Retirement withdrawals can be “out of whack” in two different ways: the client may be drawing from accounts in a tax-inefficient order, or taking withdrawals through a portfolio path that leaves it exposed to poor returns early in retirement. A sensible plan coordinates both sequences with required minimum distributions (RMDs), spending flexibility, and the client’s goals. There is no universally correct account order or withdrawal rate.
What does “sequence” mean in a retirement income plan?
It means both which accounts the client taps and when and the order in which investment returns arrive while withdrawals are happening. The first affects taxes and account balances. The second affects how long the portfolio may support spending.
Those questions interact. An account order that looks tax-efficient in a single year may not be best across a client’s lifetime, while a spending rule that raises income today may leave less room to absorb losses later. Review the plan as a coordinated cash-flow strategy rather than treating account order, investment allocation, and withdrawal rate as separate decisions.
Which accounts should the client tap first?
Use a tax-aware order as a starting point, not a rule
Vanguard’s suggested starting sequence is taxable assets, then tax-deferred accounts, then tax-free accounts. Taxable sales may receive capital-gains treatment, while withdrawals from tax-deferred accounts are generally ordinary income. Keeping tax-free assets available can also preserve flexibility. But not every taxable withdrawal qualifies for preferential tax treatment, and the sequence may be a poor fit when the client’s tax brackets, RMDs, or legacy goals point elsewhere.
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In Vanguard’s modeled example, a tax-efficient withdrawal sequence produced about 14% lower cumulative taxes by age 100 than pro rata withdrawals. That result applies to Vanguard’s specified hypothetical household, account mix, and allocation; it is not a forecast of what a particular client will save. Vanguard describes its sequence as “a helpful starting place for most people but may not be ideal for everyone” in Vanguard’s Principles for Retirement Income (2026).
Compare lifetime tax effects, not just this year’s bill
Project withdrawals and tax consequences across the client’s expected retirement horizon. Consider current and future tax rates, the size and tax treatment of each account, expected income from Social Security or pensions, and whether the client prioritizes spending, leaving assets to heirs, or both. A lower tax bill now can shift taxable income into a later year, so judge the sequence over time rather than by this year alone.
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For a client with substantial tax-deferred savings, evaluate whether Roth conversions fit the broader withdrawal plan. Their tax cost, future rates, RMD effects, and the client’s goals all matter; a conversion is not automatically beneficial just because it reduces a future tax-deferred balance.
How can early market losses disrupt withdrawals?
Sequence-of-returns risk is the damage that can occur when weak investment returns arrive early in retirement and withdrawals continue. Selling investments to fund spending after a decline can leave fewer assets to participate in a later recovery. Two portfolios with the same average return over a long period can therefore produce different retirement outcomes if returns arrive in a different order.
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Morningstar’s The State of Retirement Income: 2025, using data as of September 30, 2025, found that nearly 70% of its modeled failure trials involved investments that had lost value by the end of retirement year five. This describes the failed trials in Morningstar’s model; it is not an individual client’s probability of failure. In the same particular model, trials with gains through the first five years had about a 4% chance of later depletion. Neither finding predicts what any one portfolio will do.
For key baseline comparisons, Morningstar modeled a 40% equity and 60% fixed-income portfolio over 30 years at a 90% success rate. Model results depend on assumptions, including the return path, time horizon, and definition of success; they are not guarantees of a safe withdrawal rate.
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What’s a sustainable withdrawal approach for the client?
Choose a method by comparing the income it starts with, how much annual payments can vary, the client’s willingness and ability to adjust spending after losses, and the balance the client hopes to leave. Morningstar’s modeled comparisons show that methods can trade steadier income for higher starting withdrawals or greater flexibility; no method leads on every measure.
| Approach | How withdrawals respond | Main trade-off |
|---|---|---|
| Fixed real withdrawals | The client starts with a dollar amount and increases it with inflation. | Offers a steadier income path, but maintaining inflation increases after weak returns can put greater pressure on the portfolio. |
| Constant-percentage or endowment method | Withdrawals are tied to the portfolio balance under a defined rule. | Morningstar found these approaches could support higher starting rates in many tested allocations, but annual payments can swing more as the balance changes. |
| Guardrails or skipped inflation increases | Rules constrain increases or reductions at specified high or low points; some methods forgo an inflation increase after a losing year. | Can moderate spending changes or portfolio pressure, but may require accepting lower spending in some years. |
Compare the approaches against the client’s full retirement horizon, not just the first-year amount. Include lifetime spending and depletion risk, year-to-year cash-flow stability, and the ending balance or bequest objective. Test whether essential spending is covered by reliable income such as Social Security or a pension, and identify discretionary expenses the client could reduce if markets fall. A model’s starting withdrawal rate is an assumption-bound estimate, not a promise.
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How should RMDs change the account sequence?
Under current U.S. federal guidance, traditional IRA, SEP IRA, SIMPLE IRA, and many retirement-plan owners generally must begin RMDs at age 73. A workplace-plan participant may be able to delay distributions until retirement, subject to the 5% owner exception and plan rules. RMDs are generally taxable except to the extent of basis or a qualifying tax-free distribution.
The first RMD is generally due by April 1 of the year after the year the owner turns 73. The next distribution is still due by December 31 of that same year. Delaying the first RMD can therefore put two taxable distributions in one calendar year, potentially changing the client’s tax picture.
An RMD is a required distribution, not a direction to spend that amount. The plan should account for the distribution and its tax effects even if the client does not need all of the proceeds for current expenses. Eligible IRA RMD totals may generally be satisfied from one or more IRAs; retirement-plan RMDs generally must be taken separately from each plan. Confirm the account type, beneficiary status, current-year IRS guidance, and plan documents before relying on an aggregation or timing rule.
How can an adviser bring the sequences together?
- Map the cash flows. List expected essential and discretionary spending alongside Social Security, pensions, and other reliable income. Identify the amount the portfolio needs to provide.
- Inventory accounts and rules. Record balances, tax treatment, liquidity, applicable RMDs, and whether an RMD can be aggregated with distributions from another account.
- Compare account-order scenarios. Test taxable-first, tax-deferred-first, tax-free-first, and pro rata withdrawals where relevant. Compare projected lifetime taxes and remaining balances against the client’s goals; do not treat any one order as a default outcome.
- Stress-test the spending rule. Examine weak early-return scenarios as well as more favorable paths. Show how each approach affects starting income, annual variability, cumulative spending, depletion risk, and the ending balance.
- Agree on adjustment rules in advance. Set expectations for whether and how discretionary spending or inflation increases may change after losses, and revisit the plan as tax rules, income, health, or goals change.
This framework supports a client-specific discussion, not individualized tax, investment, or legal instructions. For federal RMD rules, consult the IRS’s “Retirement plan and IRA required minimum distributions FAQs” (updated December 10, 2024) and “Employee Plans news: Required Minimum Distributions,” as well as the relevant plan documents. For withdrawal-order and model comparisons, consult Vanguard’s 2026 retirement-income principles and Morningstar’s 2025 retirement-income research.
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