With all of the available advice about saving for retirement, one topic that doesn't get the attention it deserves is just how to prioritize using the different sources of funds that you have worked so hard to accumulate. After decades of saving, careful thought needs to be applied in determining just how to maximize the effectiveness of those funds (towards paying expenses), how to preserve them for as long as possible, and how to minimize the "loss" to taxes.
Most people will have a combination of cash/taxable accounts (this includes income from Social Security, pensions or other sources), tax-deferred 401k/IRA accounts, and/or tax-free Roth IRA accounts to draw from. Figuring out when, and how much, to use from each source can be complex. If the only consideration was the source of funds, an argument could be made to use taxable accounts first (always keeping a minimum of 2-3 years of cash available), then tax-deferred accounts, and finally tax-free accounts. The idea being that invested tax-deferred and tax-free amounts will earn a higher return than taxable savings and will have the longest possible time to grow.
However, there is one major component that significantly affects when each source should be used - taxes. There are no taxes on using money from cash or Roth accounts (after age 59 1/2), but ordinary income and capital gains are taxed (up to 85% of Social Security may be taxed as well), and all 401k/IRA withdrawals are taxed. At the very least, you will be taxed when you are forced to take Required Minimum Distributions (RMD's) from 401k/IRA accounts beginning at age 72. While you want a 401k/IRA account to grow as long as possible, the risk of doing so is that the larger your balance, the greater the RMD's will be, and the larger the tax bill you will incurr. Also, the RMD's count as income, which can then affect whether or not, and by how much, your Social Security income is taxed. RMD's can significantly reduce your flexibility to manage taxes after age 72, so you need to develop a plan well ahead of that milestone. For this reason, it may make sense to use at least some of the 401k/IRA funds before RMD's are required, as long as the annual distribution would keep you in a lower tax bracket. Such "controlled" distributions would be based on tax consequences, current and future, rather than being based solely on what you may need to pay expenses. This strategy could slowly lower your account balance (any amount not needed for expenses could be kept in cash) until RMD's start, requiring lower RMD's and lower taxes later on. What you are trying to avoid is being required to take large distributions all at once (that are not needed for any particular purpose), thereby lowering the earning potential of the remaining funds and incurring a larger than necessary tax bill.
Another reason to wait to use taxable accounts (at least in part) until later in retirement is because you will pay taxes on investment withdrawals at your capital gains rate, which is lower than your ordinary income tax rate - and 0% for taxpayers in the lowest tax bracket.
Many financial articles written on this subject suggest using the following order of funds in retirement:
1) Taxable accounts and ordinary income
2) Tax-deferred accounts (401k/IRA)
3) Tax-free accounts (Roth 401k/Roth IRA)
The truth is, spelling out one specific approach is just as over-simplified and misleading as suggesting that you use generic benchmarks or retirement calculators for retirement saving. Each person's situation is unique and there is no over-arching right answer. The best approach for efficiently using your retirement savings is actually a combination of options. Here's a quick example: you receive $25,000/year in Social Security benefits but still need another $35,000/year to pay expenses. You have $200,000 in taxable accounts, $250,000 in tax-deferred accounts, and $50,000 in Roth accounts. If you follow the order of funds above, exhausting one type of account at a time, your money will last ~ 22 years and you will pay ~ $74,000 in taxes. If you use a more balanced approach, withdrawing proportionate amounts from each type of account based on each accounts percent to the total, your money would last for ~ 23 years and you would pay only ~$46,000 in taxes. That's roughly a 38% savings in tax payments!
Another strategy is to utilize a Roth IRA during your highest income tax years to avoid a significant jump in tax brackets. For example, if RMD's push you to the top of the 12% tax bracket, you could take a withdrawal from your Roth IRA to cover any remaining expenses. This would allow you to avoid the 22% tax rate.
Keep in mind that this is not an either/or situation. Depending on your circumstances, including the amounts in different types of accounts and available tax deductions, using a combination of accounts (or only one type) in any given year will likely yield the best short and long term results. Yes, this will require you to consider many factors on an ongoing basis, and you may benefit from using an accountant to help figure it all out, but isn't it worth it to have your money last as long as possible and pay the least amount of taxes necessary?
In short, there isn't just one right answer for which funds to utilize first. It depends on many factors and may change from year to year. It's not a situation where you "set it and forget it", but it is certainly worth the effort to figure what will work best for your situation. If you're still in your savings years, having assets in multiple types of accounts could improve your flexibility for saving on taxes in retirement. If you're in your spending years, do your due diligence to keep from "spending" too much on taxes!