I’m 65 with more than $5 million saved and I’m headed toward an RMD disaster

• Minimal pensions: Less than $15,000 per year, not inflation-adjusted

• Pretax amount of $900,000 in a fixed annuity paying 4.5% interest, from which I can withdraw a maximum of 20% per year

• $3.5 million in an IRA invested mostly in equities 

• $270,000 in a Roth IRA invested most in equities 

• $1.3 million in a brokerage account invested in mostly equities

• $150,000 in a savings account which I use for my expenses

• $150,000 in a money market paying about 4.2% for emergencies or possible house purchase

• Miscellaneous other pretax 457(b) accounts amounting to about $100,000 

I have no debt at the moment and annual expenses of around $100,000 per year. 

I’m told I’m going to have a RMD disaster when I turn 72. I am having trouble increasing my spending after all of these years of saving. I don’t know what to do. 

Thanks.

NJ Zoom

Dear NJ Zoom, 

Congratulations on your retirement! Your problem of having saved too much is a relatively easy one to solve: Start giving money away. 

When you have more assets than you’re likely to spend in your lifetime, you want to distribute what you can to others in a structured way that helps with your whole financial picture and at the same time brings you joy. 

“A lot of people think about their assets and say, whatever’s left will go to charity, and they’re robbed of seeing the good they’re doing,” says Andrew Crowell, vice chairman of wealth management at D.A. Davidson.

You’ve worked hard and saved a lot. So what’s your purpose now? That seems to be a key missing ingredient in your retirement picture, which might explain why you are having trouble ramping up your spending. Buying mere things doesn’t sound like it’s working for you. And you not only have the problem of looming required minimum distributions (RMDs), but also your estate could be subject to federal taxes after 2026 if the exemption is lowered, and it could be subject to state estate taxes now, depending on where you live. 

Currently, the federal estate tax exemption is $12.92 million for an individual ($25.84 million for a married couple), but that’s set to get cut in half at the end of 2025 unless new legislation passes. With growth, your estate could possibly be over the limit when the time comes. And some state thresholds are lower, like New York’s, which is currently $6.58 million.  

The RMDs are an issue because the government requires you to start taking money out of qualified pretax accounts once you hit a certain age, which is 73 for you (not 72, since the rules changed). The amount you take out is based on a formula based on your account balance and your age.

Here’s a three-step plan that might help you decide how to start gifting your assets: 

1. Give cash directly 

If you’ve spent your career in education, it’s probably important to you. One way to make a huge difference in that area and get money out of your accounts is to help pay for the education for grandchildren, nieces and nephews or friends. 

“If he’s going to walk before he runs, he can fund 529 college savings plans,” says Crowell. “He has enough liquidity in his brokerage account, so I’d do that first.”

You can front-load up to five years of the $17,000 annual gift limit into a 529 plan, which amounts to $85,000 per recipient, and you can double that if you have a spouse. Crowell had one client who was recently widowed and wanted to help her grandchildren and reduce her taxable estate, so she prefunded accounts for 11 grandchildren. 

You can also just outright give up to $17,000 yearly to individuals in your life. “That can be holiday money or birthday money, and again it’ll systematically leave the estate and the growth happens somewhere else,” says Crowell. 

2. Tiptoe into bigger charitable gifts

Most charitable trusts are irrevocable, which means you can’t change your mind and get your money back once you designate your gift. For that reason, you might want to make small gifts that lead up to bigger gifts, suggests Crowell. 

If you’re not sure where you want to donate, you can start by contributing to something like a donor-advised fund, where you can set aside money in an account where it can grow, and decide later where to allocate it. You get a tax deduction in the year you donate. If you have a charity in mind, you can set up what’s called a charitable remainder trust, which allows you to get an income stream from the trust in your lifetime, but what’s left when you die goes to the designated charity. You can set up several of these as your assets allow. 

You can also go a bit further and set up a family foundation. Crowell’s own family did this after his father died, and he says, “This is how we transmit family values.” They gather once a year and decide how to distribute that year’s money, which amounts to giving away at least 5% of the balance. 

3. Switch to QCDs once you hit retirement age

Once you hit the age to start making required minimum distributions, you’re going to have to balance your income streams (your pensions, fixed annuity and Social Security) with the money the government says you have to withdraw based on its formula. That’s when you want to switch your charitable giving to qualified charitable distributions (QCDs). You can count up to $100,000 toward your yearly RMD and avoid income tax on the amount, which will reduce your burden significantly. And you can actually start with these at 70 1/2, under current rules.

You might also consider shifting some of your large IRA balance over the next 10 years or so with a Roth IRA conversion, but that won’t help you spend it down. That will just remove the money from the RMD formula and make it easier for your heirs to inherit without a tax burden. 

You might actually want to focus more on your fixed annuity and how you’re going to manage that as an income stream, because you funded that with pretax dollars. “As you pull money out—it’s last in, first out—every dollar coming out will be taxable income,” says Crowell. “You can decide how much of a paycheck to create over time, but that’s money you also might want to consider gifting as you get it.” 

More from Beth Pinsker