Meet Bill and Belinda Bates, residents of Mobile, Alabama. Bill and Belinda just retired at age 60. Their house is paid off, and their annual housing expenses are $5,500 a year. Paying for these and other expenses is a concern. Yes, they have assets, but they aren’t loaded. They own $400K in regular assets, $200K each in 401(k)s, and $200K each in Roth IRAs.

Bill and Belinda are conservative investors and are counting on earning 3 percent above inflation on their regular and retirement account assets. The Bates’ plan is to take Social Security at age 62 and begin smooth retirement-account withdrawals, taking out the Roth money first. They figure that by waiting to take their 401(k)s, they’ll defer taxes due on those funds. If the Bates follow their game plan, their sustainable discretionary spending (consumption) will be $71,089, measured in today’s dollars, right through age 100 – their maximum ages of life.

Can Bill and Belinda do better? Yes. According to ESPlanner, if the Bate’s withdraw from their 401(k) plans first, their permanent spending will rise to $72,236. The reason is that taking the Roth first, when they still have taxable assets, just raises their holdings of taxable assets, i.e., it raises their taxes. Taking the same amount from the 401(k) entails smaller increases in their taxable assets, since some of the withdrawn money must go to cover taxes on the withdrawals.

Moreover, by taking their 401(k) money first, the Bates limit the extent to which 401(k) withdrawals trigger income taxation of their Social Security benefits. Recall that 401(k) withdrawals add to adjusted gross income (AGI) in the year they occur, and if your AGI exceeds key thresholds, first 50 percent and then an additional 85 percent of your Social Security benefits become taxable. Currently these thresholds for married couples are $32,000 and $44,000, respectively. But the thresholds aren’t indexed for inflation. So over time, 401(k) withdrawals which grow in nominal, if not real terms, can loom large relative to these fixed thresholds.

The bottom line is that Bill and Belinda are wrong on the ordering of withdrawals. They should take their 401(k) money first. Are they also wrong about when to start taking withdrawals? Yes. ESPlanner says that if they start withdrawing their 401(k) money at 65 and start withdrawing their Roth money once their 401(k) accounts are used up, their sustainable spending climbs to $73,516. That’s 3.4 percent higher than their initial plan’s spending level.

Can Bill and Belinda do better still? Sure can. Indeed, a lot better. They can take Social Security starting at 70, rather than 62, and bunch all their retirement account withdrawals between 65 and 75 to provide liquidity (spending ability) prior to age 70. Doing so raises their sustainable spending to $78,282, which is 10.1 percent higher than the initial $71,089 level! The Bates would need and extra $225K in regular assets under their initial strategy to achieve the same living standard. ESPlanner, in effect, found $225,000 for the Bates lying on the ground.