RMD Withdrawal Strategies: How Installment Distributions Mitigate Retirement Risk Amid Volatility

In an era of economic uncertainty, retirees face a critical dilemma: how to withdraw savings without depleting portfolios prematurely. The IRS's recent RMD rule changes, combined with evolving retirement research, offer a compelling solution—installment RMD distributions. By shifting from lump-sum withdrawals to staggered payments, retirees can reduce exposure to market volatility and sequence-of-returns risk (SORR). Let's explore how these strategies work and why they're essential for sustainable retirement planning.

The New IRS Rules: A Strategic Opportunity

The SECURE 2.0 Act has gradually raised the RMD age to 73 by 2025 and 75 by 2032, extending tax-deferred growth. But the most significant change lies in how distributions are structured. For example, an individual turning 73 in 2023 must take their first RMD by April 1, 2025, with subsequent annual withdrawals based on updated life expectancy tables. This staggered approach inherently mimics dollar-cost ramping, spreading withdrawals over time to smooth out market fluctuations.

Dollar-Cost Ramping: The Anti-Volatility Play

Dollar-cost ramping works inversely to dollar-cost averaging. Instead of investing fixed amounts periodically (as in investing), retirees withdraw fixed or adjusted amounts incrementally. This method mitigates SORR—the risk of withdrawing large sums during a market downturn, locking in losses.

Consider a retiree with a $1 million IRA who takes a lump-sum RMD of $40,000 (assuming a 4% withdrawal rate) in a year when the S&P 500 drops 20%. That withdrawal represents 4% of a now $800,000 portfolio, effectively a 5% withdrawal rate in real terms. Over time, this compounding effect can drain assets faster than anticipated.

In contrast, installment RMDs spread withdrawals across quarters or months. If the same retiree takes four $10,000 withdrawals, two in a down market and two in recovery, the average cost basis is preserved.

Research-Backed Benefits: Lower Depletion Rates

Recent studies validate this strategy's efficacy.

1. Morningstar's Dynamic Withdrawal Models (2023–2025):
2. Researchers found that tying withdrawals to IRS life expectancy tables (as RMDs do) reduces portfolio depletion risk. By recalculating withdrawals annually using updated balances and age-based factors, retirees avoid rigid withdrawal rates that may overdraw during bear markets.

3. A 2023 study incorporated historical spending data, showing retirees naturally reduce expenses by ~1–2% annually after age 70. This aligns with RMD's declining distribution rates (as life expectancy shortens), creating a natural spending “ramp-down.”

4. Sequence Risk Reduction:
   Wade Pfau and Dr. Jim Dahle's work highlights that flexible withdrawal systems—like RMDs—cut SORR by 15–20% compared to fixed-rate strategies. For instance, a retiree using RMD-based withdrawals in the 2008 crash would have withdrawn smaller amounts in early years, allowing portfolios to recover.

Practical Implementation: A Three-Pronged Approach

To maximize benefits, retirees should:

1. Structure Withdrawals Quarterly or Monthly:
   Most custodians allow setting up installment RMDs. Spreading withdrawals reduces reliance on any single market moment.

2. Pair with Buffer Assets:
   Keep 2–3 years of expenses in cash or short-term bonds to cover withdrawals during downturns, sparing equities from forced sales.

3. Monitor Life Expectancy Tables:
   The IRS's Uniform Lifetime Table (Table III) is your guide. For example, a 73-year-old with a $1 million IRA would withdraw $34,483 in Year 1 ($1,000,000 ÷ 29.0 life expectancy). This amount adjusts downward as life expectancy shortens, aligning with reduced spending needs.

Navigating Economic Uncertainty

In 2025, retirees face a landscape of high inflation, geopolitical risks, and elevated equity valuations. The IRS's 25% penalty reduction for missed RMDs (down from 50%) also encourages proactive planning.

Conclusion: Act Proactively, Mitigate Risk

Installment RMD distributions are no longer just a regulatory requirement—they're a strategic tool to navigate volatility. By adopting this approach, retirees can:
- Reduce SORR through dollar-cost ramping.
- Leverage dynamic withdrawal rates tied to life expectancy.
- Align spending declines with natural aging patterns.

The shift to installment distributions is a prudent step for anyone aiming to outlast their portfolio. As markets remain unpredictable, structuring withdrawals to mirror your lifespan—and the market's cycles—is the safest bet.

Stay informed, stay flexible, and plan for the long haul.