Am I understanding minimum distribution correctly?

L1: Am I understanding minimum distribution correctly?Suppose a man turned 37 years old on June 5, 2007. Further suppose he has an IRA that will be $274,000 on Dec. 31, 2007. Further suppose that he wants to start minimum distributions in January 2008 (using the divisor that will get him the largest payment). Lastly, suppose (for ease of calculation) his IRA grows 14% per year.
OK, given the above, would the first few years look like this?
On 12/31/2007, he would divide $274,000 by 46.5, which equals $5,892.47. So on 1/1/2008 his IRA would be $268,107.53.
This amount grows 14%, so on 12/31/08 his IRA is $305,642.58. Dividing that by 45.6 yields $6,702.69. So on 1/1/2009 his IRA would be $298,939.89.
This amount grows 14%, so on 12/31/09 his IRA is $340,791.47. Dividing that by 44.6 yields $7,641.06. So on 1/1/2010 his IRA would be $333,150.41.
Etc.
To recap, his IRA grows from $274,000 (on 12/31/2007) to $333,150.41 (on 1/1/2010). In 2008 he would get $5,892.47 to put in his pocket. In 2009 he would get $6,702.69 to put in his pocket. And in 2010 he would get $7,641.06.
Am I doing all this correctly?2007-12-07 07:57, By: Geoffrey, IP: [24.9.251.237]

L2: Am I understanding minimum distribution correctly?I suspect you are doing a lot of manual calculations that you don”t need to do. Simply go to the calculator on this web site, enter your data and the machine will do the work for your. I ran your first cycle and came up with your numbers so I guess you”re doing the calculations right with one exception. If you start distributions in 2008, this person”s “attained age” will be 38 and not 37 so you should use 38 for your calculations. However, my real question is, what are you trying to accomplish?
I seriously question your logic of using a 14% rate of return for all years. If you are an “advisor”working with a client and using 14% for your rate of return, then somewhere over the 23 years of your SEPP the plan will “blow-up” on you and you will have a very unhappy client. Back test for 10-years with the 2000 market crunch and you”ll see what I”m talking about. My suggestion is to use a more reasonable rate of return in the 4% to 7% range with a bias toward the lower range.
Jim2007-12-07 08:25, By: Jim, IP: [24.252.195.14]

L2: Am I understanding minimum distribution correctly?or.. tell us all where you plan toget a 14% return each year!
I made over 20% in 2006 with my Vanguard IRA, and will end this year in the mid teens with that IRA, but I remember the early 2000”s when nothing produced a good result, and my 401k at the time yieldeda cumulative 1.2% for 5 years! Now (in retirement) the choices are much broader than the ones from my 401k provider, and the market is much better, so I am doing much better.My largest IRA is conservatively managed by a professional in FLA and I handle theVanguard IRA that I manage a little more agressively, with it all blending into a return of about 8-9%.I don”t expect these returns I am getting in Vanguard to continue forever. Jim is right in terms of using more conservative numbers. I did my projections on whether or not I could retire at 55 in 2005 and start my SEPP plan by using estimated returns (in my projections) of 5% and 6%, and it worked, so that my balance increased. That allows me a bit of a cushion in the lean return years. KEN2007-12-07 09:09, By: Ken, IP: [75.67.65.254]

L2: Am I understanding minimum distribution correctly?Thanks for the replies!
I am not any sort of advisor. I”m just a guy trying to properly understand 72(t).
As I said, I used the 14% for ease of calculation. Obviously, each year”s return will be quite different than other years.
What I”m a bit confused about, though, are the low numbers (4% to 7%) you say are more realistic. I can get that good a rate at the bank with aseven-month CD with an annual rate of 5.11%. Surely one can expect an intelligently directed portfolio to do better than a bank”s CD?2007-12-07 09:54, By: Geoffrey, IP: [24.9.251.237]

L2: Am I understanding minimum distribution correctly?Jim, I back-tested one of my less stellar funds for the last 10 years. For two of those years it posted losses, while for eight of those years it posted gains. Tracking my investment over those 10 years showed that this fund grew an average of 9.34% each year.
Again, that”s one of my less stellar funds. Off the top of my head I”d say all the funds taken together over the last 10 years averaged probably about an extra 2% (i. e., an average of 11.34% return for each of the last 10 years).
While that”s not 14%, it”s certainlymuch higher than the 4% to 7% range. I suspect that the next 22 years (taken as a whole) will be better than theprevious 10 years (taken as a whole).2007-12-07 10:47, By: Geoffrey, IP: [24.9.251.237]

L2: Am I understanding minimum distribution correctly?Geoffrey:
I agree with the sentiment here that using a 14% gain number is very risky. There is market data out there that shows that the US stock market has gained between 10.5% and 11.5% per year for the past 70 years. The 1% or so difference comes from different accounts of what happened and when and probably includes rounding errors and differences in stock buying fees as well as reinvestment of dividends timing. In any case, these average about 11%, which is about what you saw when you back-tested one of your mutual funds. Not that investing is ever a smooth ride, of course. There are years when funds that I owned were up 30% and others when they lost 20%. The averages do hold, though, overlong periods.
A very reasonable scenario for retirement planning, IMO, is to assume that your portfolio will grow at 10% while preparing to spend 4-5% per year. This will provide a steady stream of income, while at the same time, growing the account.
Do keep in mind that the 10% annual average growth IS an average and not a guaranteed annual return. The ups and downs of the market can be considerably dampened, however,by holding 2-3 years worth of SEPP payments in a money market fund and taking your SEPP payments from this fund. If your funds send their interest, dividends, and annual distributions to this same money fund, you might not have to sell any shares during the life-time of your SEPP to replenish the cash. Doing this means that it is unlikely that you will ever be forced to sell stock or fund shares in a recession when prices are at their lowest.
As with anything else in life, there is no absolute guarantee in this but I have found this approach to work well for me. In another person”s financial situation, it might not work as well. It is up to you to determine whether or not this approach will work for you.
Ed_B2007-12-08 10:47, By: Ed_B, IP: [67.170.159.37]

L2: Am I understanding minimum distribution correctly?Ed_B, thank you for your well-reasoned reply.
Your advice is sound, and it issimilar towhat I would counsel people to do when planning on a 72(t):
1. Have a large cash back-up in the bank for bad years. I would suggest at least two years” living expenses.
2. During good years (such as when your IRAs gain 20 %), do NOT spend all that extra money you get on that year”s minimum distribution method SEPP. Instead, put it in a high-yield CD or something similar. This is additional insurance for getting through tough years.2007-12-08 11:12, By: Geoffrey, IP: [24.9.245.31]

L2: Am I understanding minimum distribution correctly?You”re most welcome, Geoffrey. There are some truly outstanding experts in this forum that offer excellent advice. While I can”t hope to match their expertise in this area, I can share my experiences with early retirement. It is nice to be able to do that after receiving so much guidance from others here.
Keeping a cash reserve is a very good idea and I am glad that you are already doing that. When I was working and planning for retirement, I had little use for cash / equivalents. I was interested in maximizing my asset growth and cash never really fit into that goal. The ride that I had was bumpy for sure but my account DID grow. Now that I am retired, I only need enough growth to keep up with inflation. Preserving my wealth is much more important to me than growing it, as I know that I cannot easily replace any large losses.
When I have good years in the market now, the growth in my mutual funds is allowed to grow. If it becomes more in that asset than I want, I will sell some of it and replenish the money market account. I do keep at least 1i8 months worth of expenses in this MM account and often closer to 24 months. I also have some short to mid term bond funds that could be sold in a pinch. So far, though, things are working well and I have not needed to sell any shares. I did sell a small stock fund that was not performing up to expectations.
One other tip would be to try to rersist over-tinkering with your retirement account. I manage this by two techniques. First, I only rebalance my account annually on the anniversary of my SEPP. I do watch the account often but that is for tracking purposes and to be ready for the rebalance when it is time for it. Second, I also keep a small Roth IRA account that is invested in stocks. This is my “play money”. This is pretty much a trading account that I play with for fun. Doing this allows me to “scratch an itch” without jeopardizing my primary IRA account. Fortunately, it also is doing well. I only buy stocks of recognizable companies (no Striker Oil / Florida Lands for me!) that have REAL earnings and a decent P/E. I have made 25-30% on some of these trades in just a few months and probably 12-14% over-all. It”s harmless funand I emjoy it a lot. I don”t confuse myself with a professional investor, though. 😉
Ed2007-12-09 10:05, By: Ed_B, IP: [67.170.159.37]

L2: Am I understanding minimum distribution correctly?Good morning Geoffrey. Glad to see you ran a “back-test” on one of your funds and I”m glad you got a good average return. Now I have a new exercise for you with two similar but slightly different back testings.
Using the same fund as before with the actual rates of return for that fund, assume the following:
1. Account value of $100,000 and a constant withdrawal amount each year of $7,000 which is 7% of your initial amount. (If you can simulate a monthly distribution rather than annually,you will have a better feel for howyourfund will react during the span of each year.) This will simulate non-recalculating for your SEPP.
2. Test using two periods; Start 1/1/1993 ending 12/31/1999 (7 years) for the first period.Start 1/1/2000 ending 12/31/2006 (7 years) for the second period.
3. Compare the ending values of your fund on 12/31/1999 and 12/31/2006.
This exercise will demonstrate the problem of “sequence of returns” vs “average rates of return” for an income distribution plan, aka, SEPP / 72(t). When we assume a “constant, average rate of return” for a long period, problems arise because no investment maintains a “constant” rate of return. You mentioned buying a CD at a nice yield today. However, when the CD renews you will not get that same rate. If you base a SEPP on 5.25% and only use CD”s, then over time this rate will definitely drop and your SEPP will not be sustainable. Hence the diversified portfolio is, in my opinion, the only way to go.
Use different distribution ratesas you run these scenarios and you will have a very clear picture why I suggested using the more conservative 4% to 7% vs 14% for your assumed rate of return. Please let us know how this turns out.
Jim2007-12-10 07:59, By: Jim, IP: [24.252.195.14]

L2: Am I understanding minimum distribution correctly?Jim, let me admit up front that my understanding of 72(t) is quite a bit less than perfect, so if thispost displays some ignorance, please forgive me! 🙂
It seems that your most recent post assumes a 72(t) plan using either the annuitization or the amortization method, since you mention a “constant withdrawal amount” and “non-recalculating for your SEPP”. I, however, aminterested only in the minimum distribution method, which is re-calculated every year, and the withdrawal gradually rises from about 2.0% at age 37 to about 3.4% at age 59.
I am toocautious to use any but the minimum distribution plan for a 72(t). Everything I”ve read (including William Stecker”s book, of which I understood some) indicates that this method isdefinitely the safest.2007-12-10 08:34, By: Geoffrey, IP: [24.9.251.237]

L2: Am I understanding minimum distribution correctly?Geoffrey:
I understand that you intend to use the RMD / MD method which incorporates recalculation each year, and that”s fine. The whole point of my suggestion was for you to back-test your fund for the7-year time period before and after the market crash in 2000. Using a constant rate of withdrawal for the entire 14 years will reduce the number of “moving parts” in the exercise. You can do recalculation but it will just complicate the exercise.
The whole point of my suggested exercise is for you to see the impact of withdrawals over different market activity. If you do the exercise, you will discover that for the period 1993 through 1999, the market returns will probably support your withdrawal schedule and have an increasing ending balance. However, the same withdrawal amount for the period 2000 through 2006 may not be successful due to the severe market downturn after 2000. Now if you get through the two 7-year periods, try it for an entire 14 years and see what your results are. Since you have a fund that has returned 9 % over the last 10 years, see what impact you will have by incorporating a withdrawal strategy for these three time periods in my example.
Jim2007-12-10 13:12, By: Jim, IP: [24.252.195.14]

L2: Am I understanding minimum distribution correctly?Jim… interesting idea fornew calculator.
Using input items similiar to the 72t calculator and then allowing a rate of return (or loss) to be entered for each of the years could show some very interesting results.
2007-12-10 13:20, By: Gfw, IP: [74.136.102.241]