Retirement Spending: Which Accounts Come First?

Planning for retirement spending is more complex than figuring how much you want to (or are able to) spend each year.

Much thought and effort goes into building up a nest egg and preparing financially to retire, but exactly how we’ll use those assets to support our lifestyle in retirement doesn’t get as much attention.

Do you know which accounts you’ll access first? Will all of your assets be available to you penalty-free? Are there tax-free withdrawals you can make?

There is no one-size-fits-all plan, but we can use some general principles to help guide our decision-making when it comes to accessing money to meet our retirement spending needs.




How Much Can You Spend?


There are two main approaches to determining how much one can spend in retirement, and most everyone will use a combination of the two.


Cash Flow Approach

The first is cash flow. If you have steady, reliable income sources, this is money that you can spend. This passive or mostly-passive income can come from:



If your monthly cash flow meets or exceeds your desired spending, you’re in great shape. You will very likely have assets to pass on to heirs or charity when your time is up.

If, on the other hand, you don’t have passive income that covers all of your desired spending, fear not! You can spend from the assets you’ve saved up over all the years.


Nest Egg Approach

A second approach looks at the sum of your assets as one big pile of money that will provide for the rest of your life. If you only spend a small fraction of it each year, the odds are decent that the pile will grow by more than you’re taking out, and the odds are extremely good that the pile won’t be depleted in your lifetime.

How small is that fraction? Two seminal studies from the 1990s from William Bengen and three professors at Trinity College determined a safe withdrawal rate to be about 4% of the initial nest egg, adjusting that amount upward with inflation each year.

The assumptions were that you would be invested in a mix of US stocks (50% to 75%) and bonds (25% to 50%) and success means the money lasts at least 30 years.

If you plan on a longer retirement, you expect future returns to be worse than anything we’ve seen in the last century, or you just want to be especially safe and conservative, an initial withdrawal rate closer to 3% may be warranted.


Combining the Two Approaches

It’s important to understand that the safe withdrawal rate studies look at the total return from stocks and bonds, and that return includes the cash flow from dividend payments and any withdrawals you might take as RMDs.

I point this out to caution you against double-counting. If you’re looking to spend $100,000 and your taxable brokerage account kicks off $20,000 a year in dividends, that doesn’t mean your nest egg only needs to provide for the other $80,000 at a 3% to 4% withdrawal rate.

Conversely, income sources that are independent of your retirement assets can be used to lower your nest egg requirements. Examples include Social Security, pensions, annuities, and perhaps rent and other income from real estate if you’re not including the value of the real estate as part of your nest egg.

For example, if you’re collecting $40,000 a year in Social Security and purchased a fixed annuity that pays out $20,000 a year, and you plan to spend $100,000 a year, now you only need a nest egg to cover the remaining $40,000.

Using a 3% to 4% withdrawal rate, we multiply that $40,000 by 25 to 33 to determine that a nest egg of $1,000,000 to $1,333,333 should be adequate to give us $100,000 to spend when combined with the Social Security Checks and annuity payments.

For more information, see How Much Money Does a Doctor Need to Retire? Note that it’s actually the same for everyone. I just happen to reach a lot of doctors.


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Which Accounts Should You Access First?


Let’s start with the obvious. Any cash flow that comes to you will be your first source of spending money.

Don’t reinvest dividends from a taxable brokerage account. That’s spending money and you can’t undo the tax consequences of receiving it.

The same is true of rents or royalties collected or any other checks you receive or direct deposits that show up from various investments to your checking or savings accounts, including interest earned within those accounts.

If cash flow covers all of your anticipated spending, congratulations. You’ve earned and saved more than was necessary. Not that there’s anything wrong with working hard, but you probably could have cut back or retired at an earlier age if you had wanted.


Investment Accounts

Most of us will be spending from retirement accounts, too. This doesn’t necessarily mean eating into principal. Most years, your investments are likely to return more than the 4% or so that you’ll plan to draw from them.

In general, tax deferral and tax-free growth are good things, so it can make sense to leave money in an IRA or 401(k) for as long as you can.

Money in a taxable brokerage account suffers from tax drag, so this is a good place to start withdrawing money.

Are there exceptions to a taxable-account-first approach? You betcha.

The tax code comes into play and complicates things a bit. For example, married couples have a standard deduction of $25,100 in 2021. That means that $25,100 in taxable income can be realized before a penny of income tax is owed.

You might choose to take $25,100 from a traditional IRA or 401(k) if you’re at least 59.5 years old (and thereby not subject to a 10% penalty). You could also do a Roth conversion of that money if you don’t need the cash.

There are other taxable income considerations. For example, you won’t pay capital gains taxes when selling appreciated stock or funds in a taxable account if your total taxable income (which includes the realized capital gains from selling) falls within the 0% capital gains bracket that goes up to $80,800 for couples and $40,400 for single filers.

Eventually, you’ll be taking Social Security, and if you have other decent income sources, most of your Social Security Check will be taxed.

It’s worth your time to understand how your various sources will be taxed and to do some tax planning. I have a favorite tool for that.


With the caveats above in mind, my preferred order of withdrawals would be:

  1. Taxable Brokerage Account
  2. Tax-Deferred Retirement Accounts
  3. Tax-Free (Roth) Retirement Accounts


Roth money is the most valuable money, as it grows tax-free and can be withdrawn tax-free. As a general rule, I would save the best for last and leave that money alone as long as possible.

That being said, there may be times when you want more money to cover a large expense but don’t want to increase your taxable income, and a Roth account is a good one to tap in such a situation.

This could arise if you’re close to tipping into a higher marginal tax bracket. The jump from 12% to 22% is steep, as is the increase from 24% to 32%.

You might also want to avoid paying more for Medicare due to IRMAA — that happens for couples at a taxable income of $88,000 for single filers and $176,000 for couples filing jointly in 2021. If you’re under 65, you may want to avoid losing an ACA subsidy.

There are other ways to reduce taxable income, particularly if you’re charitably inclined. Charitable Remainder Trusts and Donor Advised Funds are two such options, and they can be used together harmoniously.

Once you’re 70.5 years of age, you can send up to $100,000 directly to charity as a Qualified Charitable Distribution (QCD) and it will count towards your RMD (once you’e 72 and required to take them), but the QCD will not be taxed.

For further reading on drawdown strategies at various ages, see The Epochs of Early Retirement.


Preparing for Retirement Spending


It’s wise and helpful to have a variety of investment account types and passive income sources.

Before you retire, try to implement some tax diversification to your nest egg. If you don’t have a Roth IRA, start now with a backdoor Roth for this calendar year. Start a taxable brokerage account; it could be as good as a Roth IRA, and in some ways, better.

Explore additional income sources. A side gig can give you income that’s more active, but it can become more passive over time, and it might be what you need to help make the transition from a demanding, purposeful career to a retired life with far fewer responsibilities.

Understand that there will be reasons to stray from this framework, but there is an order in which to access your dollars that will make your nest egg last longer and/or allow you to leave a larger legacy.

First, spend the cash that comes your way. There’s no sense in reinvesting the money that your investments spin off unless you have a surplus of passive income.

Second, sell assets from your taxable account. By paying attention to your cost basis in those equities, you will have some control over how much taxable income you realize when doing so.

Third, and at some point, this will be required, withdraw from your tax-deferred IRA, 401(k), 403(b), etc… If you have a 457(b), there are special considerations as you don’t have to wait until you’re 59.5 to access this money penalty-free and in a non-governmental 457(b), the money’s not technically yours until you withdraw it!

Finally, Roth IRA dollars should usually be the last ones to be accessed. You might spend some Roth money if a lump sum is needed and you don’t want to greatly increase your tax burden.

Depending on your level of wealth and intentions, there may be additional estate planning issues to consider that are beyond the scope of this discussion that factor into your withdrawal strategy, but I promise that your heirs won’t object to inheriting your Roth IRA.



Have you devised a drawdown strategy? Where will most of your retirement spending come from?


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30 thoughts on “Retirement Spending: Which Accounts Come First?”

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  3. As always, thanks for the insightful column. I always look forward to seeing an email from your newsletter in my mailbox. I was confused by your warning about double counting: “I point this out to caution you against double-counting. If you’re looking to spend $100,000 and your taxable brokerage account kicks off $20,000 a year in dividends, that doesn’t mean your nest egg only needs to provide for the other $80,000 at a 3% to 4% withdrawal rate.” If you don’t apply the $20,000 from dividends, why wouldn’t you then need $80,000 to cover your planned spending budget of $100,000?

    • I could have phrased that better.

      What I was trying to say is that the $20,000 is part of your total return. It’s not bonus money. So if you want to use a 4% withdrawal rate and a planned spend of $100,000 a year, you should build up a nest egg of 25x $100,000 = $2.5 Million, NOT 25x $80,000 = $2 Million. The safe withdrawal rate studies included stocks and their dividends plus bonds and their yields.

      Now, if you have enough in dividends to completely cover your spending and taxes on those dividends in any given year, you’ve probably got far more than 25x. If not, you’ve got a heavy dividend tilt and I wouldn’t necessarily count on that portfolio delivering that level of dividends indefinitely.

      I hope that makes more sense.


  4. Excellent article, as always. Just a small point: qualified charitable distributions (QCDs) can actually start at age 70-1/2, not age 72 as stated.

  5. So, here’s my drawdown strategy: Roth last, yes. But because I’m retiring at 55 and will have 12-15 years before I plan to collect SS, I’m going to tap retirement accounts from my employer that I can access without penalty under the Rule of 55, but only up to the amount of my standard deduction or itemized deductions (whichever is higher). That way, whatever I draw off those accounts annually isn’t taxed, as I’ll be deducting it. Then for the rest of the money I need, I’ll sell appreciated stock/mutual fund shares from my regular brokerage account, staying under the limit to be in the 0% long term capital gains bracket. I’m looking at 15 years or so of owing 0 or very minimal federal tax, while being able to spend more each month in retirement than I do while I’m working.

    • 0% cap gains rate for 2023 is for income up to $89,250 filing jointly. The way I understand this number is that cap gains are stacked on top of any other income you have.
      So, will your total withdrawals will be $89,250/yr? Seems low-ish, although it depends on your spending habits

      • That’s not how capital gains taxes work, unless you have a cost basis of 0 in the assets you’re selling.

        Read the Taxman Leaveth post linked above. One can easily have a six-figure annual spend and no federal income taxes.


      • That’s not how capital gains taxes work, unless you have a cost basis of 0 in the assets you’re selling.

        Read the Taxman Leaveth post linked above. One can easily have a six-figure annual spend and no federal income taxes.


    • Possibly. I would expect capital gains to be relatively low, so this would be a low-taxable-income source of funds. Not tax-free like Roth money, but not fully taxed like tax-deferred dollars, either.

      Now, if the munis are kicking off enough tax-free income (might still have state income tax on them) to live on, you’d have no reason to sell.

      This is why I emphasize that there’s no one-size-fits-all approach. Your personal withdrawal plan depends on your spending habits, asset location, tax situation, cost basis, etc…



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