facebook twitter instagram linkedin google youtube vimeo tumblr yelp rss email podcast phone blog search brokercheck brokercheck Play Pause
Retirement Income Planning: Develop a Plan in Four Easy Steps Thumbnail

Retirement Income Planning: Develop a Plan in Four Easy Steps

Retirement Income Planning: Develop a Plan in Four Easy Steps

You may think you’re prepared for retirement by having a retirement savings account, but have you developed a retirement income plan? Here’s what you need to know to help ensure a more confident retirement.

Much has been written about how to save for retirement. It’s harder to find information on what to do when you’re ready to retire and need to start drawing on your investments to supplement your income. It’s something you should carefully plan for, and that planning will benefit you whether retirement is around the corner or still many years away.

Here you will find what every investor should know when income planning for your Golden Years, including some easy steps you can take to develop an effective retirement income plan. A sound plan can help ensure that you can fully enjoy the benefits of being able to set your own schedule, devote more attention to your interests, and spend more time with family and friends.

What is a retirement income plan?

A retirement income plan is a roadmap you can follow to make sure you have sufficient income to meet the lifestyle you want to have in retirement. It will help you figure out how much money you have, what you’ll need, and the best way to manage your money once you can no longer rely on a regular paycheck. A good retirement income plan can provide you with a sufficient income stream and specify a sustainable strategy for withdrawing funds so that you can minimize the risk of outliving your nest egg.

What steps are required to create a retirement income plan?

There are four steps you can follow to develop a thorough retirement income plan. Gathering the information you will need may take some effort, but the details you collect will be instrumental to building your plan.

Step 1

Estimate what your expenses in retirement will be. If you’re a diligent planner who has always kept a monthly budget, you’re off to a good start. Many people aren’t that disciplined, though, and it can be easy not to track your income versus your spending when you’re earning a steady paycheck. That will stop once you retire. To build an effective retirement income plan, you will need first to figure out what your expenses will be after stepping away from work.

So what is a good annual income for retirement? There is no magic number because everyone’s lifestyle needs are different. The general rule of thumb is that you will need 70% to 80% of your pre-retirement income to live on when you stop working, but your individual needs, lifestyle, and goals can raise or lower that number significantly.1 So, try to account for all of your monthly expenses like housing, utilities, and transportation, in addition to discretionary spending like entertainment and travel. Will your house be paid off or will your household expenses actually go up if you plan to finance a second home?

Don’t forget, if you intend to wait until you’re in your 60s to retire, being a “senior citizen” can offer certain privileges. Be sure to research the benefits seniors in your town may receive, like a potentially lower rate on property taxes.

How much traveling do you plan to do? If it’s a lot, be sure to budget for it. Don’t forget to plan for medical expenses, too. Even when you reach age 65 and can qualify for Medicare, you may still need supplemental insurance or have to pay for a variety of out-of-pocket medical expenses. Consider that your adult children and other family members may require some financial support, and you may want enough pocket money to spoil your grandchildren.

Step 2

Take inventory of what all your sources of income will be. Your income in retirement could come from multiple sources, including your personal savings and investments, workplace retirement plans, and Social Security. If you have worked at several firms over the course of your career and have vested retirement benefits with different

past employers, be sure not to overlook any of those accounts. Adding up the balance of all these accounts will reveal the size of your nest egg.

If you’re still many years away from retirement, use modest estimates of what the future growth of your accounts may be. Using no more than an annual return of 6% on stocks, for example, may prevent you from overestimating the future growth your investments may experience.

You’ll also have to estimate how much you can safely withdraw from your investment accounts annually once you’re in retirement. If you don’t want to exhaust the principal of your accounts and run the risk of running out of money, the general rule is not to withdraw more than 3% to 4% per year of your nest egg’s balance.2 Consider some retirement accounts that may have Required Minimum Distributions (RMDs) or minimum amounts that a retirement plan account owner must withdraw annually starting in the year that he or she turns 73.

Though they’re less prevalent today than they once were, you may also have a traditional pension. Unlike a 401(k) or a 403(b) plan, for which the value of your account depends on the performance of the investments you select, a traditional pension will provide a regular monthly benefit that is based on your earnings and years of service. The company or union you have your pension with can give you an estimate of what your monthly retirement benefits may be.

For Social Security, you can get an estimate of your future benefits that is based on your actual earnings. You’ll need to get, complete, and return to the Social Security Administration the request for this benefits statement.

If you’re fortunate to have income from other sources, like annuities you invested in or rental income from properties you own, be sure to include those in your income projections. Don’t forget that you may also have to pay taxes on many of your sources of income, including Social Security benefits, so be sure to consult with a financial professional when mapping out your plan.

Step 3

Determine whether your income will fall short of your expenses, and if it does, come up with a plan for how to make up for the shortfall. If your income will exceed what you are likely to spend, congratulations. You have done a good job preparing for retirement. But if your income seems likely to fall below what your expenses will be, you’ll have to figure out how to make up the difference. The simplest solution may be to postpone your retirement date for a few years so that you have more time to save and invest.

Still, you may have other options. For example, if you’re an empty nester, would you be willing to reduce your housing expenses by downsizing to a smaller, more

affordable home? Do you want to stop working completely? If not, would a part-time role help you make up your income shortfall? If you’re ready to bring your current career to a close, would you consider doing something completely different as a consultant or part-timer?

Step 4

Determine how to manage your investments in retirement. When you’re investing for retirement, you have one primary investment objective – growing your principal. But as you approach retirement and once you enter it, two other words will become much more important to you – income and stability. Still, don’t assume you can go entirely conservative with your investments. Increasing life expectancies mean you could spend 20, 30, or even more years in retirement. To avoid running out of money, you may need some growth to combat the impact of inflation and to help ensure you do not exhaust your principal too soon.

Need help? You don’t have to go through the retirement planning process alone. Let us help you organize and manage this process in an orderly and thoughtful way. You can schedule an introductory call with our team here.

This material is intended for informational/educational purposes only and should not be construed as tax, legal or investment advice, a solicitation, or a recommendation to buy or sell any security or investment product. Investments are subject to risk, including the loss of principal. Some investments are not suitable for all investors, and there is no guarantee that any investing goal will be met. Certain sections of this material may contain forward-looking statements. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is no guarantee of future results. Third-party links are provided to you as a courtesy. We make no representation as to the completeness or accuracy of information provided at these websites. Information on such sites, including third-party links contained within, should not be construed as an endorsement or adoption of any kind. Please consult with your financial professional and/or a legal or tax professional regarding your specific situation and before making any investing decisions.

1 Probasco, Jim. “How Much Do I Need to Save to Retire?” Investopedia, November 10, 2022. https://www.investopedia.com/retirement/how-much-you-should-have-saved-age/.
2 Kagan, Julia. “What Is the 4% Rule for Withdrawals in Retirement and How Much Can You Spend?” Investopedia, September 21, 2022. https://www.investopedia.com/terms/f/four-percent-rule.asp.