RMDs + Sequence Risk = Retirement Destruction?

Before the article, here’s what’s happening this week on our podcast, Personal Finance for Long-Term Investors:

Paul wrote in and said:

I’m years away from RMDs, but all the bad stuff that comes with them makes me worry….

Forced to withdrawal more than I need, withdrawal rates that start too high and just keep going up, trigging higher taxation of Social Security, increasing IRMAA Medicare rates, no more stretch provision for heirs.

But a particular fear is self-inflicted sequence of returns damage. I re-balance in May. As part of that, I figure that’s when I’ll take my RMD.

Let’s say my IRA balance was $1M as of 12/31. However, the market dropped 30% in February and it has not recovered.

I’m forced to calculate my RMD against a balance that doesn’t even exist anymore. My balance is down to 700k. Conceivably, this could happen many times over 20+ years. The RMD might force me to withdraw 5% or 6%, when (if I were in control) a guardrail approach might only suggest 2% for that year.

Basically, when there’s a hole in the boat, best to not make it any bigger.

I find this scenario very troubling.

Paul outlines a fascinating and possibly scary concern.

Do required minimum distributions (RMDs) have a destructive synergy with the sequence of returns risk? Can this combo “sink your boat?”

rustic wooden boat partially submerged in lily pond

Let’s dive in. I’ll add some color and explanation to Paul’s question, walk you through my thoughts, and ultimately leave you with a solid plan of how to mitigate (or even avoid) these bad outcomes in your retirement.

Basics – RMDs, Sequence Risk, and Other Concerns

First, I would like to provide some background on Paul’s question so that you can fully understand what he’s asking.

Required minimum distributions, or RMDs, are mandatory withdrawals you must take each year from certain tax-deferred retirement accounts (like traditional IRAs and 401(k)s) starting at age 73, age 75, or possibly other ages pending future legislation. The RMD amount is based on your account balance and remaining life expectancy. Just like other withdrawals from tax-deferred accounts, RMDs are taxed as ordinary income.

The sequence of return risk states the following: not only does the magnitude of investment returns matter, but the sequence of those returns matters as well. Specifically, a particularly poor series of investment returns during the early years of retirement can permanently damage and derail a long-term retirement plan.

To learn more about the sequence of return risk, tune into Episode 87 of Personal Finance for Long-Term Investors:

Paul, who asked the question, outlines a couple of other concerns too. I’ll explain them below, but won’t dive much deeper.

Higher taxation of Social Security**. Depending on your total income, only a portion of your Social Security income is actually taxable. Granted, these income brackets are relatively low. For example, a married couple earning $44,000 (or more) is in the highest of these brackets, and 85% of their Social Security is taxable****.
IRMAA surcharges. IRMAA (Income-Related Monthly Adjustment Amount) is a Medicare premium surcharge imposed on higher-income beneficiaries in addition to their standard Medicare Part B and Part D premiums. The amount of IRMAA is determined based on an individual’s modified adjusted gross income (MAGI) and can result in higher healthcare costs for those with higher incomes.
No more “stretch provision” for heirs. In short, the rules for withdrawing inherited IRA moneys used to be very beneficial for heirs, allowing them to keep large amounts of money growing tax-deferred for decades. Now, however, the 10-year rule mandates inherited IRAs are emptied in 10 years. No more “stretching” the withdrawals for decades.

**I’m still digesting the July 2025 tax bill (Big / Beautiful), and it does have a specific deduction for people 65+ on Social Security. I will return / addend /edit this once I’ve learned more.

****Note – “85% taxable” is much different than “taxed at an 85% rate.” Instead, it means that 15% of SS income is tax-free, while the other 85% is taxed at one of the Federal income tax rates (10%, 12%, 22%, etc.).

For both the Social Security and IRMAA concerns, RMDs can be negative. RMDs can lead to higher Social Security taxability and result in higher tax rates on that Social Security income, as well as higher IRMAA surcharges. All are possible.

But this is where forethought in your financial plan can pay huge dividends. It won’t always be possible to avoid extra taxes and surcharges, but a prudent plan thinks about these questions ahead of time.

I want to focus the remainder of this article on Paul’s primary concern: can RMDs combine with sequence of returns risk to torpedo your retirement, all completely out of your control?!

RMDs + Sequence Risk: Terrible? Or Merely Worth Being Aware Of?

You should be aware of how RMDs and sequence risk can negatively interact. But with proper planning, you can turn this “perfect storm” into a passing rain shower.

Sequence of Returns Exists With or Without RMDs

The sequence of returns risk is omnipresent for stock market investors, whether they are taking RMDs or not. Three principal ingredients can turn the sequence of returns risk into a real danger:

Your withdrawal rate,
The returns from the market,
And where you are in your retirement/withdrawal timeline (earlier is worse for you)

It’s a bit like a fiery explosion. It requires fuel, oxygen, and a spark. If you’re missing one of those key components, you won’t get an explosion.

To that end, RMDs only matter if they increase your overall withdrawal rate. For some retirees, RMDs will do just that. But for other retirees, RMDs might not increase their withdrawal rate at all. Instead, RMDs will simply shift which account(s) they are taking most of their withdrawals from.

Sequence Risk Usually Dissipates by RMD Age

The two investors in the chart below have the same returns, but in a different sequence. They make the same withdrawal amounts each year. But look at the difference in their final portfolio value!

It’s $105,944 vs. $35,889. That’s a 300% difference over only 15 years!

Even though the “blue” investor experienced a bad sequence of returns in years 11 through 15, it barely affects them.

The “green” investor, who suffered those same returns in Years 1 through 5, got decimated.

The lesson is clear: the sequence of returns risk has much greater impact during the early years of retirement. The underlying math is simple. During the early years of poor returns, each withdrawal (in this case, a fixed $5,000 withdrawal) requires us to sell a larger number of shares, leaving behind fewer shares to participate in any future market recovery.

But will this matter by the time our RMDs start?

Based on current legislation, RMDs will start at:

Age 73, if you’re born between 1951 and 1959
Age 75, if you’re born in 1960 or later
And yes, this might change in the future

Depending on where you look, the average retirement age in the U.S. falls between age 62 and age 65. Meaning RMDs won’t kick in until ~10 years into retirement.