Create a retirement income strategy that’s tax-efficient, flexible and long-lasting.
Creating reliable income in retirement often means drawing from multiple sources, such as annuities, tax-advantaged accounts — like 401(k) plans, IRAs and health savings accounts (HSAs) — brokerage accounts, Social Security and, in some cases, a pension. However, while these pieces can work together, turning them into a steady, predictable income stream isn’t always straightforward.
We can help you bring these elements together into a coordinated retirement income strategy that accounts for your lifestyle goals, tax considerations and comfort with risk.
Here’s what you need to know to plan your retirement income:
Understand retirement distribution rules
Certain retirement income sources have distribution rules, dictating when and how much you need to withdraw, while others do not. Understanding how much flexibility you have over your income streams is key when planning your retirement income. Here’s a brief overview:
- Automatic distributions: For some retirement income streams — including Social Security, pensions and annuities — you will have less flexibility over how and when you receive income. With Social Security, for example, the amount and frequency are fixed by the U.S. government based on what you (or your spouse) earned and when you claimed the benefits. With pensions and annuities, the amount and cadence are dependent on your contract.
- Required withdrawals: Certain retirement accounts — including traditional IRAs, 401(k) plans and other employer-sponsored plans — are subject to required minimum distribution (RMD) rules, which generally require investors to make minimum withdrawals once they reach age 73.
- Optional income: The rest of your income can be taken from accounts with more flexibility — including Roth IRAs, savings and brokerage accounts, HSAs and non-qualified annuities — that are not subject to RMDs.
Advice spotlight
Consider the potential benefits of consolidating retirement accounts.
Having multiple retirement accounts of the same type can make the withdrawal process challenging — especially when you start RMDs. One way to simplify the RMD process is to combine multiple traditional IRAs into one account.
Manage your taxable income
Taxes can have a significant impact on your retirement income. By choosing how and when to withdraw different assets, however, you can better manage your tax burden and potentially make your money last longer. Specifically, you’ll want to anticipate your taxable income for the year so that you can implement strategies to help mitigate your tax bill. For example:
- In years when your tax rate is higher: You can choose to take distributions from investments in tax-free accounts, such as a Roth IRA, to avoid paying additional taxes.
- In years when your tax rate is lower: You can choose to increase distributions from tax-deferred accounts like a traditional IRA or employer retirement plan, such as a 401(k). You will pay taxes on the distributions, but potentially at a lower rate. Depending on your circumstances, you could even consider doing a Roth conversion in low-tax years.
- In years when you are considering selling a long-term asset: You might work with your tax professional to see if you can take some, or all, of the gain at the 0% long-term capital gain tax rate. Or, if that isn’t possible, offset your capital gains with capital losses with a strategy known as tax-loss harvesting.
Prepare for the possibility of a “tax torpedo”
Once you begin receiving Social Security benefits and taking RMDs, the additional income can unexpectedly push you into a higher tax bracket — a situation often called the retirement “tax torpedo.” This can happen when retirees rely more heavily on tax-deferred accounts later in retirement, especially if earlier withdrawals come mostly from lower-tax or tax-free sources. As expenses rise over time due to inflation or medical needs and withdrawals shift to accounts that generate ordinary taxable income, overall taxes can increase sharply.
This effect can compound once RMDs begin, since mandatory withdrawals add to taxable income each year. And if one spouse passes away, the surviving spouse may face the same expenses, but with higher single-filer tax rates, which can intensify the tax burden even further.
Consider different withdrawal strategies
Social Security and pensions may provide a fixed amount every month, but you'll need to have a plan to cover your remaining expenses throughout retirement. Here are a few common withdrawal strategies:
- Fixed-dollar withdrawal strategy: This involves withdrawing a set dollar amount each year from your retirement portfolio, regardless of how markets perform. Because the withdrawal amount doesn’t change, your income stays predictable, but your portfolio may face more pressure in years when markets decline. Additionally, if your expenses rise later in life, you may need to revisit your fixed-dollar target amount and adjust it accordingly.
- The 4% rule: You limit your withdrawals in your first year of retirement to 4% of the total amount held in your retirement accounts. You then adjust your withdrawals in later years to account for inflation. In theory, by following the 4% rule, you should be able to sustain your lifestyle for a 30-year retirement.
- Adaptive withdrawal strategy: You set a target withdrawal amount each year, but adjust it based on market performance to help keep your portfolio sustainable over time. When markets are strong, withdrawals may increase, and when markets decline, withdrawals may be reduced to help preserve your long-term assets.
Take market fluctuations into account
As you plan your retirement income, you’ll want to consider the broader market environment before you withdraw from your investment portfolio. For example, during a market downturn, you may want to limit withdrawals from your growth-oriented investments to avoid locking in losses. In this scenario, you may instead consider withdrawing cash and fixed income opportunities first to allow stocks and other investments that are underperforming to recover.
Regularly rebalance your retirement portfolio
Rebalancing your investment portfolio should be a part of your regular financial housekeeping routine. But it’s especially important during retirement. If left unattended, your portfolio’s asset allocation can evolve into a different risk profile, leaving you more vulnerable in the event of a market decline. Rebalancing brings your portfolio back in line with your risk tolerance, so that you’re better prepared to weather the unexpected.
Get help converting retirement assets into retirement income
My team can work with you to help turn your assets into a stream of income that can last throughout retirement.