Retirement Income Distribution — Avoiding Costly Mistakes - Vincent A. Virga

Introduction

Building wealth is only the first step. Distributing it effectively in retirement is often the greater challenge. High-net-worth families face unique risks when transitioning from accumulation to distribution, including taxes, market volatility, and longevity. Missteps during this phase can significantly reduce the sustainability of retirement income.

The One Big Beautiful Bill (OBBB), enacted in 2025, provides more certainty in tax brackets and estate exemptions, which helps families model retirement distributions more accurately. Yet, some provisions remain temporary, requiring careful attention. If you have not stress-tested your retirement distribution strategy under today’s rules, now is the time.

Understanding Sequence-of-Returns Risk

Sequence-of-returns risk occurs when retirees experience poor market returns early in retirement. Withdrawing from a portfolio during a downturn can permanently impair long-term wealth.

For example, two retirees with identical portfolios can have very different outcomes depending on whether they encounter negative returns early or later. Academic research shows that withdrawing 4 percent annually during a severe downturn in the first five years can double the probability of running out of money compared to encountering the same downturn later in retirement.[1]

Managing this risk requires flexibility. Using a dynamic withdrawal approach, rather than a fixed rule such as the “4 percent rule,” can improve outcomes. Retirees should plan for market variability rather than assume steady growth.

Withdrawal Sequencing and Tax Efficiency

Withdrawal sequencing—the order in which assets are drawn from taxable, tax-deferred, and tax-free accounts—can materially affect retirement sustainability.

A common strategy is to first withdraw from taxable accounts, then tax-deferred accounts such as IRAs or 401(k)s, and finally Roth accounts. This allows Roth balances to grow tax-free for as long as possible.[2]

With OBBB making tax brackets permanent, retirees can plan more confidently around bracket management. For example, filling lower brackets with taxable withdrawals or Roth conversions early in retirement can reduce exposure to higher brackets and minimize required minimum distributions (RMDs) later. If your current strategy does not include an intentional withdrawal sequence, this is an area worth reviewing.

Required Minimum Distributions (RMDs)

RMDs remain a central feature of retirement planning. Under current law, retirees must begin taking RMDs from most tax-deferred accounts at age 73, with the age set to increase to 75 in 2033 under SECURE 2.0.[3]

The permanence of tax brackets under OBBB allows families to project more accurately how RMDs will affect taxable income. Large RMDs may push retirees into higher brackets, increase taxation of Social Security benefits, and trigger Medicare IRMAA surcharges. Partial Roth conversions in the years before RMDs begin can help smooth out taxable income.

Longevity and Inflation Risks

Retirees today must plan for longer lifespans. A healthy 65-year-old couple has nearly a 50 percent chance that one partner will live past age 90.[4] This makes it critical to structure distributions to last three decades or more.

Inflation is another risk. Even at a modest 3 percent annual rate, purchasing power halves in roughly 24 years. Protecting against inflation may involve allocating part of a portfolio to equities, real assets, or inflation-protected securities. Annuities with inflation riders or variable payout features may also provide stability. Families who have not tested their plans against inflation scenarios risk overestimating the durability of their assets.

Integrating Social Security and Medicare with Distributions

Retirement income is not just about portfolio withdrawals. Social Security benefits and Medicare premiums interact directly with income decisions.

For example, higher withdrawals from tax-deferred accounts may increase provisional income, leading to higher taxation of Social Security benefits.[5] They may also push MAGI above thresholds that trigger higher Medicare premiums under IRMAA.[6]

With OBBB making tax brackets permanent, retirees can plan these interactions more precisely. Coordinating Social Security claiming strategies with withdrawal sequencing and healthcare costs creates a more resilient retirement plan. If you have not modeled these interactions, it may be time to do so.

Stress Testing Retirement Income Plans

Uncertainty remains a fact of retirement planning. Market volatility, inflation, and potential future tax changes can all disrupt projections. Stress testing involves modeling retirement income strategies under adverse scenarios to assess resilience.

For example, simulations can test the impact of retiring during a recession, experiencing higher-thanexpected inflation, or living longer than anticipated. Morningstar research shows that retirees who adjust withdrawals dynamically in response to stress scenarios improve the sustainability of their income plans.[7]

Families who do not stress test their strategies risk discovering weaknesses only when it is too late to adjust.

Conclusion

The distribution phase of retirement is complex, but it offers opportunities to preserve and extend wealth when approached strategically. Sequence-of-returns risk, tax-efficient withdrawal sequencing, RMD planning, and integration with Social Security and Medicare all play a role.

The clarity provided by the One Big Beautiful Bill allows families to plan distributions with greater confidence. Yet, temporary provisions and external risks make stress testing and professional coordination essential. If you have not revisited your retirement distribution plan under the current rules, now is the right time. For guidance on integrating distributions with your tax, estate, and healthcare strategies, visit www.pfswealthgroup.com or email info@pfswealthgroup.com.

Required Disclosure:

Insurance products are offered through the insurance business PFS Wealth Management Group. PFS Wealth Management Group is also an

Investment Advisory practice that offers products and services through AE Wealth Management, LLC (AEWM), a Registered Investment Advisor. AEWM does not offer insurance products. The insurance products offered by PFS Wealth Management Group are not subject to Investment Advisor requirements.

Investing involves risk, including the potential loss of principal. Any references to protection, safety or lifetime income generally refer to fixed insurance products, never securities or investments. Insurance guarantees are backed by the financial strength and claims paying abilities of the issuing carrier. This radio show is intended for informational purposes only. It is not intended to be used as the sole basis for financial decisions, nor should it be construed as advice designed to meet the particular needs of an individual’s situation. Please remember that converting an employer plan account to a Roth IRA is a taxable event. Increased taxable income from the Roth IRA conversion may have several consequences. Be sure to consult with a qualified tax advisor before making any decisions regarding your IRA

PFS Wealth Management Group is not permitted to offer and no statement made during this show shall constitute tax or legal advice. Our firm is not affiliated with or endorsed by the U.S. Government or any governmental agency. The information and opinions contained herein provided by third parties have been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed by PFS Wealth Management Group. A PR firm was paid to assist with media placement. 3326645-10/25

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