Making sure your IRAs are allocated properly for required minimum distributions (RMDs) once you reach the age at which you must take them is as simple as following a bit of advice your parents probably used to tell you: live off your interest, don’t touch your principal. That may sound simple enough, but there are many factors to consider in order to ensure the interest and dividends you’re generating from your savings and investments is sufficient to cover your RMDs and satisfy your other income needs throughout retirement.
Again, RMDs are distributions the IRS requires you to make on your retirement savings each year after you’ve reached age 70-and-a-half. The amount changes each year in conjunction with your estimated life expectancy and the balance of your IRAs and other qualified plans as of December 31st the preceding year.
Ideally, an asset allocation right for taking RMDs should be able to generate at least 3.7% dividend or interest. If your interest and dividend income aren’t sufficient to cover RMDs, then the distributions will most likely have to come from the principal. Why is that so bad? Well, with average life expectancy rates today higher than they’ve ever been, most people need to plan for 30 years of retirement. That being the case, spending any principal at all, especially during the early years of retirement, can be a slippery and dangerous slope…
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