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 The U.S. tax system has a mandatory required minimum distribution, or a minimum amount that must be withdrawn from investment accounts annually, beginning at age 70.5.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