How to Plan for Income in Retirement

When you build a nest egg, you want to make sure your savings will last so you can enjoy life in retirement to the fullest. With this goal in mind, it can be difficult to judge just how much income you can safely withdraw each year once retirement begins. Withdraw too much and you could exhaust your savings early. On the other hand, if you’re too strict with your retirement income, you could miss out on the quality of life you worked so hard to achieve.

An appropriate retirement strategy plan for income has potential for growth. A steady income stream coupled with a strategic withdrawal plan can ensure that the money going out doesn’t surpass the money coming in. With this type of retirement planning strategy in place, you shouldn’t have to worry about money. Instead, you can focus on the people and priorities that make life worth living.

Establish long-term goals

One of the first steps to maintaining the type of lifestyle you want in retirement is to take an honest look at the numbers. You need to determine how much money you are likely to spend in a given year.

During your comfortable retirement income calculations, be sure to account for the following potential expenses.

• Essentials (e.g., housing, utilities, groceries, taxes, healthcare, debt, vehicle expenses, insurance, day-to-day expenditures, home and vehicle maintenance)
• Discretionary (e.g., vacations, entertainment, luxury products, home improvements, hobbies, and classes)

It’s important to save funds for both the essentials and the nonessentials that make life richer and more rewarding. Also, be sure to consider the role that inflation and increasing healthcare costs may have on your long-term expenses with the passage of time. (Tip: Many experts recommend including a 3-4% inflation rate when figuring retirement income needs.^[i])

Also, you need to think about when you want your retirement journey to begin. Though there is some debate on the subject, many consider the traditional retirement age to be around 65 years old. However, nearly 40% of consumers hope to retire early—by as much as a full decade.^[ii] Whatever retirement age is right for you, be sure to factor that decision into your calculations and plans.

Identify income sources

Next on the retirement planning to-do list is identifying what your sources of income will be once you stop working. This is an essential step in making sure you have enough money set aside to prepare for the comfortable retirement income you desire. It’s also important to understand how taxes might impact each income source so you can diversify your income sources as needed.

Here are some examples of the types of income you might have available in retirement.

• (Potentially) tax-free income sources: Roth IRA, health savings accounts (HSA), municipal bonds, cash value life insurance
• (Potentially) tax-deferred income sources: Traditional IRA, 401(k), 403(b), 401(a), pension plans, annuities
• Taxable income sources: Savings, taxable brokerage accounts, Social Security benefits

Rebalance the portfolio

Your retirement years will be filled with many changes—and that includes how you approach your investment portfolio. No longer will your focus be on wealth creation and growth. Instead, your new aims will be to establish a steady series of payments that will last for the rest of your life.

What might this change look like for you? For a portion of your assets, you will likely want to consider a shift from high-risk, high-reward investments to more conservative, fixed-income investments, including the following:

• Government and municipal bonds
• Corporate bonds
• Bond mutual funds and exchange-traded funds (ETF)
• Certificates of deposit (CDs)
• Money market funds

Diversify investments

As mentioned, your new investment strategy should be aligned with a level of risk that you are comfortable with. Yet diversification of income sources remains imperative as well.

Different income categories represent different levels of risk and reward. To help protect yourself from volatility in the market, you should aim to spread your risk across numerous types of investment vehicles.

For example, you might consider setting aside some of your portfolio in assets with little to no risk of loss. These assets might include cash, money market accounts, or CDs, to name a few options. With these assets, you could have the funds you need to help meet your income needs over the next several years. You might then keep another portion of your portfolio invested in real estate, stocks, bonds, sustainable funds, etc.

This diverse approach can give part of your portfolio the opportunity to potentially grow and create additional wealth.

Set up a withdrawal plan

Just like you should create a budget to manage your money during your working years, it’s important to have a plan when it comes to your retirement savings as well. It’s also important to understand the rules when it comes to your retirement savings accounts, as these can impact your overall withdrawal plan in meaningful ways.

Consider traditional IRAs, for example. Unless you qualify for an exception, you’ll likely want to wait until you’re at least 59 ½ years old before you make any withdrawals from these accounts. Otherwise you may have to pay a 10% tax penalty to the IRS for early distributions. At the same time, once you turn 72 years old, you may have to withdraw a required minimum distribution (RMD) from certain IRAs as well.^[iii]

Once you understand the rules regarding your specific retirement accounts, you should be able to build a withdrawal plan that works for you. The best withdrawal plan will ensure you have enough money to last while helping you to maintain the type of lifestyle you want to lead.

Here are some strategies to consider as you build your personal withdrawal plan:

• 4% rule: Withdraw up to 4% of your retirement savings during the first year of retirement.
• Buckets strategy: Withdraw from three types of retirement accounts (“buckets”)—each of which holds different types of assets. These three buckets are generally cash savings, fixed income securities, and equities. When you deplete the cash in your first “bucket,” you refill it with funds from the other types of accounts, giving those assets an opportunity to grow in the meantime.
• Fixed-percentage withdrawals: Take out a fixed percentage of your retirement portfolio each year. The actual amount of your withdrawal may vary based on the current value of your portfolio.
• Fixed-dollar withdrawals: Withdraw a set amount of money from your retirement savings each year. Reassess your withdrawal amount every year (or every few years) to make sure the amount you’ve chosen to withdraw still makes sense.
• Systematic withdrawals: Only tap into the income (dividends or interest) that your underlying investments earn. Leave the investment principal alone so it has a chance to generate more wealth for future retirement income.

Of course, there are pros and cons to each of the withdrawal plans above. The 4% rule, for example, is a classic retirement approach. Yet many experts argue that the strategy may be too aggressive and doesn’t account for market fluctuations or rising interest rates. As a result, there’s a risk you could run out of money and deplete your savings too soon if you’re not careful.

Manage cash flow

As a retiree, your sustainable cash flow is important. This makes you less susceptible to market volatility and fluctuations. Yet with the right plan, you can establish a steady series of retirement payments that should last you for the rest of your life.

It’s understandable to have questions about which retirement strategies make the most sense for you. Depending on your situation, a mixture of approaches might even be best. So don’t be afraid to reach out and ask for advice from a specialist. At Santander Private Client, you have dedicated financial advisors who can help you create retirement strategies that work for you during your retirement years.