What is RMD?

RMD stands for “required minimum distribution.” Its importance has to do with your retirement.

Why do you need to know about RMD? Because it has a direct impact on your retirement planning.

Calculating RMD

So, how much money do you need to have saved when you retire to live comfortably? To answer this question, let me begin by asking you a few more:

• How many more years of work do you have before you plan to retire?
• How much money do you need to start putting away today for your retirement?

Let’s do some math.

I’m going to create a hypothetical contractor — let’s name him Bill — who’s 40 years old today. He works alone and wants to retire when he turns 62, which means he has 22 years of working left.

Bill wants to have at least $100,000 in annual income in retirement, which means he’ll need $2 million in the bank, earning him 5% interest, when he retires. Currently, Bill has saved nothing for retirement. For Bill to reach his goal of $2 million by age 62, he needs to save $35,000 a year, earning 9% interest every year, until retirement.

But, Bill hasn’t factored in one very important aspect of retirement planning: RMD. His math isn’t going to add up and he’s not going to meet his retirement goals.

Here’s the reason. The U.S. tax system has a mandatory required minimum distribution, or a minimum amount that must be withdrawn from investment accounts annually, beginning at age 70.5.

When Bill reaches this age, Uncle Sam will tax Bill’s $2 million retirement fund at 6.67%, which equates to $133,400. This leaves Bill with $1,866,600 in his account. At the 5% return Bill wants, this will leave him with an annual retirement income of only $93,330. Now what?

Doing some quick math, Bill has increased his retirement contributions to $50,000 per year. A much better plan, and one that will ensure he meets his retirement goals.

But where will Bill get this $50,000? Being a wise businessman, Bill increased his contribution for retirement planning in his overhead by increasing his hourly rate by $15 per hour. Best of all, his business hasn’t missed a beat.

What’s your RMD?

What does your retirement plan look like? How much money will you need to retire securely? Work with your business coach or financial planner to figure out how much money you need to put away for retirement. If necessary, increase your overhead to make it work. Build it right into your selling price. Remember, and this is very important: retirement investment for you is an overhead item.

I routinely meet with my financial planner. He helps me plan my next moves and stay well ahead of my retirement goals. Build retirement funding into your overhead and then find a financial planner that works for your business. Retirement is in your horizon.

I believe your employees’ retirement is your responsibility, as well. Employees tend to stay with companies that care about them. Build a proper retirement for them in your selling price, too.

This article was originally titled “What is RMD?” in the April 2018 print edition of Plumbing & Mechanical.