Retirees Who Spend From the Wrong Account First Run Out About Three Years Sooner. Here’s the Order That Adds Six Figures

Retirees who spend their savings in the wrong order can drain their portfolios years earlier than those who follow a tax-aware sequence. The conventional playbook, endorsed by Fidelity, Vanguard, and T. Rowe Price, is straightforward: draw from taxable brokerage accounts first, then tax-deferred accounts like traditional 401(k)s and IRAs, and Roth accounts last.

Modeling studies from those firms and academic researchers consistently show the difference can extend portfolio longevity by roughly three years and preserve a six-figure balance at the end of a 30-year retirement, mostly because compounding works best when tax-free money is left alone the longest.

The stakes carry real weight for most households. Northwestern Mutual’s 2025 Planning & Progress Study pegged the retirement “magic number” at $1.26 million, down from $1.46 million a year earlier, while 51% of adults said it was somewhat or very likely they would outlive their savings.

The PLANSPONSOR 2025 Participant Survey found 48% of workplace savers have less than $100,000 set aside. When the underlying balance is modest, sequencing errors that shave three years of income can determine whether savings cover rent at 88.

Three Buckets, Three Tax Treatments

Every retiree essentially manages three tax buckets. Taxable brokerage accounts hold money already taxed once, with future gains taxed at long-term capital gains rates. Tax-deferred accounts like traditional 401(k)s and IRAs were funded with pretax dollars, so every withdrawal is taxed as ordinary income. Roth 401(k)s and Roth IRAs were funded with after-tax dollars, and qualified withdrawals come out tax-free.

The logic behind spending taxable accounts first is that only the gains are taxed, and often at preferential rates. Meanwhile, the tax-deferred and Roth accounts continue to compound untouched. Because the Roth grows tax-free forever, leaving it for last squeezes the most value out of the account with the best tax treatment.

How the Tax Brackets Turn Sequencing Into Real Money

The mechanics become concrete once you layer in current tax brackets. For 2025, a married couple filing jointly pays 10% on taxable income up to $23,850 and 12% on income up to $96,950. The 2026 standard deduction under the One, Big, Beautiful Bill rises to $32,200 for joint filers and $16,100 for single filers.

That means a retired couple can pull roughly $56,000 from a traditional IRA and still stay inside the 10% bracket after the standard deduction. Draining the traditional account too fast pushes later withdrawals into the 22% or 24% brackets, sometimes on the same dollars that could have come out at 10% or 12% in an earlier year.

Required minimum distributions add a hard deadline to that math. The IRS requires distributions to begin at age 73, and the amount is set by the prior year-end balance. A retiree who spent Roth or taxable dollars first and left the traditional IRA to grow can face RMDs large enough to trigger higher Medicare premiums and make up to 85% of Social Security benefits taxable.

What Retirees Actually Spend

Sequencing decisions look different when placed against real spending. Bureau of Labor Statistics data put average annual household expenditures at $78,535 in 2024, up from $77,280 in 2023. The 2027 Social Security cost-of-living adjustment is tracking toward 3.3%. The gap between Social Security and total spending is what portfolio withdrawals have to close, and that gap is where sequencing decisions play out year after year.

Cash held in taxable accounts adds another wrinkle. The FDIC national average 12-month CD rate stood at 1.71% APY as of August 2026. Interest from CDs held in a taxable brokerage account is ordinary income, which can nudge more Social Security benefits into taxable territory and undercut the case for stockpiling cash outside a tax-advantaged wrapper.

Where Blending Beats the Rulebook

Strict sequencing works as a starting point that most plans build on. Many advisors now recommend blended withdrawals in early retirement, when income is naturally low, to fill the 10% and 12% brackets with traditional IRA distributions or Roth conversions before RMDs and Social Security stack on top.

That quiet window between the last paycheck and the first required withdrawal may be the lowest tax rate a retiree ever sees again, and we sized up how to use it in a free guide here.

Contribution rules are also shifting the after-tax landscape. Starting in 2026, workers 50 and older who earned more than $150,000 in 2025 must make 401(k) catch-up contributions to a Roth account, with the standard catch-up capped at $8,000 and a super catch-up of $11,250 for ages 60 to 63. More Roth money coming in eventually means more Roth money to sequence out.

What to Do Before the First Withdrawal

Three steps make the biggest difference. First, map the three buckets and the tax rate each dollar will face as it comes out. Second, use low-income years between retirement and age 73 to withdraw or convert traditional balances up to the top of the 12% bracket, locking in a low rate before RMDs arrive. Third, treat the Roth as the last account touched, both because tax-free compounding rewards patience and because Roth balances give heirs the cleanest inheritance under current rules.

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