Most retirees wait until the end of the year before taking their required minimum distributions, or RMD, from their IRA account. If you haven’t taken yours yet and planned on waiting until December, you may want to take it now, or at least start preparing for it. The way 2022 has played out, with extreme volatility in both stock and bond markets, unnerved a lot of retirees. Dealing with the 2008 financial crisis in your 50s was one thing, dealing with a significant drawdown on your net worth in your 70s is an entirely different animal. The good news is the market has rebounded strongly recently, recapturing some of the gains from 2021 that it had given up.
Who should take their RMD now?
If the market downturn in the first half of the year left you sick to your stomach, then you may want to consider taking your RMD now. Balanced portfolios, (as shown by Vanguard’s VBIAX), were down nearly 20% at the lows in June but have recently halved those losses to -10% on the year. A one million dollar portfolio just gained $100,000 in value over the last six weeks. So by taking, or at least preparing to take your RMD now, you are guarding against the concern that the market may be lower again by year’s end.
This tactic is best suited for retirees who need the cash, or plan to use it within the next six months. If you are someone who takes your RMD and just leaves the money invested in the market, then you probably should not take your RMD now; you’d give up four more months of tax deferred returns in the event of a continued market rally. But again, if you’ve been planning around using your RMD for expenses (bills, gifts, vacation, renovation, etc), and hated the thought of being forced to sell stocks “low” to satisfy your RMD, then you may want to do your planning now. The market, especially stocks, is at a much higher price than it was just one month ago.
Steps to consider
If you don’t need your RMD right now but like the certainty of raising the funds now, there are moves you can make in your portfolio to prepare. First, review your allocations and determine if you need to rebalance. Stocks have rallied much more than bonds over the last month which may mean your allocation targets are slightly off. A simple rebalance will probably involve selling some of your stock positions and buying some bonds. Next, you may decide that you want to earmark your RMD while leaving it inside your IRA account until later in the year. We’d recommend raising cash and moving it into a safe bond fund like VGSH, which is currently yielding 3.10%. You’ll earn that yield tax-free while the holding sits in your IRA. Then, in December, liquidate VGSH and make your RMD (or make an ‘in-kind‘ transfer).
If you need the cash from your RMD immediately, you should simply take the RMD in cash right now. We never know the future when asking if “it’s a good time to sell?” But, we know the past. Today is a better time to sell than one month ago, when your account value was probably 5-10% lower. We can’t emphasize enough that the core of this RMD conversation comes down to personal cash flow needs and your own experience in the market. Many people who say they can handle a 20% downturn may have a different answer now that they just experienced one. So if you need the cash, and you feel uneasy about the market, then you may as well just take your RMD now.
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