Understanding RMDs in an Inflationary Environment
For retirees, Required Minimum Distributions (RMDs) represent a significant portion of their income strategy. Beginning at age 73 (per current IRS rules), you must withdraw a minimum amount each year from tax-deferred retirement accounts like IRAs and 401(k)s.
But what happens when inflation steadily erodes the value of your withdrawals? For many retirees, inflation can feel like a hidden tax on their retirement lifestyle, especially when combined with the mandatory nature of RMDs.
As a fiduciary financial advisor, my role is to help retirees and pre-retirees understand how inflation interacts with RMDs—and how to adjust their income strategies accordingly.
The Relationship Between Inflation and RMDs
RMDs are calculated based on your account balance at the end of the previous year and your life expectancy factor from IRS tables. Here’s where inflation comes into play:
- Higher account balances can mean larger RMDs. If markets perform well during inflationary periods, your year-end balances may increase, leading to higher RMD amounts.
- Purchasing power declines. Even if your RMD grows nominally, inflation can reduce how far that money goes toward everyday expenses.
- Tax brackets matter. Inflation adjustments to tax brackets may not keep pace with rising RMDs, potentially pushing retirees into higher tax brackets.
In short: RMDs ensure you withdraw from your accounts, but inflation determines whether those withdrawals will truly cover your retirement needs.
Key Questions Retirees Should Ask
To protect your financial well-being, retirees should consider these questions:
- Is my RMD keeping up with inflation?
Compare your RMD increases to the actual rise in your living expenses. - Will higher RMDs trigger unnecessary taxes?
Growing balances may mean larger distributions—and potentially higher taxable income. - How should I adjust my withdrawal strategy?
Consider whether taking more than the minimum in certain years provides greater flexibility. - Am I over-relying on RMDs for income?
Diversification across taxable, tax-deferred, and tax-free accounts can help cushion inflation’s impact.
Strategies to Mitigate Inflation’s Impact on RMDs
While you cannot avoid RMDs, you can take proactive steps to reduce inflation’s effect on your retirement income:
- Roth Conversions
Shifting assets from tax-deferred accounts into Roth IRAs before RMD age reduces future RMD obligations and provides tax-free withdrawals later. - Tax-Efficient Withdrawal Planning
Use a coordinated withdrawal strategy across accounts to balance taxes and preserve purchasing power. - Inflation-Protected Investments
Allocate part of your portfolio to assets like Treasury Inflation-Protected Securities (TIPS) or equities with dividend growth to outpace inflation. - Charitable Giving Strategies (QCDs)
Qualified Charitable Distributions (QCDs) allow you to donate directly from your IRA, satisfying your RMD while reducing taxable income.
Final Thoughts
Inflation is one of the most persistent risks retirees face. While RMDs are mandatory, how you manage them in an inflationary environment can make the difference between a comfortable retirement and one strained by rising costs.
Working with a fiduciary financial advisor ensures your RMD strategy aligns with both current tax laws and long-term retirement goals.
Call-to-Action
If you’re approaching RMD age—or already taking distributions—now is the time to evaluate how inflation could affect your retirement plan. As a fiduciary advisor, I can help you build an inflation-resilient strategy tailored to your needs.
Contact me today to schedule a personalized retirement income review.
Global View Capital Management (GVCM) is an affiliate of Global View Capital Advisors (GVCA). GVCM is a SEC Registered Investment Advisory firm headquartered at N14W23833 Stone Ridge Drive, Suite 350, Waukesha, WI 53188-1126. 262.650.1030. Ryan Peca is an Investment Adviser Representative (“Adviser”) with GVCM. Additional information can be found at www.adviserinfo.sec.gov Global View Capital Insurance Services (GVCI) is an affiliate of Global View Capital Advisors (GVCA). GVCI services offered through Experior Financial Group, ASH Brokerage, and/or PKS Financial. GVCI is headquartered at N14W23833 Stone Ridge Drive, Suite 350, Waukesha, WI 53188-1126. 262-650-1030. Ryan Peca is an Insurance Agent of GVCI.
These views do not necessarily represent the views of GVCM or any of its affiliates. Investment involves risk.