How to Create a Retirement Income Plan That Lasts

Expenses that typically decrease

Start by calculating what retirement actually costs. The common rule of thumb is 70-80% of pre-retirement income, but your actual number depends on your specific plans.

Expenses that typically decrease: Commuting and work-related costs, retirement savings contributions (you are no longer saving), payroll taxes (no more FICA on earned income), and possibly housing costs if your mortgage is paid off.

Expenses that typically increase: Healthcare (significantly — the average 65-year-old couple needs approximately $315,000 for lifetime healthcare costs beyond Medicare), travel and hobbies, and potentially long-term care.

Expenses that stay roughly the same: Food, utilities, insurance, property taxes, home maintenance, and entertainment.

Build a detailed monthly budget using your current spending as a baseline, then adjust for expected changes. Be honest about your desired lifestyle — underestimating expenses is the most common retirement planning mistake.

Social Security

Guaranteed income sources cover your essential expenses with no market risk. The more of your basic needs they cover, the less pressure on your investment portfolio.

Social Security: Create an account at ssa.gov to see your projected benefit at ages 62, 67 (full retirement age for most), and 70. For average earners, Social Security replaces roughly 40% of pre-retirement income. Higher earners see a lower replacement rate.

Pensions: If you have a defined benefit pension, contact your HR department for your projected monthly benefit and understand your payout options (single life vs. joint and survivor).

Annuities: If you own annuities, know your guaranteed income amount and when payments begin. Consider whether converting a portion of savings to a single premium immediate annuity (SPIA) makes sense for covering essential expenses.

Calculate the gap: Total your guaranteed monthly income and subtract it from your estimated monthly expenses. The difference is what your investment portfolio must generate.

The 4% rule

The 4% rule: Withdraw 4% of your total portfolio in your first year of retirement, then adjust that dollar amount for inflation each year. A $1 million portfolio would provide $40,000 in year one, $40,800 in year two (with 2% inflation), and so on. Research suggests this approach has historically sustained a portfolio for 30 years with high probability.

Dynamic withdrawal strategies: Rather than rigidly following a fixed percentage, many advisors now recommend flexible approaches: spend more in good market years and less in down years. The guardrails approach sets a ceiling and floor — if your withdrawal rate rises above 5% due to market losses, you cut spending; if it falls below 3.5% due to gains, you can spend more.

Required Minimum Distributions (RMDs): Starting at age 73 (75 beginning in 2033), you must withdraw minimum amounts from traditional IRAs and 401(k)s. Factor these required withdrawals into your income plan — they count as taxable income and may affect your Social Security taxation and Medicare premiums.

Bucket 1 — Cash (1-2 years of expenses)

The bucket strategy divides your retirement portfolio into three time-based segments, each with a different investment approach:

Bucket 1 — Cash (1-2 years of expenses): High-yield savings accounts, money market funds, or short-term CDs. This covers your immediate spending needs and ensures you never have to sell investments during a market downturn. Refill this bucket annually from Buckets 2 and 3.

Bucket 2 — Income (3-7 years of expenses): Bond funds, Treasury securities, and conservative balanced funds. This provides stable returns and serves as the refill source for Bucket 1. Lower volatility than stocks but higher returns than cash.

Bucket 3 — Growth (8+ years of expenses): Stock index funds, diversified equity funds, and real estate investment trusts. This is your long-term growth engine that keeps pace with inflation over decades. You will not touch this bucket for 8+ years, giving it time to recover from any market downturns.

The psychological benefit of the bucket strategy is significant: knowing you have 1-2 years of expenses in cash makes it easier to stay invested during market volatility rather than panic-selling.

Claiming at 62

When you start Social Security has an enormous impact on your lifetime income. Your benefit increases approximately 8% per year for each year you delay between 62 and 70.

Claiming at 62: You receive 70% of your full retirement age (FRA) benefit. Best if you need the income immediately, have health concerns that may shorten your life expectancy, or want to reduce portfolio withdrawals in early retirement.

Claiming at FRA (67 for most): You receive 100% of your calculated benefit. A balanced choice for most people.

Claiming at 70: You receive 124% of your FRA benefit (or about 77% more than claiming at 62). Best if you are healthy, have other income sources to bridge the gap, and want to maximize guaranteed lifetime income. For a couple, having the higher earner delay to 70 maximizes the survivor benefit.

The break-even point between early and delayed claiming is typically around age 80-82. If you live beyond that (and most healthy 65-year-olds will), delaying increases your total lifetime income.

General strategy

The order in which you draw from different account types significantly affects your total tax bill in retirement.

General strategy: In early retirement (before RMDs begin at 73), draw from taxable accounts first while doing Roth conversions to fill low tax brackets. Then use traditional IRA/401(k) withdrawals, and preserve Roth accounts for last since they grow tax-free.

Why this order matters: Taxable accounts generate capital gains and dividends whether or not you withdraw. Drawing from them first is tax-efficient. Meanwhile, converting traditional IRA money to Roth during low-income years locks in low tax rates and reduces future RMDs.

Roth accounts as a tax tool: In retirement years when you face an unexpected large expense, need to cover a home repair, or face a high-income year from RMDs, withdrawing from your Roth IRA does not add to your taxable income. This flexibility is extremely valuable for managing your tax bracket.