Why Withdrawal Order Matters in Retirement

Saving for retirement is only half of the equation. How money is withdrawn once retirement begins can significantly affect how long savings last and how much is lost to taxes along the way. Withdrawal order is often overlooked, yet it plays a central role in retirement sustainability and income stability.

Most retirees hold assets across different types of accounts. Taxable brokerage accounts, tax deferred retirement accounts, and tax-free accounts each follow different tax rules. The order in which these accounts are used determines how much income is reported each year and how exposed retirement income becomes to taxes and future rule changes.

Taxable accounts are often used first in retirement. Withdrawals from these accounts typically include a mix of principal and investment gains. Only the gains are taxed, often at capital gains rates, which may be lower than ordinary income rates. Using taxable assets early can allow tax deferred accounts to continue growing and delay higher taxation later. It can also create flexibility for managing income levels during the early retirement years.

Tax deferred accounts such as traditional retirement plans are taxed as ordinary income when withdrawals occur. Required minimum distributions later in life force withdrawals whether income is needed or not. If these accounts are allowed to grow unchecked for too long, mandatory withdrawals can push taxable income higher than expected. This can increase taxes on Social Security benefits and raise Medicare premiums. Gradual withdrawals before required distributions begin can help smooth income over time.

Tax free accounts offer the most flexibility. Withdrawals from these accounts do not increase taxable income, which makes them valuable tools later in retirement. They can be used to cover large expenses, manage tax brackets, or offset income in years when other sources push income higher. Because of this flexibility, these accounts are often preserved as long as possible. However, using them too sparingly can also lead to inefficiencies if other accounts grow into future tax problems.

Withdrawal order also interacts with market conditions. During years of poor market performance, pulling funds from accounts that are less exposed to volatility can reduce pressure on invested assets. In stronger markets, withdrawing from growth-oriented accounts may be less damaging. This adaptability matters more than following a rigid rule.

Healthcare and Social Security considerations further complicate withdrawal decisions. Income levels affect Medicare premiums and the taxation of Social Security benefits. Poor coordination between withdrawals and these thresholds can create higher costs that persist for years. Withdrawal planning is not just about taxes in the current year, but about downstream effects that compound over time.

Spending patterns change throughout retirement. Early retirement years may involve higher discretionary spending, while later years may bring increased healthcare costs. Withdrawal strategies should evolve alongside these changes. A static approach that assumes consistent spending and tax treatment can miss opportunities to improve long term outcomes.

There is no universal withdrawal sequence that works for everyone. The optimal approach depends on account balances, income sources, tax considerations, and personal priorities. What matters most is understanding that withdrawal decisions are strategic, not mechanical.

Retirement planning does not end when work stops. How savings are accessed over time can be just as important as how they were built. A thoughtful withdrawal strategy helps preserve flexibility, manage taxes, and support income throughout retirement.

Write to Marck Berotte at mberotte@aglaosconsulting.com