When Should You Take Your RMD?

Recently, a client asked if they should be taking their RMDs at the beginning of the year. Given the market’s recent upward performance, a market correction is due, thought the client. By that logic, it should make sense to take the RMD sooner rather than later, right? Perhaps, let’s see what the numbers say.

I looked at annual stock returns from 1926 to 2016. For this, I used the CRSP 1-10 data. Here’s what I found:

• % of times that the stock market return was greater than 0%: ~75% (this is different than the 2/3 metric for lump-sum investing outperformance)
• % of times that the market return was less than 0%: ~25%

Said another way, there’s a roughly three out of four (~3/4) chance that stocks will be higher at the end of the year compared to the beginning of the year. By that logic, you’re usually better off keeping your money in the market.

It’s pretty clear that the odds are favorable to keeping your money in the market for as long as possible.

However, looking at any individual year may be misleading. So, let’s stretch out the timeline.

RMDs on 30-Year Rolling

Here are the results on 30 years of rolling data for the same time period:

• 30-year rolling, % of times that doing RMDs at the beginning of year meant earning more money over doing RMDs at end of year: 0%
• 30-year rolling, % of times that doing RMDs in either strategy ran out of money: 0%
• 30-year rolling, median & average superior wealth terminal when doing RMDs at year end over doing RMDs at beginning of the year: 24%

Twenty-four percent. That’s 24% more money by doing RMDs at year end.

Said another way, the difference isn’t even close. On a 30-year timeline, there’s not a single data point that makes a case for doing RMDs at the beginning of the year.

RMD Timing in a Diversified Portfolio of Stocks & Bonds

I shared the above findings with a fellow investment nerd, Steven Rocha. He reached the same conclusions as the above. Moreover, he offered a successive analysis. Here are his cliff notes:

• It’s better to take the RMD at the end of the year over a 30-year time frame, no matter what percentage of stocks (or bonds) is in a portfolio.
• Over 20 years (is everyone going to live to be 100?), it turns out that it has ALWAYS been better to take your RMD at the end of the year over a 20-year time frame.
• Over 10 years, it is sometimes better to take the RMD in the beginning, if the portfolio has more than 60% of stocks.  BUT, doing so only lead to an outperformance of 1.9% in the best year, while taking the RMD at the end of the year could have lead to a 25% outperformance for the best 10-year period.

In short, it may make sense to make RMDs at the end of the year – rather than at the beginning of the year. The reason why is the same reason we invest in the stock markets in the first place: the stock market goes up in value over time!