When people think about retirement income, the focus is usually on how much they can afford to spend each year. That’s an important question, but it’s only half the picture. In retirement, where your income comes from can matter just as much as how much you withdraw.
Imagine two retirees who look identical on paper. Both retire at age 65. Both have saved $1 million. Both plan to spend $50,000 per year, adjusted for inflation, and both earn the same market returns over time. The only difference between them is how they take money out of their accounts.
Each retiree has the same mix of savings: $400,000 in a traditional IRA, $400,000 in a taxable account, and $200,000 in a Roth IRA. Like many people, the first retiree takes a straightforward approach. Each year, withdrawals are spread evenly across all three accounts. It feels fair and balanced, and it’s certainly simple.
The problem is that simplicity can come with hidden costs. Pulling evenly from a traditional IRA means paying ordinary income tax sooner than necessary. Roth assets—arguably the most flexible and valuable dollars in the portfolio—sit untouched even when it might make sense to use other accounts first. Over time, this approach can also lead to larger required minimum distributions later in retirement, pushing more income into higher tax brackets.
The second retiree takes a more intentional approach. The annual spending amount is the same, but the order of withdrawals is different. Early in retirement, income comes primarily from taxable accounts, with an eye toward managing capital gains. Traditional IRA withdrawals are used strategically to fill lower tax brackets over time. Roth assets are left for last, allowing them to continue growing tax-free.
This sequencing does more than reduce taxes year to year. By preserving Roth dollars as long as possible, the retiree also increases the amount of tax-free assets that can be left to heirs. In many cases, Roth funds can be passed on and withdrawn without income tax, making them especially valuable from a legacy perspective.
Over a 25-year retirement, these two approaches can lead to dramatically different outcomes. In this example, the retiree taking even withdrawals ends up paying roughly $320,000 in lifetime taxes. The retiree who withdraws intentionally pays closer to $170,000. That’s a difference of about $150,000, without taking on additional risk or trying to outperform the market.
The lesson here is simple but often overlooked. Retirement planning isn’t just about accumulating savings. It’s about coordinating your accounts so they work together. A withdrawal strategy that seems harmless on the surface can quietly erode wealth over time, while a thoughtful plan can preserve both flexibility and legacy. And in many cases, it’s one of the easiest retirement planning mistakes to fix—especially if it’s addressed before the first withdrawal is ever taken.