Cascade air-to-water heat pumps have better overall efficiency than single-stage air-to-water heat pumps when operating at low ambient temperatures for high temperature water supply. While many studies in the literature investigated the specific features of equipment performance of cascade heat pumps, there is little information about retrofit applications of these heat pumps in residential buildings using experimentally validated dynamic building simulations. In this study, the techno-economic assessment of a variable capacity cascade air-to-water heat pump retrofitted into residential buildings is conducted by means of experimentally validated TRNSYS simulations. The cascade heat pump coupled with thermal energy storage operating in different scenarios is further studied. Laboratory and field trial results were obtained to develop and validate a cascade heat pump model integrated with a dynamic building simulation model. Regarding the heat pump system without storage, the predicted annual COPs were almost below 2.5 at ambient temperatures of from −11.2 °C to 29.5 °C, even the heat pump adopted weather compensation control. Simulation results also indicated that the cascade heat pump could not defeat gas boilers and high-efficiency oil boilers (90%) in terms of operating costs, but there were CO2 reductions (from 14% to 57%). As for the heat pump coupled with storage, simulation results showed that at ambient temperatures of between −5.6 °C and 23.8 °C, the continuous coupling between the heat pump and the storage revealed the lowest annual performance (actual COP of 1.41), while the direct heating obtained the highest efficiency (actual COP of 2.12) followed by the load-shifting (actual COP of 1.88).