What to do with RMD money

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nick2302
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What to do with RMD money

Post by nick2302 » Sun Jan 07, 2018 8:57 am

My sister is now forced to take money from her retirement accounts. She has been doing this for several years and putting the money in a savings account. She is in her mid-seventies. I am wondering if I should encourage her to invest even a small portion in bonds or maybe go take a walk on the wild side and invest in a stock or two that has a high dividend. Or some of both. Or is it not wise for her to invest in stock and instead just stay liquid?
She is in fine health and does not look or act her age. But she is pretty tight for money. She owns her home in the clear and has a bundle in cash savings @50K. I am thinking it is dumb to be earning next to nothing for her savings.

Advise? Ideas, thoughts would be most appreciated.

The Wizard
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Re: What to do with RMD money

Post by The Wizard » Sun Jan 07, 2018 9:10 am

Invite your sister to become active on the Bogleheads forum.
Education is the best answer...
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nick2302
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Re: What to do with RMD money

Post by nick2302 » Sun Jan 07, 2018 9:25 am

Thank you for your suggestion. I know my sister would never ask this question in such a public forum and she gets intimidated very easily when it comes to financials issues. This is the reason I am asking for advice so I can help her.

Thanks

retiredjg
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Re: What to do with RMD money

Post by retiredjg » Sun Jan 07, 2018 9:27 am

The money could certainly be invested in something more profitable than a savings account, but nobody here could say whether that is a good idea or not based on only the information given.

J295
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Re: What to do with RMD money

Post by J295 » Sun Jan 07, 2018 9:36 am

What are the investments in her retirement account from which she takes the RMD?

livesoft
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Re: What to do with RMD money

Post by livesoft » Sun Jan 07, 2018 9:43 am

She can give it away to charity and spend it on herself or others, too. If you tell her about all the money that you have donated to charity, then maybe she will get the hint.
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Beehave
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Re: What to do with RMD money

Post by Beehave » Sun Jan 07, 2018 9:51 am

The walk on the wild side would be something like the Vanguard Retirement Income fund which conservatively blends stocks and bonds and TIPS. But my concern with any bond or stock fund or blended fund no matter how conservative is the very strong possibility of its showing a loss. My guess is that this would greatly upset your sister and is not worth the risk (she will sell when the market tanks, lose money, and the experience may damage your relationship with her).

Instead - - what about investing in I-savings bonds from the government using funds she won't need in the near future? The investment will be safe (not lose money) and will afford her better protection against inflation (which is a real potential danger to her) than her savings account.

My thoughts, with best wishes.

dbr
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Re: What to do with RMD money

Post by dbr » Sun Jan 07, 2018 10:50 am

An RMD is a transfer of money out of a tax preferred account into a taxable account. When you do that you may have to make changes in both accounts to maintain the overall asset allocation and asset location plan. In a simple instance one might sell stocks in the retirement plan to take the RMD and then use the money to buy the same stocks in the taxable plan. In some instances there are more manipulations involved. Naturally it is possible that at the same time some of the money is spent, including to pay taxes on the distribution. It is conceptually helpful to separate this into a transfer followed by a withdrawal from taxable because it allows one to keep the focus on asset allocation and asset location.

If the person does not have a plan for allocation and location, then anything is fine.

kaneohe
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Re: What to do with RMD money

Post by kaneohe » Sun Jan 07, 2018 11:53 am

nick2302 wrote:
Sun Jan 07, 2018 8:57 am
My sister is now forced to take money from her retirement accounts. ........................ But she is pretty tight for money. ......................
Perhaps I'm misinterpreting but the above is a bit confusing to me.........."forced to take" suggests she doesn't need the money. "pretty tight for money" suggests the opposite.

If she is fine w/ how things are, then I would agree w/ dbr (post above), withhold for taxes or set that portion of distribution aside into savings, then reinvest the rest in something similar to where it came if..........assuming she is ok w/ the current allocation......but it her $$$ so she has her own comfort level and I would suggest but not push too hard.

22twain
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Re: What to do with RMD money

Post by 22twain » Sun Jan 07, 2018 12:30 pm

Has she ever dealt with her retirement accounts in a "hands-on" way by switching investments around or rebalancing them online or by some other means? Does she do any financial stuff online?

If she always made her contributions in a "set it and forget it" fashion, and has not interacted with the account otherwise, except to receive the RMD checks, then she may not want to have anything to do with a separate taxable mutual-fund or brokerage account. In that case, the best thing is probably simply to look for CDs with decent rates at her local banks. My mother did this in her 80s and 90s after my father died. My wife will start taking RMDs next year, or annuitize her account balance, and I would be surprised if she has any inclination to look beyond CDs for re-investing the surplus.

Assuming the retirement accounts are at least partly invested in stock funds, re-investing the RMDs in CDs will gradually make the asset allocation more conservative, which at her age would not be an outlandish thing to do.

dbr
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Re: What to do with RMD money

Post by dbr » Sun Jan 07, 2018 12:34 pm

22twain wrote:
Sun Jan 07, 2018 12:30 pm
Has she ever dealt with her retirement accounts in a "hands-on" way by switching investments around or rebalancing them online or by some other means? Does she do any financial stuff online?

If she always made her contributions in a "set it and forget it" fashion, and has not interacted with the account otherwise, except to receive the RMD checks, then she may not want to have anything to do with a separate taxable mutual-fund or brokerage account. In that case, the best thing is probably simply to look for CDs with decent rates at her local banks. My mother did this in her 80s and 90s after my father died, and my wife does it now with her own money.

Assuming the retirement accounts are at least partly invested in stock funds, re-investing the RMDs in CDs will gradually make the asset allocation more conservative, which at her age would not be an outlandish thing to do.
It could make a great deal of sense that once funds have been moved from an IRA and one does not have similar investments in a taxable brokerage account that CDs or a savings account would be used. Keep in mind RMDs are a pretty small fraction of the total IRA.

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obafgkm
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Re: What to do with RMD money

Post by obafgkm » Sun Jan 07, 2018 12:40 pm

nick2302 wrote:
Sun Jan 07, 2018 9:25 am
I know my sister would never ask this question in such a public forum and she gets intimidated very easily when it comes to financials issues. This is the reason I am asking for advice so I can help her.
How encouraging was she when you told her you were going to ask for her on Bogleheads?

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Sheepdog
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Re: What to do with RMD money

Post by Sheepdog » Sun Jan 07, 2018 1:13 pm

Without mentioning regular investments, let me mention the first ideas coming to this 84 year old mind.
1. Give to charities, but give via QCDs before taking regular RMDs so that that will not be listed as taxable income. (My favorite)
2. Invest in CDs. (I do)
3. Take a cruise and take family members. (I did last in 2015 and 2016 and am considering for later this year or next again)
4. Buy I Bonds (more tax deferred savings and some inflation protection)
5. Spend it.... perhaps on home remodeling. (I remodeled baths and added new tile floors the last 3 years. Buy a new car as we will do this year. etc) Does she like theater? Orchestras? Opera, etc.? then buy some season tickets and take family and friends. In other words, have fun with that money. We do.
Even spending on such things as these, our nest egg has continued to grow.

I could add that as my bank account grew, I put some of that bank account money into immediate annuities to provide some additional regular income.
People should not say everything they think. They should think about everything they say.

nick2302
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Re: What to do with RMD money

Post by nick2302 » Tue Jan 09, 2018 7:40 am

Thanks to everyone who shared thoughts and gave suggestions. From what I have read I see that probably the I-Bonds or good old-fashioned CD's would be the best for her. Her RMD comes from an annuity she got talked into by a shyster financial advisor years ago. Then she has a Florida pension I forget what the plan number is, 459, 549 something like that. I will have to investigate about I-Bonds as I know nothing about them. How long are you committing the money for, what happens if you need to redeem them and etc. before I say a word about them.

She does nothing online and is totally terrified of losing money. Seems her goal in what remains of her life is spend as little as possible so she can leave something to her children (who don't want it and have told her that many times). But neither here nor there. She believes that she makes terrible financial decisions and I cannot argue with her. Why she bought that terrible annuity and invested in GE when it was in the 30's is beyond me. I think in the case of GE it was because of the high dividend at the time, and for the annuity a fast talking, smooth financial "advisor" who wanted a commission.

I hate to see her so upset about money and stressing over every penny as she claims she has no money. No money meaning money she doesn't want to spend any. So again, thanks to all who have shared their ideas and thoughts I really appreciate it. When my time comes to take RMD I will look into and hopefully know more about I-Bonds and depending on my research use them for myself.

Thanks everyone.

retiredjg
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Re: What to do with RMD money

Post by retiredjg » Tue Jan 09, 2018 7:46 am

Here is the information about I Bonds. I'm not sure they offer much more for this situation than a good CD.

https://www.bogleheads.org/wiki/I_savings_bonds

nick2302
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Re: What to do with RMD money

Post by nick2302 » Tue Jan 09, 2018 3:13 pm

Thank you for the link. I thought they would be tax exempt. Silly me!!! Oh well they are similar to a CD that is for sure. I am assuming in an FDIC bank if you had enough money to reach 250K in CD's any additional money in other accounts could be subject to the bank failing. With the I Bonds only if Uncle Sam defaults would you lose money. Other than that I don't think I see a difference.

Thanks again.

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Epsilon Delta
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Re: What to do with RMD money

Post by Epsilon Delta » Tue Jan 09, 2018 3:20 pm

I bonds are indexed to inflation. Most CDs are not. You can argue how good the particular version of CPI they are indexed to is, but it is a heck of a lot better than not being indexed.

Also I bonds are backed by the full faith and credit of Apple. (That's a joke)

ThriftyPhD
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Re: What to do with RMD money

Post by ThriftyPhD » Tue Jan 09, 2018 3:44 pm

nick2302 wrote:
Tue Jan 09, 2018 3:13 pm
Thank you for the link. I thought they would be tax exempt. Silly me!!! Oh well they are similar to a CD that is for sure. I am assuming in an FDIC bank if you had enough money to reach 250K in CD's any additional money in other accounts could be subject to the bank failing. With the I Bonds only if Uncle Sam defaults would you lose money. Other than that I don't think I see a difference.

Thanks again.
Tax-deferred growth

Interest from I Bonds accumulates tax-deferred for up to 30 years. (I Bonds do not distribute interest like CDs and other bonds do.) After 30 years, the I Bonds reach final maturity and no longer earn any additional interest. When I Bonds mature or are redeemed, the interest is taxable income for federal income tax purposes, but is free from state and local taxation. However, if the entire proceeds of the I Bond redemption (both principal and interest) are used for qualifying educational expenses, the interest can be tax-free at the federal level (see below). You also have the choice of paying income taxes on the accrued interest each year (which may be advantageous if a bond is titled in a child's name).
In a CD, you pay tax on the interest every year. In an I Bond this grows tax free, and you only pay tax when you redeem them. Therefore a CD has more of a 'tax drag' than I Bonds do. The I Bond is also always tax free for state/local taxes. Not sure where your sister lives or what tax bracket her local tax is, but that could be important too.

Since you can only buy $10k I Bonds a year, you'll likely need to get a mix anyway, which is probably the way to go. Put $10k in I Bonds, and the remaining $40k in CDs or similar.

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midareff
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Re: What to do with RMD money

Post by midareff » Tue Jan 09, 2018 4:02 pm

nick2302 wrote:
Sun Jan 07, 2018 8:57 am
My sister is now forced to take money from her retirement accounts. She has been doing this for several years and putting the money in a savings account. She is in her mid-seventies. I am wondering if I should encourage her to invest even a small portion in bonds or maybe go take a walk on the wild side and invest in a stock or two that has a high dividend. Or some of both. Or is it not wise for her to invest in stock and instead just stay liquid?
She is in fine health and does not look or act her age. But she is pretty tight for money. She owns her home in the clear and has a bundle in cash savings @50K. I am thinking it is dumb to be earning next to nothing for her savings.

Advise? Ideas, thoughts would be most appreciated.
Yeah, I have a truly great idea.... Viking River Cruises. Don't like rivers.. Viking Ocean Cruises. If that level of food, service, entertainment and destination experiences is a little too rich try American Cruise Lines here ijn the states, Princess, Oceania, Fathom and Holland. I just turned 70 and am trying to increase our travel, while ambulatory is me. Walk on the wild side with your group and guide through small European cities. My clock is ticking and when I go it will be with memories, not I wished I woulda's.

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