the retirement assets should be invested going forward,” he said.

He said they look at all potential sources of income in retirement –pension, Social Security, annuity payments, etc. Then they look at expenses, including basic living costs, healthcare, insurance premiums, discretionary expenses, taxes, etc. — to determine the approximate income need from the retirement portfolio.

“Once we have the shortfall number — if one exists — we can work backwards to construct a portfolio designed to provide that amount of income with as little invasion of principal as possible – or at least try to predict how long it will be until you run out of money given certain inflation and return assumptions,” DeFelice said.

If you’ve saved enough, this should go a long way to eliminate overexposure to the stock market’s swings and hopefully avoid putting you into a situation where you are forced to panic-sell equities in the midst of a horrendous decline like we experienced in 2008-2009, he said.

Another popular retirement income strategy that may work for you is the bucket approach.

The conceptual idea here is that instead of withdrawing “X” amount from your portfolio each year, you fill up several “buckets” of money – one for each stage of retirement, DeFelice said.

For example: The first “bucket” would be designed to cover expenses in the first several years of retirement, and should be invested in mostly cash and short-term fixed income instruments with virtually no correlation to stock market volatility – this can simply be spent down as needed.

The next “bucket,” DeFelice said, would be designed to cover retirement years 4 to 10, and should be invested in intermediate term instruments that are slightly more aggressive than the first bucket, such as longer term fixed income and balanced funds.

The last bucket would cover years 10-plus and can be invested the most aggressively, primarily in stocks to provide growth and income for the remaining years in retirement.

“The size of each bucket will vary depending on time horizon and risk tolerance, but in most instances the third bucket will have the least amount of your overall investment dollars at the onset, thus limiting your stock market exposure in the interim with the idea that over a 10-plus year period, it will eventually grow into a larger piece of the pie,” DeFelice said.

And as the first short-term bucket is depleted, you can rebalance across the board accordingly, and theoretically you would never have to worry about what the stock market is doing because you know where your current income is coming from, he said.

“Whichever method you choose, the less market timing you try to do the better off you will be in the long run,” DeFelice said.

Good luck!

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This story was first posted in September 2015.