How a smarter sequencing strategy can extend your portfolio for decades.

Retirement is not simply the day you stop collecting a paycheck. It is the day you begin writing your own. And for many people, that transition — from decades of accumulating wealth to deliberately spending it down — is one of the most psychologically and financially complex shifts they will ever make. The good news is that a well-structured withdrawal strategy can mean the difference between a plan that merely survives and one that genuinely thrives across changing tax rates, market cycles, and an increasingly long retirement horizon.

This article focuses specifically on your investable assets: your retirement accounts, brokerage accounts, and savings. These are the dollars you will use to bridge the gap between guaranteed income sources like Social Security or a pension and the full cost of the lifestyle you have worked your entire career to enjoy. What often trips people up is not that they spent too much; it is that they pulled money from the wrong account at the wrong time, triggering unnecessary taxes and locking in preventable losses.

If you are approaching or have recently entered retirement, the following framework addresses exactly that problem.

The Conventional Wisdom (and Why It Can Backfire)

You may have heard the traditional withdrawal sequence recommended by many financial textbooks and advisors: spend taxable accounts first (your brokerage accounts, savings, and money market funds), then draw down tax-deferred accounts (like a traditional IRA or 401(k)), and finally tap tax-free accounts (such as a Roth IRA or Roth 401(k)) last.

The logic seems sound. You preserve your tax-advantaged accounts as long as possible, allowing them to compound with no annual tax drag. On paper, this is efficient. In practice, however, it can quietly build a tax problem that becomes very difficult to dismantle once it gains momentum.

The RMD Problem: A Tax Tornado on the Horizon

Here is what the conventional approach often overlooks. By leaving your traditional IRA and 401(k) untouched for the first decade or more of retirement, those balances continue to grow — and the IRS will eventually force you to withdraw them, whether you need the income or not. These are known as Required Minimum Distributions, or RMDs [1].

Depending on the year you were born, RMDs begin at age 73 or 75 [2]. And here is where the "tax tornado" effect takes hold. Larger-than-necessary RMDs can simultaneously:

• Push your taxable income into a higher federal bracket, increasing the marginal rate on every dollar above the threshold
• Trigger Income-Related Monthly Adjustment Amounts ( IRMAA ), which increase your Medicare Part B and Part D premiums [3]
• Cause a greater portion of your Social Security benefit to become taxable (up to 85% of benefits can be subject to federal income tax, depending on your combined income) [4]
• Reduce your ability to deploy Roth conversions or other tax-planning strategies, because your income is already elevated

Once these forces align, they are genuinely difficult to reverse. That is why proactive sequencing — done years before RMDs begin — is one of the most valuable things a retirement plan can address.

A Smarter Withdrawal Order: Flip the Script

Rather than following the conventional sequence, a more tax-efficient approach for many retirees reverses the first two steps. The revised order looks like this:

• Tax-deferred accounts first (traditional IRA, 401(k), 403(b))
• Taxable accounts second (brokerage, savings, money market)
• Tax-free accounts last (Roth IRA, Roth 401(k))

This reordering may feel counterintuitive at first. Why would you voluntarily create taxable income by drawing from your IRA early, when you could use "free" money from your brokerage account instead? The answer lies in lifetime tax optimization, not just today's tax bill.

Why Drawing Tax-Deferred Accounts Early Makes Sense

By taking intentional, controlled distributions from your IRA or 401(k) during the early years of retirement — often before Social Security begins or before Medicare surcharges kick in — you have an opportunity to fill your lower tax brackets deliberately. This is sometimes called "bracket harvesting," and it effectively converts future forced, uncontrollable distributions (RMDs) into smaller, planned ones you manage on your own terms.

When you later reach taxable accounts, you may find yourself in a meaningfully lower income bracket, which matters significantly for long-term investors. Long-term capital gains are taxed at 0%, 15%, or 20% depending on your taxable income, meaning the timing of when you realize gains on appreciated securities can be optimized with some care [5].

And by preserving your Roth accounts until last, you allow your most valuable dollars — the ones that will never be taxed again on withdrawal — to compound quietly in the background for the longest possible period. The longer those accounts grow, the more tax-free wealth is available in later retirement, when healthcare costs and late-stage care expenses tend to rise.

Beyond Taxes: The Account Type Risk You Rarely Hear About

Tax sequencing is only half of the equation. An equally important — and far less discussed — dimension of retirement income planning concerns the type of risk each account carries at the time you need to make withdrawals.

Consider what happens when a retiree draws income from a market-based account during a significant downturn. Not only may they be realizing taxable gains at an inconvenient time, but they are also permanently reducing the number of shares or units available to participate in any eventual recovery. This dynamic, known as sequence-of-returns risk , can do more damage to a long-term retirement plan than a poor average return ever could — precisely because the timing of losses during early distribution years is irreversible [6].

What Is a "Protected" Asset?

To address sequence-of-returns risk directly, a disciplined income strategy draws first from accounts that have three specific characteristics:

• Principal protection: the account balance cannot decline due to market activity
• Competitive, inflation-conscious growth: the account should historically keep pace with inflation, generally in the 2% to 4% range over time
• Sufficient liquidity: distributions can be taken consistently without penalties or restrictions that would disrupt your income flow

Accounts that may qualify under these criteria include fixed indexed annuities with no surrender period, high-yield savings accounts, penalty-free certificates of deposit, and certain stable-value or capital-preservation funds [7]. The specific vehicle matters less than the purpose it serves: providing stable, predictable income without forcing premature sales of growth-oriented assets during periods of volatility.

It is worth noting that bonds, while generally more stable than equities, do not meet this definition — because bond values can and do decline when interest rates rise. The 2022 bond market decline served as a sobering reminder of this for many retirees who assumed fixed income meant fully protected income.

The Protected Spend Down in Practice: An Illustrative Scenario

Please note: The following scenario is purely illustrative and does not represent a guaranteed outcome or a specific client result. It is intended to demonstrate a conceptual framework using simplified, conservative assumptions.

Imagine a couple retiring at age 67 with the following portfolio structure:

• $250,000 in protected accounts (e.g., a fixed indexed annuity or high-yield savings), assumed to grow at a conservative 3% annually
• $250,000 in growth-oriented accounts (e.g., a diversified equity portfolio), assumed to appreciate at a conservative 6% annually

They begin drawing $25,000 per year from the protected side to supplement their Social Security income. At 3% annual growth and $25,000 in annual distributions, the protected accounts sustain that income stream for approximately 13 years. By around age 79, that protected pool is essentially depleted.

Meanwhile, the growth portfolio — left completely untouched throughout those 13 years and compounding at 6% annually — has grown to roughly $533,000. At that point, the couple allocates $250,000 from the growth side to replenish the protected account bucket, and the income cycle begins again. That second protected pool, drawing $25,000 per year at the same conservative return, sustains distributions for approximately another 12 years.

By age 91, the couple has received 25 years of stable, predictable income from their protected bucket while their growth portfolio — having benefited from an extended, uninterrupted compounding period — sits at approximately $539,000. At that stage, they likely have sufficient flexibility to spend directly from growth assets without concern.

The key insight here is not the specific numbers; it is the structure. By separating income needs from growth assets, you allow each to do its job without interference. You are not selling equities at depressed prices to fund monthly expenses. You are not making emotionally driven allocation changes during volatile markets. You are working from a plan, not reacting to headlines.

Adding Flexibility: The Guardrails Approach to Withdrawal Rates

The protected spend down strategy becomes even more resilient when paired with a guardrails-based withdrawal framework. Rather than committing to a rigid, fixed dollar amount regardless of portfolio performance, a guardrails system establishes a baseline income level and adjusts distributions only when the portfolio crosses a defined upper or lower threshold.

Think of it less as a panic button and more as a course-correction mechanism — similar to the rumble strips on a highway that alert a driver before a problem becomes a crisis. If the portfolio performs well above expectations, the system may allow for a modest spending increase. If it falls below a defined floor, a temporary modest reduction — perhaps 10% of discretionary expenses — prevents deeper long-term damage.

This approach, grounded in research originally developed by financial planner Jonathan Guyton and later refined by others, addresses one of the most common psychological traps in retirement: making large, irreversible financial decisions based on short-term market noise rather than long-term plan performance [8].

Frequently Asked Questions About Retirement Withdrawal Sequencing

Does this approach work if I have most of my savings in a 401(k)?

Yes, and in fact it may be especially important if you do. Large tax-deferred balances are the primary driver of future RMD exposure. Beginning intentional, modest distributions from your 401(k) or rolling it into a traditional IRA early in retirement — particularly in years before Social Security begins — can reduce the eventual forced distribution amount considerably. Whether a Roth conversion strategy makes sense alongside this depends on your specific bracket situation, future tax expectations, and legacy goals; a qualified advisor can model both scenarios.

What if I need more income than my protected accounts can provide?

This is where blended strategies come into play. If your income gap exceeds what a single protected bucket can cover, the priority is still to minimize distributions from growth accounts during market downturns. Some retirees maintain a two-to-three-year cash reserve in highly liquid accounts specifically for this purpose, drawing from that reserve during market contractions and allowing the equity portfolio to recover before resuming distributions from it.

Is delaying Social Security a better strategy than drawing from retirement accounts early?

For many people, delaying Social Security to age 70 increases the monthly benefit by approximately 8% per year beyond full retirement age — which represents a compelling, inflation-adjusted, longevity-protected income source [9]. Drawing modestly from tax-deferred accounts to "bridge" the income gap during the delay period can make this tradeoff worthwhile, though it depends on health, life expectancy, other income sources, and the current size of tax-deferred balances. This is one of the most consequential decisions in retirement planning and warrants a careful, personalized analysis.

What about Roth conversions? Do they fit into this strategy?

Strategic Roth conversions — converting a portion of a traditional IRA to a Roth IRA in years when your taxable income is lower than usual — can be an excellent complement to the withdrawal sequencing approach described here [10]. By converting in early retirement years, before RMDs begin and before Social Security may push your income higher, you can shift assets into a permanently tax-free structure. The tradeoff is that conversions create taxable income in the year of conversion, so the sizing of each conversion must be calculated carefully against your current marginal rate and projected future rates.

Ready to Build an Income Plan That Works for Decades?

Retirement planning at this stage of life is not about picking the best stocks or chasing the highest yield. It is about structuring the income you have already built in a way that is tax-efficient, market-resilient, and flexible enough to adapt as your life evolves. The strategies discussed here — tax-smart sequencing, protected spend down, account type prioritization, and guardrails-based flexibility — are the kinds of integrated, interrelated decisions that have a compounding effect on the overall health of your retirement plan.

At Phibbs Financial Services, we believe that retirement should feel like freedom, not anxiety. We help people create more memories with their money. If you are ready to learn how to spend without fear, we invite you to schedule your no-cost Retirement Inspection® . This is a complimentary, no-obligation conversation designed to bring clarity to your income plan, your tax exposure, and your long-term trajectory. There is no sales pressure and no one-size-fits-all playbook — only a thoughtful look at where you stand and where you want to go.

Your retirement deserves more than a generic rulebook. It deserves a strategy built specifically for you.

Visit freeretirementinspection.com to schedule your no-cost Retirement Inspection® today.

Sources

[1] IRS Publication 590-B: Distributions from Individual Retirement Arrangements (IRAs), Required Minimum Distributions. irs.gov/publications/p590b

[2] SECURE 2.0 Act of 2022 (Division T of P.L. 117-328): RMD age increases from 72 to 73 (effective 2023) and to 75 (effective 2033). irs.gov/retirement-plans/secure-20-act-changes

[3] Centers for Medicare and Medicaid Services (CMS): Income-Related Monthly Adjustment Amount (IRMAA) thresholds for Medicare Part B and Part D. cms.gov/medicare/your-medicare-costs/part-b-costs

[4] Social Security Administration: Publication No. 05-10035, "Income Taxes and Your Social Security Benefits." ssa.gov/pubs/EN-05-10035.pdf

[5] IRS Topic No. 409: Capital Gains and Losses. irs.gov/taxtopics/tc409

[6] Sequence of Returns Risk: Pfau, W. (2013), "Sequence of Returns Risk," Retirement Researcher. finra.org/investors/insights/sequence-of-returns-risk

[7] Fixed Indexed Annuities: National Association of Insurance Commissioners (NAIC). content.naic.org/consumer/annuities.htm. CDs are FDIC-insured up to applicable limits; see fdic.gov for current coverage details.

[8] Guyton, J.T. and Klinger, W.J. (2006), "Decision Rules and Maximum Initial Withdrawal Rates," Journal of Financial Planning.

[9] Social Security Administration: "Retirement Benefits" and Delayed Retirement Credits. ssa.gov/benefits/retirement/planner/delayret.html

[10] IRS Publication 590-A: Contributions to Individual Retirement Arrangements (IRAs), Roth IRA Conversion rules. irs.gov/publications/p590a

Disclosures

The material provided is for general educational and informational purposes only and does not constitute personalized investment, legal, or financial advice. All investment strategies, including retirement distribution and tax-efficiency planning, involve inherent risks and potential loss of principal, and past performance is never a guarantee of future market results. Any hypothetical examples or strategies discussed are purely illustrative and may not be suitable for your specific age, tax bracket, or financial situation. Furthermore, while our comprehensive financial planning evaluates strategic wealth outlooks, Phibbs Financial Services LLC does not provide formal tax preparation, legal counsel, or IRS representation. Readers should always consult with a qualified CPA or licensed attorney before implementing any advanced tax or estate strategies mentioned herein.