How to Create a Retirement Income Plan: A Step-by-Step Guide

What Is a Retirement Income Plan?

A "Retirement Income Plan" is a financial strategy designed to provide a consistent and sustainable income stream to cover your expenses after you stop working.

It involves managing your savings, investments, and other income sources to ensure you have enough money to cover your expenses throughout retirement. The goal is to have a plan that provides a steady income stream to support your lifestyle, covering everything from essential expenses to the activities that bring you joy in retirement.

Retirees may face financial shortfalls without proper planning, especially with increasing life expectancies, rising healthcare costs, and uncertain economic conditions. A well-crafted retirement income plan helps mitigate these risks and ensures you remain financially independent.

Step 1: Determine Your Retirement Goals

Establishing your retirement goals is the first step in creating a retirement income plan. Think about what you want your retirement to look like. Here are some questions to guide you:

• At what age do you plan to retire?
• What kind of lifestyle do you envision for yourself in retirement?
• Do you plan to travel frequently, or are you more interested in staying close to home?
• Will you relocate, downsize, or stay in your current home?
• What hobbies and activities do you want to pursue?

Your answers will help determine the amount of money you'll need each month during retirement.

Step 2: Assess Your Current Financial Situation

Once you have a clear idea of your retirement goals, it's time to assess your financial situation. Inventory your assets, liabilities, income, and expenses. Consider the following:

• Retirement Accounts: Look at your employer-sponsored 401(k), IRAs, and other individual retirement accounts. What is the current balance, and how much are you contributing each year?
• Other Investments: Include your investment portfolio, such as stock market brokerage accounts, mutual funds, money market funds, real estate, or other assets you may have.
• Debt: List any outstanding debts, such as mortgages, car loans, or credit card balances. Ideally, you want to enter retirement with minimal debt.
• Monthly Expenses: Break down your current expenses into essential and discretionary categories. This will give you a better idea of your spending needs in retirement.

Step 3: Estimate Your Retirement Expenses

You need an accurate estimate of your future expenses to create a reliable retirement income plan. While some expenses may decrease in retirement, others, like healthcare, may increase. Typical categories to consider include:

• Housing: Rent or mortgage payments, property taxes, utilities, and maintenance costs.
• Health Care: Premiums for Medicare, supplemental insurance, out-of-pocket expenses, and long-term care costs.
• Daily Living: Groceries, transportation, clothing, and other essentials.
• Lifestyle: Travel, hobbies, entertainment, and other discretionary spending.
• Debt Payments: Any remaining debt obligations.

A common rule of thumb is that you'll need about 70% to 80% of your pre-retirement income to maintain your lifestyle, but this can vary significantly based on your personal goals and situation.

   Estimate your expenses using our retirement cost of living calculator  

Step 4: Identify Your Sources of Retirement Income

Next, you'll need to determine where your retirement income will come from. Common sources of retirement income include:

• Social Security: Estimate your Social Security benefits using the Social Security Administration's calculator.¹ Social Security provides lifetime income payments. Your monthly benefit amount will depend on your earnings history and the retirement age at which you claim benefits.
• Pensions: If you have a pension, determine how much income your pension payment will provide and whether it's subject to cost-of-living adjustments.
• Retirement Savings Accounts: Withdrawals from your 401(k), IRA, or other retirement accounts will likely be a significant part of your income. Remember that required minimum distributions (RMDs) start at age 73.²
• Annuities: Annuities can provide a guaranteed lifetime income stream in retirement. Consider whether purchasing an annuity makes sense for your situation.
• Investment Income: Income from investments, such as dividends or interest, can supplement your retirement income.
• Part-Time Work: Some retirees choose to work part-time to supplement their income, either for financial reasons or personal fulfillment.

Step 5: Develop a Withdrawal Strategy

Creating a withdrawal strategy is critical to ensuring your retirement savings last as long as needed. There are a few approaches to consider:

• The 4% Rule: A common approach is to withdraw 4% of your portfolio in the first year of retirement and adjust for inflation each year. This strategy is designed to provide a steady income while preserving your savings over a 30-year retirement.
• Bucket Strategy: The bucket strategy divides your assets under management into different "buckets" based on when you'll need the funds. For example:
  • Short-Term Bucket: Cash and cash equivalents to cover 1-3 years of expenses.
  • Medium-Term Bucket: Bond portfolio mix or other relatively stable investments to cover the next 5-7 years.
  • Long-Term Bucket: Stocks or other growth investments for income needed beyond 10 years to continue market participation with future growth potential.
• RMD Strategy: Once you reach age 73, you'll be required to take minimum distributions from certain retirement accounts. Incorporate these RMDs into your withdrawal plan.

Step 6: Plan for Inflation and Unexpected Expenses

Inflation can impact your purchasing power over time, especially during a long retirement. It's important to include investment strategies to combat inflation in your retirement plan, such as investing in assets that have the potential to outpace inflation, like stocks or inflation-protected bonds.

Unexpected expenses, such as health care emergencies or significant home repairs, can also derail your retirement income plan if you're unprepared. Having an emergency fund or considering long-term care insurance can help protect against these risks.

Step 7: Consider Tax Implications

Taxes can have a substantial impact on your retirement income. Different income sources are taxed differently:

• Social Security Benefits: Your total income will determine if your Social Security benefits are taxable.
• Traditional 401(k) and IRA Withdrawals: Withdrawals from these accounts are subject to ordinary income tax.
• Roth IRA Withdrawals: Withdrawals are typically tax-free if specific conditions are satisfied.
• Investment Income: Interest, dividends, and capital gains are also subject to taxes.

A tax-efficient withdrawal strategy can help minimize the taxes you pay, allowing you to keep more of your income. Consider working with a financial advisor to create a plan that considers the tax implications of your withdrawals.

Step 8: Account for Healthcare Costs

Health care costs are one of the biggest expenses retirees face. Planning for these costs, including Medicare premiums, out-of-pocket expenses, and long-term care, is critical.

• Medicare: Medicare typically covers many healthcare costs for retirees, but there are premiums, copayments, and deductibles to consider.
• Supplemental Insurance: A Medigap policy or Medicare Advantage plan can help cover some of the costs not included in traditional Medicare.
• Long-Term Care: Long-term care is not covered by Medicare, so it's important to consider how you'll pay for these services if needed. Options include long-term care insurance, a health savings account (HSA), or self-funding.

Step 9: Revisit and Adjust Your Plan Regularly

Retirement income planning is not a one-and-done task. Your needs, goals, and circumstances will likely change over time, as will economic conditions and tax laws. Revisit your retirement income plan at least annually to ensure it remains aligned with your current situation and goals.

• Market Fluctuations: Adjust your withdrawals and investment allocations based on market performance. If the market is down, consider reducing withdrawals to preserve your principal.
• Life Changes: Major life events, such as a change in health status or unexpected expenses, may require adjustments to your plan.
• Spending Needs: Track your spending in retirement and adjust your budget as necessary. Your spending patterns may change significantly in the early versus later retirement years.

Step 10: Seek Professional Guidance

Creating a comprehensive retirement income strategy can be complex, especially considering factors like taxes, inflation, and market risks. Consulting with a financial advisor can provide valuable insights and help you make informed decisions.

An experienced financial advisor has the ability to assist in:

• Calculating How Much You Need: Estimating your retirement needs based on your specific goals and spending expectations.
• Developing a Withdrawal Strategy: Helping you create a sustainable withdrawal plan tailored to your needs and understanding the potential impact of market volatility.
• Investment Management: Ensuring your portfolio is diversified and aligned with your risk tolerance and financial goals.
• Tax Planning: Identifying tax-efficient ways to draw down your assets.

Conclusion: Help Secure Your Financial Future with a Thoughtful Retirement Income Plan

Creating a retirement income plan is more than just accumulating savings—it's about strategically managing your money to last throughout your retirement years. By determining your goals, assessing your current financial situation, understanding your sources of income, and developing a thoughtful withdrawal strategy, you can build a plan that ensures you have enough income to cover your expenses and live the retirement lifestyle you desire.

Remember, retirement planning is an ongoing process. Stay proactive, adjust as needed, and don't hesitate to seek professional guidance to help you navigate the complexities. With a solid plan in place, you can enjoy a comfortable, financially secure retirement.

   Prepare for retirement with a plan that helps ensure a steady income stream and manages risk. Start Your Free Plan  

Sources & Footnotes

1. Plan for Retirement - Social Security Administration. https://www.ssa.gov/prepare/plan-retirement
2. Retirement Topics - Required Minimum Distributions (RMDs) - Internal Revenue Service (IRS). https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-required-minimum-distributions-rmds