How required minimum distribution is calculated

Q: I’m confused. The Required Minimum Distribution table number for age 70 1/2 is 27.4. Where are you getting the 3.65 percent rate mentioned in a recent column as the amount of the first RMD? Also, that number goes down year by year — so it looks like the rate decreases as you get older, not increases. — C.S., by email

A: Don’t worry about being confused — you’re not alone. The 27.4 figure is a figure provided to estimate the length of the distribution period, year by year. It represents 27.4 years, which is substantially longer than actual life expectancy at age 70 for an individual. It’s also longer than the joint life expectancy of a couple that age.

If you divide 100 by 27.4, you get 3.65, which is the percentage figure I gave in the column. Year-by-year the figure in the RMD table declines from 27.4, so when you divide the new, smaller, figure into 100, the distribution rate rises. It takes quite a few years

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before the number declines to 20. That would represent an RMD of 5 percent. It would not occur until age 79.

While the percentage amount you withdraw in an RMD rises each year, you’re always taking a percentage of the remaining money. As a consequence, the account can never be exhausted — but the distribution can become insufficient to meet your expenses as the size of the account declines. Quite a few websites have calculators that will illustrate how your distributions may change over time.

Q: I am a single, 76-year-old woman. Although I have a Ph.D., it is not in finance! Because I am illiterate about money, I have always been very cautious. I am to receive $300,000 from the sale of a farm very soon. Can you give me a suggestion for what I might do with this money — or to better manage the rest of my assets?

I have no debt. My house and car are paid for. My yearly take-home income from teacher retirement and Social Security (after long-term care, Medicare, and Aetna Supplemental Health premiums have been deducted) is $64,326.

My IRAs (mostly in CDs) total $201,450. My non-IRA savings total $468,558. This includes the cash from the farm sale, CDs, loans to children, stocks and checking account.

Most of these savings are earning between 1.3 and 1.5 percent. My home is worth about $950,000 in today’s market, and my 2011 car is probably worth $10,000. Maybe it is not too late for me to be more strategic with my financial matters. — B.M., by email

A: You can get very confused trying to figure out the “best” and cleverest financial move. So I suggest a different path: Fit the money you have to your particular needs. Arrange it so it will improve your life with as little attention as possible. The good news is that you can do this with ease because you have sources of security that many — most — people don’t have.

As a single woman, with $64,326 in guaranteed income after deductions for long-term care, Medicare and supplemental insurance, you don’t have to worry about investing your savings to produce a guaranteed income that you draw on every year.

You could easily invest your IRA money in a ladder of certificates of deposit, maturing in one, two and three years. As each matures, take your required minimum distribution and reinvest the net proceeds in a new three-year certificate. That’s one action to take a year.

With your IRAs invested in fixed income, you could then put your taxable savings ($468,558) in Vanguard Balanced Index Fund Admiral Shares and either spend, or reinvest, any dividends, interest and capital gains. The combined portfolio would be conservative, with 42 percent in equities.

Your greatest long-term concern is the cost of operating a house that may be worth $1 million. It’s your biggest asset. But it’s also your biggest liability since it has significant taxes and other operating costs.

Most people would consider that a great problem to have. One option: Sell it and buy a house worth half as much, keeping a fund worth the value of the house to cover all expenses.

• Scott Burns is a principal of the Plano, Texas-based investment firm AssetBuilder Inc., a registered investment adviser. Questions about personal finance and investments may be sent by email to scott@scottburns.com.