Reader Question: “I am familiar with the investing strategy called “dollar-cost-averaging.” I have benefited from this strategy while saving for my retirement years. Now that I am retired, I am aware that taking the same dollar amount each month out of a stock-based mutual fund works against me. I have never seen an explicit strategy to avoid this problem that you call “dollar-cost-ravaging.” I’ve turned 70½ and I need to take Required Minimum Distributions (RMDs). Some of my IRA money is in CDs and some is in stocks. What do you suggest?” – Larry
 

David’s Response: You understand very well this issue that I addressed in a previous column (archived here). I am pleased to say that there are solutions to avoid the adverse consequences of “dollar-cost-ravaging.” Here is a hypothetical example so we can walk through the strategy:

 

1. 1. Take the total amount of all IRAs and determine the required annual RMD. Let's assume all of your IRAs total $300,000 and you are 70; your annual RMD would be about $10,500.
2. 2. Compare the RMD to the amount needed (annually) to supplement your living expenses. Plan on withdrawing the larger of the two amounts. Let’s assume the $10,500 RMD is all you need to supplement your income.
3. 3. Since it is generally considered more prudent to pull income from a stable portfolio, rather than a vacillating one, you’ll want to reposition your IRA so the RMD can come from more secure holdings. In this example, that would mean about $200,000 of the $300,000 would need to be moved to a “safe place” and the remaining $100,000 could stay in equity investments (e.g., stocks and mutual funds). The idea is that you'd draw all of the RMD each year from the $200,000, while $100,000 is invested for growth and as a hedge against inflation. I have found that this approach helps to insulate the investor; if the stock market takes a big hit (which we know happens), the equity portion of the IRA can be left alone to recover, while the more resilient, safer portion can continue to provide income and RMD withdrawals.

 

This approach can work very well in the right situation. And, the size of the IRA doesn’t matter (whether it’s $100,000 or $1,000,000). Of course, more specifics about your individual situation would be needed to determine if this is the best approach for you.

 

 

 

 

 

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David D. Holland, a CERTIFIED FINANCIAL PLANNER™ practitioner, hosts a weekday radio show at 9AM on AM1380 Ormond Beach, AM1230 New Smyrna Beach and AM1490 Deland. He has also authored two books in his Confessions of a Financial Planner series. Holland offers investment advice through Holland Advisory Services, Inc., a registered investment adviser in Ormond Beach. He can be contacted at (386) 671-7526. Email your financial questions to info@DavidHolland.com.