Lifetime Withdrawal Factors for IRA Accounts
Individual retirement accounts, or IRAs, are tax shelters designed to help you save money for retirement. They do this by deferring income taxes on the investment earnings inside the account. Some IRAs defer taxes on contribution amounts, while others eliminate tax on distributions during retirement. Regardless, you'll need to know the various withdrawal factors for IRAs so that you do not run out of money during your retirement.
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IRS Lifetime Withdrawal
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The IRS publishes mortality tables that may be used to determine how much you can safely withdraw in any given year from your IRA account (see Resources). These tables represent average life expectancies and may be used to determine the average withdrawal for your age. Because you cannot predict your exact date of death, the lifetime withdrawal factor published by the IRS should be used as a guide, but you must realize that you may still run out of money if you live beyond your life expectancy.
When you reach age 70 1/2, you will need to comply with table III in the appendix of publication 590 for required minimum distributions from your traditional IRA. Roth IRAs are not subject to required distributions.
Dividend Discount Model
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The dividend discount model is a withdrawal method that uses interest from your investment as income. Because of this, the dividend discount model does not require that you deplete the principal of your investment so your income will never end (as long as you are generating investment income from your investments in the IRA). You must use appendix III of publication 590 after you reach age 70 1/2, however, so this model may not be appropriate if you own a traditional IRA. Roth IRAs may take advantage of this withdrawal factor, since there are no required minimum distributions from a Roth account.
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Annuity Withdrawal Factor
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Annuities are insurance products designed and sold by life insurance companies. Annuities spread out the risk of running out of money across many policyholders. This means that, instead of using the lifetime withdrawal factor from the IRS, you allow the insurance company to calculate your income for you. The insurer will guarantee that you will receive income for the rest of your life or for a set period of time. You get to choose the length of time you receive income.
Periodic Withdrawals
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Periodic withdrawals may be made over your lifetime. This withdrawal factor is highly variable because it is necessarily supplemental. Periodic withdrawals allow you to take money from your IRA as you need it. Your savings may or may not last your entire life, and it all depends on how much interest your IRA is earning plus the total amount of retirement savings you have versus how much you are withdrawing annually.
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