Required Minimum Distributions from 401(k)
April 27, 2022 3:10 PM Subscribe
What's the best way to withdraw an RMD from an account that has several sources?
I'm handling my Mom's finances now, and her 401(k) has about 8 different funds in it with wildly varying amounts of money. One has the lion's share while the others have different amounts, all of which are collectively maybe about 20% of the entire account. Everything is at Vanguard and the mix was set up by her cousin who is a smart finance guy and CPA, probably 10-12 years ago after my Dad died.
Last year I just took it from the largest fund, but from talking to the agent I thought it was worth figuring out if that's the best strategy. Are there standard math techniques I can use to figure out the optimal proportions to take, I assume based on their growth rates? While the whole idea of RMDs is to drain the account over a number of years, I figure that doesn't mean I shouldn't try to minimize impacts on its future value.
Secondarily, I'm thinking she should have a plain money market or similar account rather than plopping the entire (fairly significant) amount into her regular checking account. Would that be good for adding some more interest activity and probably allow for automatic transfers to her checking on a schedule?
I'm handling my Mom's finances now, and her 401(k) has about 8 different funds in it with wildly varying amounts of money. One has the lion's share while the others have different amounts, all of which are collectively maybe about 20% of the entire account. Everything is at Vanguard and the mix was set up by her cousin who is a smart finance guy and CPA, probably 10-12 years ago after my Dad died.
Last year I just took it from the largest fund, but from talking to the agent I thought it was worth figuring out if that's the best strategy. Are there standard math techniques I can use to figure out the optimal proportions to take, I assume based on their growth rates? While the whole idea of RMDs is to drain the account over a number of years, I figure that doesn't mean I shouldn't try to minimize impacts on its future value.
Secondarily, I'm thinking she should have a plain money market or similar account rather than plopping the entire (fairly significant) amount into her regular checking account. Would that be good for adding some more interest activity and probably allow for automatic transfers to her checking on a schedule?
Response by poster: I figured there would be generic advice just from a math finance perspective, but I suppose there's no harm in specifying. The funds are: VMFXX (5.5%), VWILX (23%), VSCGX (1.4%), VBTLX (3.5%), VTSAX (60%), and VWENX (7%). Obviously that's only six funds, I wrote the question without looking at the account details.
posted by rhizome at 3:25 PM on April 27, 2022
posted by rhizome at 3:25 PM on April 27, 2022
The different funds probably have different risk levels. There's no right answer, but generally you want to have a portfolio that is lower risk when you are in retirement.
Your second question, money market accounts return almost nothing these days. The most competitive money market account that I could find myself/you using is 0.5%. That's not nothing, but on an average balance of $20,000, that's only $100 a year. Not worth (in my opinion) going through the trouble of changing banks. Some local credit unions might have better (I think LMCU might have 1.5% in Michigan) but still, that's not that much money to be worth the switch if things are otherwise fine. A 2% Cashback credit card would likely get better returns.
posted by bbqturtle at 3:29 PM on April 27, 2022
Your second question, money market accounts return almost nothing these days. The most competitive money market account that I could find myself/you using is 0.5%. That's not nothing, but on an average balance of $20,000, that's only $100 a year. Not worth (in my opinion) going through the trouble of changing banks. Some local credit unions might have better (I think LMCU might have 1.5% in Michigan) but still, that's not that much money to be worth the switch if things are otherwise fine. A 2% Cashback credit card would likely get better returns.
posted by bbqturtle at 3:29 PM on April 27, 2022
VTSAX Is the riskiest that they have, and it's what you pulled from.
If you wanted to be more intentional though - you would withdraw from less risky stocks during market downturns (right now) and draw from the risky stocks during upswings (in 6 months, hopefully).
https://www.aarp.org/retirement/planning-for-retirement/info-2022/withdraw-strategy-during-market-downturn.html Here is the first google result on this topic! ("withdraw retirement during downturn")
posted by bbqturtle at 3:34 PM on April 27, 2022
If you wanted to be more intentional though - you would withdraw from less risky stocks during market downturns (right now) and draw from the risky stocks during upswings (in 6 months, hopefully).
https://www.aarp.org/retirement/planning-for-retirement/info-2022/withdraw-strategy-during-market-downturn.html Here is the first google result on this topic! ("withdraw retirement during downturn")
posted by bbqturtle at 3:34 PM on April 27, 2022
I would figure out what asset allocation you want (maybe by going back to her cousin), and then each year withdraw the RMD and make transfers as needed to maintain the desired asset allocation.
posted by doctord at 5:47 PM on April 27, 2022 [1 favorite]
posted by doctord at 5:47 PM on April 27, 2022 [1 favorite]
Response by poster: make transfers as needed to maintain the desired asset allocation
Isn't that basically withdrawing from all of them proportionally? That was my initial naive alternative, but as above, I figured risk might be a factor, and something I would have to research. Which is fine, but there's a question of weighting if I'm including that. More math!
posted by rhizome at 6:58 PM on April 27, 2022
Isn't that basically withdrawing from all of them proportionally? That was my initial naive alternative, but as above, I figured risk might be a factor, and something I would have to research. Which is fine, but there's a question of weighting if I'm including that. More math!
posted by rhizome at 6:58 PM on April 27, 2022
Isn't that basically withdrawing from all of them proportionally?
Only if the current asset allocation is equal to the desired asset allocation. These are probably not the same for a few reasons: it might not have been the right allocation in the first place; your mother's investment goals and risk tolerance may have changed (generally people choose to move into less-risky assets as they age); and even if you set everything up perfectly an account is going to drift from its initial allocation - more on this below.
On drift: let's say the account initially had 40% equities and 60% bonds. But over the years since the account was set up, the equities portion has grown by 50% while the bonds part has stayed about the same value (obviously I'm keeping the numbers simple on purpose here), so now the account is 50/50 equities and bonds. If you want to get it back down to 40/60, you need to reduce the amount invested in equities and/or increase the amount invested in bonds.
Basically, figure out what you want the asset allocation to be (a frequently-used rule of thumb is "your age in bonds/fixed income, the rest in equities", but the "right" allocation depends on your goals for the money) and then withdraw, sell, and/or purchase to get there.
As for what to do with the money from the RMDs - your mother can do whatever she wants with it, including investing the funds she withdraws in a brokerage account in the exact same securities she has in her retirement accounts if she wants (I own VTSAX in both my IRA and my taxable brokerage account, for example). But again, it depends on what she needs the money for and what her goals for growth and income are.
posted by mskyle at 5:06 AM on April 28, 2022 [1 favorite]
Only if the current asset allocation is equal to the desired asset allocation. These are probably not the same for a few reasons: it might not have been the right allocation in the first place; your mother's investment goals and risk tolerance may have changed (generally people choose to move into less-risky assets as they age); and even if you set everything up perfectly an account is going to drift from its initial allocation - more on this below.
On drift: let's say the account initially had 40% equities and 60% bonds. But over the years since the account was set up, the equities portion has grown by 50% while the bonds part has stayed about the same value (obviously I'm keeping the numbers simple on purpose here), so now the account is 50/50 equities and bonds. If you want to get it back down to 40/60, you need to reduce the amount invested in equities and/or increase the amount invested in bonds.
Basically, figure out what you want the asset allocation to be (a frequently-used rule of thumb is "your age in bonds/fixed income, the rest in equities", but the "right" allocation depends on your goals for the money) and then withdraw, sell, and/or purchase to get there.
As for what to do with the money from the RMDs - your mother can do whatever she wants with it, including investing the funds she withdraws in a brokerage account in the exact same securities she has in her retirement accounts if she wants (I own VTSAX in both my IRA and my taxable brokerage account, for example). But again, it depends on what she needs the money for and what her goals for growth and income are.
posted by mskyle at 5:06 AM on April 28, 2022 [1 favorite]
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posted by caek at 3:16 PM on April 27, 2022 [1 favorite]