Asset Allocation and RMDs

RMD Asset Allocation, and “Safe Money”

RMD Strategy: Asset Allocation of RMDs


Even if you have oversaved for retirement, once RMDs begin, you must withdrawal funds every year. What should your asset allocation be given RMDs, and how much “Safe Money” do you need because of RMDs?

Do you want to avoid selling equities when they are down? If the market has crashed an you have to take your RMD, it might be nice to have some “Safe Money” you can withdrawal instead of selling stocks.

How much Safe Money do you need in your pre-tax retirement accounts (henceforward called IRAs) in order to prevent RMDs from forcing you to sell low?

We know the market can be down for a long duration before it recovers. Since you are forced to take distributions, what percentage of your pre-tax retirement accounts do you need in “Safe Money” (cash and bonds) in order to not to sell equities when they are down?

Let’s unpack!


How Do you Calculate RMDs?

The RMD calculation changes in 2022. Have a look:

New RMDs in 2022

Above, you can see “old” and “new” RMD calculations starting at age 72. This is the uniform life table which is updated for 2022; most folks use it to calculate their yearly RMD percentage.

You can see the “old” RMD factor at age 72 is 25.6, and the “new” one is 27.4. This means you used to be forced to take 3.91% of your pre-tax money at age 72, and now it is 3.65%. Not a big difference, but it is a 6.65% decrease.

The new uniform life table takes into account the fact that folks are living longer, and thus “need” to withdrawal at a slower pace to account for longevity. Of course, most folks take out more than their RMD every year… but those folks are not my typical audience.

Now that we know the new RMDs in 2022, let’s next discuss sequence risk and how much safe money you might want in your pre-tax retirement accounts.


Sequence Risk and RMDs

If you have oversaved for retirement, you may aggressively invest in your IRA.

While you should de-risk prior to retirement, if you don’t “need” the money, then you can invest aggressively in your 70’s and 80’s for your kids or charity. As I say, at that point, asset allocation concerns the trade offs of sleeping well at night vs making the kids rich…

That said, since you are forced to take out RMDs every year (whether you want to or not), there are unique sequence risk considerations.

Normally when we talk about Sequence of Returns Risk, we are talking about the 5 years before and 10 years after you start portfolio withdrawals in retirement.

Here, we are talking about forced pre-tax distribution due to RMDs. These are fully taxable.

If you are forced to sell equities when they are down (because you have no “Safe Money” in your IRA—after all you are aggressively invested since you don’t need the money), then a couple of bad years might impede the overall returns.

So, if you must take out 30% of your IRA in the next couple of years, should you have at least that amount in “Safe Money,” or is it ok to be 100% stocks? How much safe money do you need as a result of the forced RMDs, and what should your asset allocation be due to RMDs?

Let’s answer that question in a second, but first, is RMD sequence risk an issue of fungibility or of taxes?

Consider the fungibility of your IRA and brokerage accounts for a second.


Wait, What About the Fungibility of Money in my IRA and Brokerage Account?

I might lose some people here, but that’s ok. Skip this section if you aren’t a nerd.

When RMDs force you to sell pre-tax equities when they are down, you cannot “just” adjust your overall asset allocation to make up for it.

Yes, money is fungible, and, actually, the inverse of the above is true. But while your brokerage account is fungible with your IRA, your IRA is not fungible with your brokerage account because of taxation.

First off: If you are forced to sell equities from your brokerage account when the market is down, you can just adjust your overall asset allocation and be just fine. Fungible.

As an example, think about this for a second:

You need cash from your brokerage account, but it is 100% equities (as you might see if you have a good asset location strategy). If the market is down, and you sell stocks low, aren’t you committing the cardinal sin of investing by selling low and locking in losses?

No, not really. Say you have bonds in your IRA. You can exchange some of those bonds into stocks at the same time you sell the stocks in your brokerage account. So you have sold stocks, and then sold bonds and bought stocks. That is [(-) stocks plus (-) bonds plus (+) stocks] which works out to just selling bonds!

[The dark underbelly of fungibility is that you actually must calculate the after-tax equivalence to get your asset allocation exactly the same as before, but that is complicated and most don’t bother… If you want to bother, you might decrease your brokerage account by your capital gains rate and decrease your IRA by your effective tax rate, and then adjust your asset allocation accordingly, but then your head might explode.]

But it is not the same if you are FORCED to take RMDs instead of choosing to take money from your brokerage account.

With RMDs, if you sell stocks low but yet you don’t need the money, you can just turn around and buy those same equities in your brokerage account with the liberated money.

The amount invested, however, actually is decreased by your marginal tax bracket (rather than effective) as, since you don’t need the money for expenses, they are the last dollars out of your IRA. Moreover, since you are practicing good asset location hygiene, you don’t have bonds just sitting around in your brokerage account that are fungible.

If I haven’t lost you by now, then you are smarter than me for sure.

But the long and the short of it: Since RMD’s increase over time, even if you don’t need the money, you should have more Safe Money in your IRA as you get older. This is as a result of the fact that when you are forced to sell equities low (and then pay marginal taxes on them) only to re-invest the money in a taxable brokerage account, you will never catch up because of the taxes. Not fungible, even if we use after-tax equivalence.

If you are still with me, I would love to hear what you think about this section. Are unneeded RMDs fungible? What say you?

Regardless, I hope you agree that Safe Money is needed in an IRA once RMDs commence.

The question is next: How Much?


Asset Allocation in Your IRA as a result of RMDs

This is simple math. How much safe money do you need in your IRA because you must take RMDs? Well, we know the amount you have to withdrawal every year (it is above), but the question is: how many years might the market be down?

To answer this question, we need to know the duration of the average drawdown. How long do drawdowns last?


How Many Months is the Average Time to Recovery from a Drawdown?

RMD asset allocation

Let’s start simple. Above, you can see the performance and length of Corrections and Bear markets.

Recovery from a drawdown takes 22 months—call it two years—on average.

Let’s dig in a little more.


How Long do Bear Markets Last?

How long do bear markets last?

Above, you can see some bear markets are extremely short (3 months in ’87, ’90, and even shorter than that in March 2020).

We remember well the 2000 and 2008 wrecks; they lasted 31 and 17 months respectively.

This number (duration) is from the top to the bottom. After that, we still need to get back to breakeven!

What we are interested in: how long does it take for the market to recover?


How Long does Recovery Take?

asset allocation and RMDs

Instead of the duration, see the recovery period, above.

Remember the bear market lasted just 3 months in ’87 and ’90? Well, how long did it take to get back to zero? That is, how long did it take for the stock market to recover the lost value during the bear market?

You can see 19 months and 5 months for ’87 and ’90, respectively.

And for 2000? The bear market lasted 31 months but took 55 months (4.5 years) to recover. And in 2007, even though the bear market was shorter (17 months), it took 65 months to recover (5.4 years). The longest recovery is in ’73 at 5.75 years.

So, in summary, on average it takes about 2 years to recover, but it may take up to 5ish years.

And this is, remember, historical data rather than predictions about the future.


So, How Much Safe Money do You Need in Your IRA?

So, in summary, you need 1, 3, or 5 years of RMDs kept as safe money to prevent you from selling equities when they are down.

One year if you are extremely aggressive and don’t want a lot of cash and bonds in your IRA. One year of safe money is, of course, easy to calculate. If equities are up when you take your RMD, just sell enough to meet your RMD and a little extra to account for the increase in RMD next year. Have one year of cash or bonds (or even long-term bonds) that slowly increases over time as your RMD increases.

If you are more moderate (and understand that this is, in toto, a super aggressive strategy to begin with), you might have 3 years of RMDs in Safe Money.

If you are conservative, consider 5 years of Safe Money.

Here is what you need: (at stated age, 3 year or 5 years of RMDs require this percentage in safe money)


AT 72

  • 3y 11.36%
  • 5y 19.65%


At 80

  • 3y 15.53%
  • 5y 27.14%


At 90

  • 3y 26.16%
  • 5y 46.60%


In summary, even if you can tolerate a high equity allocation in retirement because you don’t need the money, you might want to decrease your asset allocation over time to prevent you from selling equities low.

This is the “Safe Money” in your IRA. Since you are forced to take the money out, it has a unique sequence risk as you get older. As stated with incredible perspicacity above, this is due to tax issues rather than fungibility concerns. (I’m happy to be proven incorrect on the topic.)

But beyond a point, there is a theoretical risk that you could wind up with less money if you are too aggressive in your IRA and don’t account for RMDs during a bear market.

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  1. It seems to me that preparing for a bear market also means that I would use that bear time to make partial Roth conversions, paying taxes from after-tax accounts, so that I maximize the effect of the conversion. This would lower both future RMDs and capital gains, and possibly IRRMA. So, preparation would include having funds in both pre-tax and after-tax accounts that are “safe”. The conversion might be best if I used pre-tax bond funds to buy Roth stock funds. That is, buying stocks would be even better than not-selling stocks.
    Great article. I will be taking action based upon this.

    • Ray, thanks. Mostly just something I’m thinking about right now. Not sure how applicable it will be to most!

  2. hi Dave, great post! luckily I was planning to be 60/40 in retirement and was going to put all my bonds in tax deferred 🙂

    But if I wasn’t, I am unclear but do you have to pay the tax immediately on a forced RMD distribution? does the brokerage automatically not give you the entire RMD but takes out taxes first? I thought you take the forced RMD and then pay taxes on April 15th, and until april 15th you can take the entire RMD and invest in equities immediately in taxable? Of course, you will have to pay taxes on April 15th from somewhere- hopefully one has cash lying around to pay for it. But it seems that if you would only be right if the RMD is immediately taxed on its way out or you don’t have cash lying around to pay the tax on the RMD on April 15th.

  3. So basically I should stay 80% stocks 20% bonds and then I’ll be okay? In a bear market I’ll just live off my bonds. Otherwise I’ll rebalance every year.

  4. Isn’t this the tax tail wagging the investment dog? Yes you have avoided taxes, but at what missed opportunity cost if the investment had been in all stocks during a typical good year (since the market goes up more than it goes down).

    • Maybe. There is nothing wrong with being 100% stocks unless you are forced to sell low. This is just a bit of something I was thinking about the other day. Again, looking for any thoughts about it.

  5. That’s the reason Life Strategy or Target Funds’s type of funds are a bad idea in IRA( at least no 100% of the money): you could be forced to sell both bonds and equities at the same time.

    • Luis, thanks for the comment. This is a reason why the TSP may not be a great option for the deaccumulation period.

  6. The logic that this is a tax rather than fungibility issue strikes me as correct. But one aspect of the discussion is unclear to me. What about the long run? That is, if the market is up on average year over year, would we not be better off to hold an aggressive portfolio and accept a few years of RMDs when the market is down in return for many more years of higher RMDs when the market is up? Which strategy works out better over, say, 20 years?

    • Good points. It gets back to the idea that you don’t need the money, so you want to aggressively invest it for other priorities. I would think about the fact that when you are aggressively investing in an IRA, you are investing for both you and uncle Sam. The growth has to be large enough to overcome the 20-30% taxes you will pay on the growth. In the end, even though you have chosen to be aggressive, I guess the question is how aggressive do you want to be? If it is — how well do you sleep at night vs how rich you want the kids to be — then, also, don’t forget to consider time diversification and the fact that stocks become MORE RISKY the longer you hold them!

  7. If your RMD is more than living expenses then the safe money only needs to cover expenses plus a little extra to cover taxes on equities you sell to fulfill the RMD. The equities you sell are immediately repurchased with cash from their sale.

  8. Great topic for sure. Could you instead, keep your “Safe Money” in a brokerage account, and if the market is down, simply transfer the stocks, mutual funds, or ETFs out of the IRA or 401ks as needed into the brokerage account to meet the RMD requirement? So instead of selling low, you transfer and hold until they recover.

    • Right you can. You still need to pay the taxes, however. And you could just take sell, take the cash out, and buy the same equities in the brokerage account which would be just like transferring out specific shares. But what about taxes? You still owe taxes on the RMD from the 12/31 amount of the RMD prior to the crash. This is why I think it is a tax issue and not one of fungibility. But it hurts a little to think about too long…

  9. So insightful! I really enjoy your posts because you raise points or items that apply to many of us that I have not read about anywhere on the web or in the many finance books I enjoy reading. Then after you raise your point, you are so thorough in explaining how we can manage these challenges. I save many of your posts so I can refer back to them later. Thank you for your great content!

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