As of 11/20/2024   Indus: 43,408 +139.53 +0.3%     Trans: 17,002 -26.31 -0.2%     Utils: 1,055 +1.25 +0.1%     Nasdaq: 18,966 -21.33 -0.1%     S&P 500: 5,917 +0.13 +0.0%	YTD  +15.2%    +6.9%    +19.7%    +26.3%    +24.1%	Targets    Overview: 11/12/2024     46,000 or 43,000 by 12/01/2024   18,000 or 16,600 by 12/01/2024   1,075 or 1,000 by 12/01/2024   20,000 or 18,400 by 12/01/2024   6,100 or 5,800 by 12/01/2024
Chart Pattern Indicator: on 11/18/24

As of 11/20/2024   Indus: 43,408 +139.53 +0.3%     Trans: 17,002 -26.31 -0.2%     Utils: 1,055 +1.25 +0.1%     Nasdaq: 18,966 -21.33 -0.1%     S&P 500: 5,917 +0.13 +0.0%	YTD  +15.2%    +6.9%    +19.7%    +26.3%    +24.1%
Targets    Overview: 11/12/2024     46,000 or 43,000 by 12/01/2024   18,000 or 16,600 by 12/01/2024   1,075 or 1,000 by 12/01/2024   20,000 or 18,400 by 12/01/2024   6,100 or 5,800 by 12/01/2024
Chart Pattern Indicator: on 11/18/24

Bulkowski on Retirement

Initial release: 12/29/2022. 1/10/23: Fixed mistakes to some of the table entries. Ditto for the .xls file.

Can you boost the balance of your traditional IRA (individual retirement account), and what happens to the balance when the stock market drops and you withdraw money from the IRA? This article answers those questions and reminds you about Medicare premiums which are income based.

Retirement: Findings

Here's some of the lessons found while researching this article.

• If you withdraw money from a traditional IRA (perhaps because of a required minimum distribution or RMD), invest the money in the stock market using a taxable account or as a rollover into a Roth IRA. Try to leave the money invested in the stock market for as long as possible.
• Withdrawing from a cash account (instead of from the IRA) the year after the market loses value helps limit the damage a down year makes on your portfolio.
• By leaving money in the stock market, you give it the opportunity to grow (but the risk of a decline can be substantial).
• The Medicare premium is income based for parts B and D. If you exceed the income limit, the premium could almost triple. You may want to begin whittling down the balance of a traditional IRA or rolling it over to a Roth IRA as soon as you turn 59 1/2 (to avoid a withdrawal penalty). The required minimum distribution of a traditional IRA may boost your income high enough to raise your Medicare premium.

• Withdraw $60k Annually
• Withdraw $60k Plus Cash
• No Withdrawal
• Medicare: Income Based
• Notes
• See Also

You can find data for this article in an Excel spreadsheet here (.xls, ~100k). It shows the returns of the Nasdaq, S&P 500 index, Dow industrial average, and a 60/40 mix of stocks and bonds, all from 2001 to 2020. You can plug and play with the numbers in the sheet for your situation to your heart's content.

In this article, I won't be showing the complete tables that the spreadsheet shows because they are intimidating and you may fall asleep. I'll present the overview results, though.

Retirement: $60k Withdrawal (Awful)

Suppose in 2001 that you had $1 million in your traditional IRA when you retired at 65. Over the next 20 years, how would you do if you chose to withdraw $60,000 each year (adjusted for inflation annually)?

The answer is: Awful. Table 1 shows the results.

If your money was invested in the Nasdaq composite, it would go to zero in 12 years. Put $1 million in the S&P 500 and you'd do better, but you'd be out of money in 2014. The Dow industrials would last to 2016. If you invest 60% of the money in the S&P 500 stocks and 40% in bonds (Barclay's U.S. Aggregate Bond Index), you'd be out of money in 2021. You'd have 20 years of income.

When I completed this analysis, I freaked. How could someone blow through a million in a dozen years while investing in the Nasdaq, the best performing (but also highest risk) index around? The answer is because you're pulling money out annually. After inflation, the $60k in 2001 climbs to $91,000 in 2021. You'd withdraw over $1.5 million during the entire span. When you add years where the index lost 21%, 32%, and 42% of your investment, then it's no wonder you run out of money quickly.

• If you withdraw money from a traditional IRA (perhaps because of a required minimum distribution or RMD), invest the money in the stock market using a taxable account or as a rollover into a Roth IRA. Try to leave the money invested in the stock market for as long as possible.

Retirement: 60K Withdrawal Plus Cash (Better)

In this scenario, the IRA owner withdraws $60,000 (adjusted for inflation) annually from his IRA unless the prior year was a down year (where the benchmark index lost value). The thinking here is to give the markets a chance to recover after a down year. The withdrawn money comes from a cash account and not from the IRA.

For this to work, the owner has to have a significant amount of cash set aside. If you're above age 70 1/2 (or 73 due to a rule change in 2023), the required minimum distribution (RMD) is withdrawn from the IRA first and any balance comes from cash.

For example, in 2018 when you're in your 80s, the Nasdaq had a down year, losing almost 4%. In 2019, the intent is to not withdraw any money from the IRA and fund the entire distribution from a cash account. In this case, however, the IRA has a required minimum distribution, so you'd withdraw the RMD from the IRA and the rest from the cash account. Putting numbers to this, 2019 has a RMD of $45,765, so you'd withdraw that from the IRA and the balance ($41,644) comes from the cash account. The $60k distribution that you want each year has ballooned to $87,409 in 2019 (because of inflation), which is why you withdraw so much.

Table 2 shows the results of this scenario. The Nasdaq composite hits $609,298 in 2020, so it does well. The S&P doesn't do as well because market returns are lower. The Dow industrials do much better with over $450,000 remaining. The big winner is the 60/40 blend of stocks and bonds that ends with a balance of $900,920. It does this by avoiding the big drops in all down years (because of the blend, the down years have smaller losses).

Notice the amount of cash you need for this to work. If the money is in cash, then you're missing the market's gains or losses (or even interest), so there's an opportunity cost to having so much cash around. You could invest the cash in the market (not in an IRA) and sell some stock to fund living expenses instead of holding $200k in cash.

• Withdrawing from a cash account (instead of from the IRA) the year after the market loses value helps limit the damage a down year makes to your portfolio.

Retirement: No Withdrawal (Best)

Let's run the same scenario again with a few changes. Since we know withdrawing money depleted the IRA, what happens if we leave the money invested in the market? When required by the RMD (mandatory withdrawal) we withdraw the funds from the IRA but invest them back into the market. What we're trying to do is keep the money in the market.

In my situation, I retired at age 36, and have never withdrawn money from my IRA. I have other portfolios where I pull money from if I need to. So Table 3 shows a realistic possibility for my future.

In this scenario, we start with an IRA balance of $1,000,000 and we buy the Nasdaq Composite (we'd have to use an ETF and not the index shown here) and hold it for 20 years, withdrawing money as required by the IRS in 14 of 20 years. After the withdrawal, we immediately invested the money back into the market in a non-IRA account. We'd have an ending balance of $5.2 million. The S&P 500 and Dow Industrials end with a balance of almost $3 million, and the 60/40 stock/bond blend does better, at $3.7 million.

What this says is that if you leave your money invested in the stock market (Nasdaq), you can make a considerable amount of money, but there's a risk of a severe drop in the indices. Over the 2001 to 2020 span, the benchmarks lost money in 4 to 6 years (depending on the index). For example, the Nasdaq lost 41.5% in price in 2008.

• By leaving money in the stock market, you give it the opportunity to grow (but the risk of a decline can be substantial).

Retirement: Medicare, Income Based

At age 65, you should sign up for Medicare (in many cases). Did you know that your premium for parts B and D are based on income? If you earn too much, your premium could almost triple.

So when you're looking at the income level to stay in the cheapest premium bracket for Medicare, do add to your income the required minimum distribution from your IRA. You'll want to keep your income plus the RMD below the Medicare threshold for a higher premium.

I started to withdraw from my IRA to cut the balance well before age 73 (2023 value) so that at that age, with the RMD, my total income will remain below the Medicare threshold. The trade-off is that my annual income increases because of the IRA withdrawals. You can begin withdrawals from your traditional IRA (and most retirement plans) at 59 1/2 without penalty (but you'll have to pay income tax on most retirement plans).

Medicare looks back 2 years at your income (so at age 65, it looks at your income when you were 63), so if you're 63 or older, take steps now to lower your income. Failure to do so may increase your Medicare premiums.

• The Medicare premium is income based for parts B and D. If you exceed the income limit, the premium could almost triple. You may want to begin whittling down the balance of a traditional IRA or rolling it over to a Roth IRA as soon as you turn 59 1/2 (to avoid a withdrawal penalty). The required minimum distribution of a traditional IRA may boost your income high enough to raise your Medicare premium.

Notes

For the three indices (Nasdaq, S&P, Dow Industrials), I used price changes only to compute the returns. Any dividends paid were not included. This makes the returns shown in the spreadsheet more conservative (meaning you'd make more money in real life). The 60/40 blend does include reinvested dividends and interest.

All figures are based on a single 65 year old with a $1,000,000 traditional IRA portfolio at the start of 2001. Any distribution (starting at $60k but adjusted for inflation at 2.1123%) occurs at the start of the associated year, not the end (it makes a difference).

-- Thomas Bulkowski

See Also

• Excel spreadsheet of data (.xls, ~100k).
• Bull Markets: How long do bull and bear markets last?
• Bear Markets: How often do stocks, ETFs, and mutual funds drop 30% or more?
• Asset protection. Seven tips to a safer life.
• Hold on. How long to you need to hold onto a stock? Find out...
• Position sizing. Reveals a new portfolio position sizing algorithm for limiting losses in bear markets!
• Scaling in. Adding to a position may not pay.
• Scaling out. Should you sell a portion of your stock?
• Seasonality. What are the best months to buy and sell stocks?
• Market direction. 7 tips to determining.
• Buy low or buy high? Buy near yearly low for larger gains, less risk.
• Dollar cost averaging. This doesn't work...or does it?
• Zero-cost averaging. What is it?
• Best buy months. Can buying at the end of the worst performing month and selling at the best performing be profitable?
• Forecast. Shows a 10-year forecast for the Dow.