How Will a Retiree’s IRA Value Change While Taking Out the Minimum Each Year?
by Shane Flait (2011)

 

If you have a traditional (i.e. deductible) individual retirement account (IRA), you may wonder how much you’ll have in it when you die – for legacy purposes? You must make minimum required distributions (MRDs), but if you restrict your withdrawals to these minimums, I can give you an idea. I’ll assume that you make it to 70 years of age, you’re the owner of your IRA, and you’ll withdraw your yearly MRD starting at age 70. 

 

The amount you’re required to withdraw each year for your MRD is simply the value of your IRA at the end of the preceding year divided by the Internal Revenue Service’s ‘remaining life expectancy’ for your age. This remaining life expectancy can be found in the IRS-life expectancy table - in IRS Pub 590, Appendix C, table III.  This table, shown below, is only for IRS owners who are not married or married with a spouse less than 10 years younger; it’s not for beneficiaries who must use Table I.

 

You’ll see that your remaining life expectancy decreases usually by about 0.8 years – but not by 1.0 year for each year you get older. That’s because your projected statistical age of death (50/50 chance) actually increases as you get older.  Nevertheless, when determining your MRD each year, you’ll be dividing by a smaller number – since your remaining life expectancy (i.e. the years you statistically have left to live) is getting smaller. This means you’ll be taking out a somewhat larger fraction of whatever is in your IRA holdings at the end of the previous year.

 

That IRS table shows a remaining life expectancy of some 27.4 years when you’re 70 years old. This presumes a 50/50 chance that you’ll live beyond 97.4. And, your remaining life expectancy – according to the IRS table - decreases to 1.9 years when you reach 115. You’d have to take almost 53% (= 1/1.9) of your remaining IRA then as a MRD – if you were alive! 

 

But, in fact, the IRS table doesn’t represent a true life expectancy but a devised one for IRA distributions. The Center for Disease Control (CDC) tabulates life expectancy and shows that at age 70, you have a 50/50 chance of living to about 85 – not to 97.4 as the IRS table shows.

 

Nevertheless, the MRDs are required because the government wants to recapture some of that tax money on your earned income you didn’t pay when you made a deductible contribution to your IRA all those years before as well as all those tax-deferred earnings within your IRA. It’s skews its IRA remaining life expectancy so no one necessarily runs out too fast by taking MRDs only.

Your IRA value vs age through retirement year

You must begin making your MRDs after turning age 70½. Since you statistically have 27.4 years left at age 70, you must take 0.0365 (= 1/27.4) out your IRA for your first minimum distribution; that means withdrawing about 3.7%.  Each following year that fraction will rise slowly at first and increasingly as time goes on.

So will your IRA grow larger or not? It’ll grow larger as long as its annual earnings rate is greater than the depletion rate due to your MRDs.

With this in mind we can consider the figure shown. It shows how the value of your IRA changes with your age if you withdraw only the annual MRD starting at age 70. The age-dependent value of your IRA is given for three different annual growth rates of 3%, 5% and 7%. The plot is based on $10,000 initial value, and is scalable for any multiple of this.  You can see that any growth rate over 4% will cause your IRA to increase despite your MRD withdrawals in the early years. But that withdrawal rate will increase to overcome any growth rate. If you live long enough, you’ll almost deplete it – but that’s highly improbable.

The vertical line represents your statistical life expectancy of 85 if you make it to 70. If you die at age 85, you can see that you may have a significant amount of value left in your IRA depending on its annual earnings rate. 

 

IRS Pub 590, Appendis C - Table III
(Uniform Lifetime)
(For Use by: ·         Unmarried Owners, ·         Married Owners Whose Spouses Are Not More Than 10 Years Younger, and ·         Married Owners Whose Spouses Are Not the Sole Beneficiaries of Their IRAs)
Age	Distribution Period
70	27.4
71	26.5
72	25.6
73	24.7
74	23.8
75	22.9
76	22.0
77	21.2
78	20.3
79	19.5
80	18.7
81	17.9
82	17.1
83	16.3
84	15.5
85	14.8
86	14.1
87	13.4
88	12.7
89	12.0
90	11.4
91	10.8
92	10.2

 

Pasted from <http://www.irs.gov/publications/p590/ar02.html>

 

 

 

Shane Flait is a writer and educator. See more at www.EasyRetirementKnowHow.com