The Withdrawal Order Nobody Taught You (And How to Save 10% on Taxes Annually in Retirement)

0:00Most retirement advice tells you to minimize your withdrawals. the actual move is to maximize the use of cheap brackets, which often means withdrawing more, not less, in your early retirement years. Yes, frugality is a virtue, but frugality at the wrong moment in the calendar is just an expensive form of virtue signaling, and the IRS is the audience that is clapping. Hello friends, this is Tyler Gardner welcoming you to another episode of your Money Guide on the Side, where it is my job to simplify what seems complex, add nuance to what seems simple, and learn from and alongside some of the brightest minds in money, finance, and investing.

0:44So let's get started and get you one step closer to where you need to be. Quick note before we dive in. July's pre-order incentive for my book, Real Wealth, is live, and this one is for the investors who are ready to go beyond the basics. Pre-order this month, tell me you did at tylergardner.com book, and I'll send you Investing 2.0 Beyond the Foundation, a full-hour video presentation on the five things every investor needs to know after they've mastered the fundamentals, yours to keep delivered to your inbox digitally in early August. And if you pre-order now, you're locked in for every monthly incentive through December 1st.

1:25tylergardner.com book. Now let's get into it. There's a question I want you to sit with before we get into anything technical today. If you spent 40 years saving and you have, let's just say, $1.5 million distributed across a traditional IRA, a Roth IRA, and a taxable brokerage, in what order should you spend it? Most retirement content gives you the same three-word response, Taxable traditional Roth. Spend the taxable account first, then the traditional 401k, save the Roth for last. It's tidy, it's repeatable, I certainly can endorse it, and it fits on a single Instagram carousel. It is the financial advice equivalent of lather, rinse, repeat.

2:14A phrase that exists more because it's satisfying to say than because it is, on inspection, correct for everyone. It also can be, for you, completely wrong. Not because the logic is bad. The logic is actually quite reasonable. But because the question itself is bad. The question assumes the only thing that matters is minimizing the tax bill across your retirement. And the question forgets that a retirement goes beyond the math problem. A retirement is a 30-year compound experiment in your life. your taxes, your health, your spouse, your heirs, your moods, your relationship to time itself. There's a passage in Wendell Berry, the farmer and essayist, one of the great American thinkers on the question of how a person should actually live, where he distinguishes between solving a problem and answering a question.

3:11A problem, Berry writes, can be solved once. A question must be answered continuously. in the daily practice of being alive, often without resolution, and sometimes without even progress. The technical part of retirement is the problem. The withdrawal order is the question. You will answer it every year for the rest of your life. And, I'm sorry, you will never solve it. So today we're going beyond the 1.0 of taxable traditional Roth, and we're going to the 2.0. And in my mind, we're doing something much, much better. Welcome to part two of the Decumulation series. Five parts. The series is a direct response to all of you who took the reader survey a few months back and told me almost in unison that the conversation everyone is having about retirement is the wrong conversation.

4:11You don't want more accumulation content. You want help with the part where you actually spend it. So today, the withdrawal order. The real one. Part one. Why the withdrawal order is not what you think it is. I want to start with an idea that almost no creator in the personal finance space talks about because it sounds a little depressing and it doesn't sell courses. It's this. The optimal withdrawal order changes every single year. I know how much you hate me right now. It's not depends on your situation. It's not varies by individual. It actively, structurally changes year to year because the variables that determine the right answer, Your taxable income, the tax brackets, the ACA subsidy cliffs, the IRMA thresholds, the market's performance, your projected longevity, your spouse's health, the political composition of Congress, and your own mortality table, none of those things hold still.

5:22A withdrawal order that was optimal in 2026 might be suboptimal in 2027. The decision is not made once in a vacuum. It is made every year for the rest of your life. And anyone telling you there's a fixed answer is selling you the illusion of certainty in a domain where certainty does not exist. Welcome to life. You know this by now. This is the first thing I wish someone had told me when I started managing portfolios for other people. The withdrawal phase is not an algorithm. It's an annual decision-making practice. The people who do it well, they're the ones who have built the habit of making the decision well one year at a time for, I know, again, you hate me, 30 years in a row.

6:13There's a useful analogy here from gardening that I'm getting into a little more as I age. And bear with me because I think it's the right analogy. A garden is not something you plan in February and then run for the rest of the year. It's something you tend. You watch what the soil is doing. You watch what the weather is doing. You watch what each plant needs this week. You make small adjustments constantly, and you make them based on what's actually in front of you, not on what the seed packet said to do in February. The retirees who handled their withdrawal order well are gardeners. The ones who handle it badly are still working from the February plan in October, wondering why their tomatoes are dying.

6:58The advice industry has trained you to want a final answer because final answers are easy to sell. The reality is that work is work, every year, forever. You're not solving a problem, you're tending a garden. Some years, there are going to be storms. Some years, there are going to be droughts. Some years, everything just grows and it's phenomenal and you sit on the porch and you feel briefly competent. The garden does not stop being a garden because you've decided you're tired of tending it. Okay, enough with the analogy and with that framing in place, let's actually look at how to tend it. Part 2.

7:39The tax bracket topography most people never think about. Here's something most retirees have looked at a hundred times and somehow never actually seen. Pull up the federal tax brackets. married filing jointly 2026. There's a 10 % bracket from zero up to about$25 ,000, then 12 % up to$100 ,800, then 22 % up to$211 ,400, then 24 % up to$403 ,550. bucks. Now, quick pro tip slash reminder, just remember this is after the 2026 standard deduction, which most people will end up taking. So your real gross income would be what's mentioned above, plus$32 ,200, as is the 2026 standard deduction. Now, most people look at these numbers and just see that, a list of numbers.

8:38What they don't see is the strategic terrain, the shape of the thing, and how you could use it to your advantage. This is, I think, one of those moments where geography is a better teacher than math. If I gave you a topographical map of a mountain range, you would not look at it and see a list of elevations. You would see passes and ridges and cliffs and gentle slopes. You'd understand intuitively where you wanted to walk and where you didn't. That is exactly what a tax bracket schedule is, except that the financial industry has spent decades presenting it as a chart of numbers rather than a map of terrain.

9:22And the result is that most retirees walk straight off some cliffs they couldn't see because no one taught them simply to look at the terrain. So here's the shape made as visible as I can make it. The 12 % bracket is enormous. It spans roughly$76 ,000 of income for married filing joint from$24 ,800 to$100 ,800. Again, that's after the standard deduction. The 22 % bracket above it is also enormous, spanning roughly$110 ,000. But the jump from 12 % to 22 % is a near doubling of the marginal rate. 10 full percentage points in a single step. The terrain at that boundary is not a gentle slope. It is a cliff, a specific named geological feature of the U.S.

10:22tax code that almost nobody draws on the map. That cliff, the transition from the 12 % bracket to the 22 % bracket, is, in my opinion, the most consequential tax feature in the entire United States tax code for retirees, and nobody talks about it. This episode is brought to you by Caldera Lab. Time for a quick confession. In high school, my AOL screen name might have been Pretty Boy Durden. That was my actual nickname, because while other guys were collecting baseball cards and playing real sports, I might have been collecting skincare products and taking my appearance embarrassingly seriously.

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12:22That's calderalab.com slash Tyler. This episode is brought to you by Copilot Money. I have a group chat with four of my closest friends from my finance days. Between us, decades of managing other people's money, multiple licenses, and an embarrassing amount of opinions about actively managed funds. These are not people who download budgeting apps. These are people who tend to mock budgeting apps. And yet, every single one of them uses co-pilot money. The group text now contains, between bond market commentary and bills game updates, sincere love letters to a finance app. One texted last week, I finally feel like my financial life is in one place.

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13:52So go to copilot.money.com. Use code TYLER2, that's Tyler and the number 2, for two free months. That's copilot.money.com. Here's what it means in practice. Every dollar of retirement income you can keep under that$100 ,800 ceiling is taxed at 12 % or less. Every dollar above it, including the very next dollar, is taxed at 22 % or more. The marginal rate on dollar number 100 ,801 is almost double the marginal rate on dollar number 100 ,800. Two dollars waking up next to each other, going to completely different fates. One escapes the IRS at 12%, the next one pays 22 % for the privilege of being a little later to the party.

14:48This is what I call a withdrawal cliff, and the strategic implication is enormous. In any given year, especially in retirement, you want to fill the 12 % bracket to the absolute edge and not$1 over if you can help it and if you can live that way. Every dollar of room you leave in the 12 % bracket is a dollar you've handed back to the IRS in a future year because that dollar has to come out eventually. And if it comes out in a 22 % year, you just paid an extra 10 cents on it for no reason. I've watched retirees do exactly the wrong thing here. They begin retirement by living frugally. They've been told to be scared of sequence of returns.

15:37They've been told to only take out 1 % or 2 % of their assets. So they draw$50 ,000 a year from a$2 million traditional IRA. And then they feel virtuous about their discipline. And then RMDs hit at age 73 and force them into the 24 % bracket, maybe for the rest of their lives. You might have left$50 ,000 of room in the 12 % bracket for 10 consecutive years, that's$500 ,000 of taxable income that could have come out at 12 % and is now potentially coming out at 22 % or above. That's potentially over$50 ,000 in additional taxes paid for the privilege of being frugal at the wrong time. The optimal annual decision is not how little you can withdraw.

16:29It is how much you can withdraw to perfectly fill the cheapest tax bracket available to you. Some years, that means draining the traditional IRA. Some years, it means realizing capital gains in the brokerage. Some years, it means converting traditional dollars to Roth dollars while you still have the room, especially if you don't need the money. It's a topographical question. Where are the cliffs? Where's the open ground? How do I move my income across the terrain so that I am always walking on the flattest, cheapest part. Most retirement advice tells you to minimize your withdrawals. The actual move is to maximize the use of cheap brackets, which often means withdrawing more, not less, in your early retirement years.

17:17Yes, frugality is a virtue, but frugality at the wrong moment in the calendar is just an expensive form of virtue signaling, and the IRS is the audience that is clapping. Part three, asset allocation, or how to put the right tool in the right drawer. I'm going to make this a quick segment because this is the kind of thing that gets confused constantly, and I want to clear it up before we go further. Asset allocation is the mix of stocks, bonds, cash, real estate, across asset classes in your portfolio. Let's say 70 % equities, 30 % bonds. That's how you allocate the money. Asset location is which type of account holds which asset.

18:02Bonds in the traditional IRA, stocks in a taxable account, international funds in a Roth. That's location. And so few retirees I know prioritize location. Everyone talks about allocation. And in retirement, location matters more than allocation because the tax treatment of each account type interacts with the asset's characteristics in ways that compound over 30 years. A small mental model that might help. Think of your three account types, traditional IRA, Roth IRA, taxable brokerage, as three different drawers in a workshop. They're not the same drawer. Each has different lighting, different humidity, different access rules, and a serious craftsman does not throw every tool into the nearest drawer.

18:53The good chisels go in the climate-controlled cabinet. The drill bits go in the magnetic tray. The lumber pencil goes in the apron because you reach for it constantly. The location of each tool is its own form of expertise, and the difference between a master shop and a hobbyist shop is not the number of tools, it's where they live. Your portfolio is the same. Different assets belong in different drawers. The wrong asset in the wrong drawer doesn't fail visibly. It just costs you money decade after decade. Here's the principle. The traditional IRA grows tax-deferred but will eventually be taxed at your full ordinary income rate.

19:36So you want to put assets that would otherwise be taxed at ordinary income rates anyway, i.e. bonds, which generate interest taxed as ordinary income, inside the traditional IRA. The traditional IRA is already going to be taxed at ordinary income on the way out, so putting bonds inside it is a tax rate wash with no friction. Meanwhile, the Roth IRA grows tax-free forever. Every dollar of gain inside the Roth never gets taxed again. So you want to put the highest growth assets you own inside the Roth. Equities, especially small cap or growth tilted equities, belong in a Roth. The IRS will never see another penny of those gains.

20:24The Roth is the climate-controlled cabinet. Put the precious things in the Roth. And the taxable brokerage account already gets preferential tax treatment on long-term capital gains and qualified dividends. 0%, 15%, or 20 % tax brackets, never your ordinary income rate unless sold short-term. So, broad market equity index funds, which produce mostly qualified dividends and long-term gains if you hold the investments for over a year, belong in the taxable account. The wrong arrangement, equities in the traditional IRA, bonds in the Roth, growth stocks in the taxable account, cost the typical retiree somewhere between$200 ,000 and$500 ,000 in additional taxes over a 30-year retirement.

21:14Same total portfolio, same total allocation, but different location, different outcome by up to a half a million dollars. I'm not saying that to scare you, I'm saying that to nudge you into action. And just to be clear, that's the cost of a perfectly nice house in most of the country, paid by you to the IRS in exchange for storing your tools in the wrong drawers. If you take nothing else from this episode, just go look at where your assets actually live across your three account types and ask whether the location is doing the work. For most retirees, the answer is no. This episode is brought to you by Momentus.

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22:38The problem is that as the category exploded, most brands chased flavors and marketing instead of making the creatine itself better. Momentus went the other direction with signature-spec creatine. It's manufactured in a pharmaceutical facility using reverse osmosis water purification, verified through a six-stage testing process with four independent agencies, 10 times fewer impurities, and two to five times tighter heavy metal limits. Four independent agencies. That's not a marketing claim, it's how I know I actually trust it. And that's the Momentus standard. And selfishly, the ultrafine powder actually dissolves, so I'm no longer chewing my morning drink.

23:20So if you want to try Momentus Signature Spec Creatine, head to livemomentus.com and use code Tyler for up to 35 % off your entire first order. That's livemomentus.com, promo code Tyler for up to 35 % off. livemomentus.com, promo code Tyler. This episode is brought to you by Element. Heading into the summer, Element just dropped what is essentially their version of an Arnold Palmer. Lemonade iced tea. And I currently have a full pitcher of it sitting in my fridge. A little caffeine alongside the salt and electrolytes is exactly what I want. After a long walk through the woods with the bloodhounds, or in the late afternoon when I'd otherwise be reaching for a second cup of coffee that I don't actually need.

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24:57Part four, the sequence of returns risk window and why order is everything. Sequence of returns risk, as you've heard me talk about before, is the technical term for the fact that the order in which your investment returns happen matters enormously in retirement. There's a useful way to think about this that I have stolen from, of all places, the chemistry textbook, and I was terrible at chemistry. But in chemistry, there's a concept called path dependency, the idea that that for certain reactions, the order in which you add the ingredients fundamentally determines what you end up with. Same ingredients, same final amounts, different order of addition equals different compound.

25:48You cannot make caramel by adding the sugar after the heat has burned the butter. You cannot fix it by stirring harder. The order was the recipe. Retirement returns are like that. If your portfolio returns negative 20 % in the first year, and then positive 20, positive 20, positive 20, positive 20 over five years, while you're withdrawing 5 % annually, you end up in a very different financial position than if it returns positive 20, positive 20, positive 20, positive 20, and then negative 20 over five years while withdrawing the same amount. Yes, same average return, same withdrawals, wildly different outcomes.

26:33Because withdrawing during a downturn at the beginning of retirement locks in losses on assets you needed to fund the rest of your life. Every retirement creator on the internet has covered this. I know that. But what none of them seem to talk about is the part that actually matters. The danger window is not symmetric. trick. The first five years of retirement carry more sequence risk than the next 25 years combined. Not because the math is special in years one through five, but because at year five, your withdrawal rate as a percentage of your remaining portfolio either has dropped if returns have been good and you've left the principle intact, or has structurally shifted your financial life into a different category of vulnerability if returns have been bad.

27:26Let's say you retire with a million dollars and the market drops 30 % in your first year. You're now withdrawing from 700 ,000 instead of a million. Your$50 ,000 annual withdrawal that was a 5 % draw is now 7.1 % draw. Bad markets in year one don't just hurt your balance, they restructure your withdrawal rate often permanently. The implication that almost nobody draws out, during years one through five of retirement, you should be operating with an aggressively conservative cash position, even if it costs you long-term returns. I addressed this specifically in part one of this series, and if you didn't listen to that, I'd suggest you go back and do.

28:09This contradicts standard advice. Standard advice tells you to stay heavily invested in equities to maintain growth over a 30-year horizon. The math of that is correct over 30 years, but the math of that is catastrophically wrong over years one through five if the market happens to drop in that window. Here's what that looks like in practice. Rather than holding the same 70-30 allocation throughout retirement, you could run a 60-40 in years one through five, then increase your equity allocation back to 70-30 or even to 75-25 in years 6 through 15, once the sequence risk has burned off. This is sometimes called the rising equity glide path, and it's the opposite of what every target date fund does.

29:02This is yet another reason I don't love target date funds. The target date funds decrease equity exposure as you age. The research that we've been over from Wade Pfau and Michael Kitsies, both serious academic finance people, neither of whom you've probably heard of unless you're deep in the weeds on this stuff, suggests that's exactly backwards. You should be most conservative when you retire, then as the danger window passes and your portfolio either survives or doesn't, you can take on more risk again. Yes, it's counterintuitive, and yes, I believe it's correct. Part 5. The Calendar Question Nobody Asks.

29:43Here's a thought experiment I want you to take seriously for a moment. You retire in early January. Your first move is to fund the year ahead. You draw, let's say,$80 ,000. The question, do you draw it all at once on January 2nd, or do you draw it monthly throughout the year? The default answer is monthly. It feels more orderly. It mirrors the rhythm of your old paycheck. It produces a stable cash flow. The personal finance industry loves that answer. But here's what monthly withdrawals actually do mathematically. They mean that in any given year, roughly half of your$80 ,000 has been invested longer than the other half.

30:23The first month's withdrawal came out in January. The last month's withdrawal sat in the market until December. On average, your withdrawal money was invested for six months while in transit instead of zero months, which means monthly withdrawals are equivalent to leaving an additional half year of withdrawal money in the market in expectation. On$80 ,000, that's$40 ,000 of extra market exposure. Over 30 years of retirement, at potential 7 % real returns, that effect compounds. The math says monthly withdrawals will outperform January 2nd lump sum withdrawals by roughly$50 ,000 to$80 ,000 of accumulated value across a 30-year retirement.

31:11But, and this is the part that has been completely under-theorized, that's the math answer. The life answer might be very different. Because here's what monthly withdrawals also do. They keep you in psychological proximity to the market every single month. They turn every minor market dip into a question of whether to delay the withdrawal. They invite micromanagement. They make your relationship with money active when one of the goals of retirement that I've said forever is for that relationship with your portfolio to be passive. Meanwhile, the January 2nd lump sum approach has a hidden benefit nobody talks about.