Waiting for the government to push you to take withdrawals could be an expensive mistake. Luckily there is an easy fix.
Waiting for the government to push you to take withdrawals could be an expensive mistake. Luckily there is an easy fix..
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Most retirement planning hinges on the assumption that you'll start spending from your nest egg. But study after study seems to suggest that retirees are actually reluctant to spend their savings.
Researchers David Blanchett and Michael Finke (1) found that a typical 65-year-old retired couple withdraws just 2.1% of their portfolio each year. That's significantly lower than the standard 4% rule . This aversion to spending hard-earned savings was also reflected in a JP Morgan study (2) which found that roughly 33% of retirees took little or no withdrawals from their retirement plans until Required Minimum Distribution (RMD) rules compelled them to.
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Simply put, after decades of delayed gratification and careful accumulation, it's difficult for most retirees to start taking withdrawals. If you're worried about running out of cash in retirement, this might seem like an obvious move. But in reality, it could be a missed opportunity. Here's why.
In 2026, retirees are subject to RMDs at age 73, according to the IRS (3).
Waiting until the government compels you to withdraw from your retirement savings could seem like a smart move, but it creates two problems.
Compulsory withdrawals could push you into a higher tax bracket and there's not much you can do to offset this issue. Depending on your income and wealth, a sizable portion of your retirement savings could be snapped away by the tax authorities.
Second, RMDs create cash flows when you potentially have less use for it.
Spending tends to gradually decline in retirement, according to JP Morgan's analysis (2) of client data. You're simply healthier and more active in your 60s, which means you need more cash during this initial 'go-go' phase of your retirement. By your mid-70s, you're potentially spending less but withdrawing more because of RMDs.
Fortunately, this is a relatively easy problem to solve with one simple trick.
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Required minimum distributions — the mandatory annual withdrawals the IRS imposes on traditional IRAs, 401(k)s, 403(b)s and similar accounts once you reach age 73 — have one glaring exception: the Roth IRA.
Roth IRA owners are never required to take a distribution during their lifetime, according to Vanguard (4). The money can sit and compound tax-free for as long as you live.
That's the trick most Americans miss: converting a slice of your traditional IRA or 401(k) into a Roth IRA during your 60s, what's known as a Roth conversion , can permanently shrink the forced withdrawals waiting for you down the road.
