Retire With Purpose - The Retirement Podcast · Casey Weade

Sequence Risk Meets RMDs: The Retirement Trap No One Talks About

July 18, 2025·28 min·2 clips

Casey explains how two climbers with leaking water bottles face different fates based on when they encounter rough terrain.

This episode examines the potential interaction between required minimum distributions and sequence of returns risk in retirement planning. Hosts Casey and Marshall Johnson, both certified financial planners, analyze a listener's question about this specific financial concern. They use an article from the Best Interest blog titled "RMDs and Sequence Returns Risk" as their primary discussion framework. The listener, Paul, worries that RMDs could force excessive withdrawals during market downturns, triggering higher taxes and Medicare premiums. He presents a scenario where a $1 million IRA drops 30% before his RMD calculation, forcing a withdrawal from a diminished balance. The hosts explain that sequence risk refers to the damaging effect of poor investment returns early in retirement when withdrawals are being taken. They illustrate this with a spreadsheet example comparing two 15-year periods with the same average 4% return but different sequences of good and bad years. A climber analogy describes one hiker exhausting their water early on a difficult climb, symbolizing a portfolio depleted by early withdrawals during downturns. RMDs can increase taxable income, potentially making up to 85% of Social Security benefits taxable and raising Medicare Part B premiums through IRMAA surcharges. A key insight is that while sequence risk often diminishes by RMD age, it is not eliminated, as retirees may still have 20 or more years of distributions. The hosts note that the article's example uses an unrealistic five consecutive years of negative returns, whereas history shows a maximum of three. They argue the greater concern is a single severe market drop early in the RMD period. Crucially, RMDs are a percentage of the remaining account balance, which self-regulates withdrawal amounts downward after market losses, unlike a fixed dollar withdrawal. Their analysis shows this mechanism mitigates, but does not erase, the sequence risk compared to flat withdrawals. Proactive strategies include setting aside several years of RMDs in low-risk "buckets" to avoid selling depressed assets and performing strategic Roth conversions during lower-income years before RMDs begin. The tone is educational and conversational, breaking down complex financial concepts with analogies and spreadsheet data. The style is advisory, offering actionable strategies for listeners to consider for their own planning. This episode is ideal for pre-retirees or retirees actively planning their withdrawal strategy who are concerned about tax efficiency and market volatility. Listeners seeking basic investment advice or those already comfortably executing a detailed plan may find the content less immediately applicable.

As heard by us

RMDs look procedural until bad returns arrive at exactly the wrong time.

The episode turns a practical retirement question into something immediate: sequence-of-returns risk can become far more punishing once required minimum distributions enter the picture.

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Why you'd press play

When RMDs and bad early returns collide, retirement math gets serious fast.

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