How to Make a Retirement Income Plan

When it comes to how to plan for retirement income, start by evaluating your anticipated living expenses, considering healthcare costs and taking into account the amount you’ll need for leisure activities and potential emergencies. Then, assess your expected sources of income and develop a withdrawal strategy that aligns with your lifestyle and longevity expectations. By taking stock of your savings, investments and potential pension benefits, you can formulate a plan that maintains your financial stability throughout your retirement years and ensures you’ll meet your financial needs.

A financial advisor can help you establish a retirement plan that works for your unique financial situation.

1. Assess Your Financial Situation

The first step when planning for retirement income is to evaluate your current financial situation and estimate your future income needs in retirement.

Consider factors such as living expenses, healthcare costs and any money needed to cover anticipated travel or leisure activities. Aim to leave a little buffer for any unexpected costs that arise as well. Creating a comprehensive budget will give you a clearer picture of how much retirement income you’ll need to maintain your desired lifestyle throughout retirement.

2. Identify Retirement Income Sources

Next up, identify all potential sources of retirement income. These can include:

Social Security: Estimate your benefits based on your earnings history and the age at which you plan to start receiving benefits. Use the Social Security Administration’s online tools for accurate calculations.
Pensions: If you have a pension plan, make sure you understand its terms and payout options. Decide between lump-sum payments or annuities based on your financial needs.
Savings and investments: Review your retirement accounts, including your 401(k), IRA and taxable investment accounts. Consider the impact of withdrawal rates, taxes and market performance on your income.
Part-time work: Many retirees choose to work part-time to supplement their income and stay active. Evaluate potential job opportunities and their impact on your overall plan.

Understanding the different streams of income available to you during your golden years will help in creating a retirement income plan that’s balanced and reliable.

3. Estimate Future Expenses

Another foundational step in retirement income planning is projecting your future expenses. Begin by examining your current spending habits to identify which costs will continue and which will decrease or disappear after you retire. For instance, daily commuting, work-related clothing and professional memberships are examples of expenses that often diminish after retirement.

Also, consider how your healthcare needs and lifestyle changes will impact your budget. Healthcare expenses typically rise with age, so plan to allocate more funds for medical insurance, medications and potential long-term care. On the brighter side, some leisure activities also might increase, as retirees often spend more on hobbies and travel.

Don’t forget to account for inflation when estimating future expenses. The cost of living tends to increase over time, which erodes purchasing power. Use historical inflation rates as a benchmark to project how your expenses might grow to ensure your retirement income keeps pace with rising costs.

4. Tailor Your Withdrawal Rate

Developing a strategic withdrawal plan can help to extend the life of your retirement savings and minimize tax liabilities. Here are some different strategies you might consider:

The 4% rule: A common approach is the 4% rule, which suggests withdrawing 4% of your retirement savings in your first year of retirement and then adjusting your future withdrawals to keep pace with inflation. However, this rate may need adjustment based on individual circumstances such as life expectancy, market conditions and retirement goals.
The guardrails strategy: Another effective withdrawal approach is the guardrails strategy. This involves setting upper and lower limits on the percentage of your portfolio you withdraw each year. When your portfolio performs well, you can withdraw a bit more, but if its performance declines, you reduce your withdrawal rate. The flexibility of this method can help to preserve your retirement savings over the long term.
The Social Security Bridge: Another popular strategy, the Social Security Bridge involves using your retirement savings to cover living expenses while delaying Social Security benefits. By waiting to take Social Security, you can increase your monthly benefit amount, which can provide a larger, more reliable income stream later in retirement. This strategy can be particularly beneficial for those with other sources of income in their early years of retirement.

When determining your withdrawal approach, also consider the tax implications of different accounts, and plan to prioritize withdrawals in a manner that reduces your tax burden. Consulting with a financial advisor can provide personalized strategies for tax-efficient withdrawals.

5. Manage Risk

After all of your hard work saving for retirement, it is important to manage your risk. Diversifying your portfolio spreads your assets across different types of investments, reducing the impact of poor performance in any single asset class. By including stocks, bonds, real estate and other asset types in your portfolio, you balance potential gains and losses.

Over time, the value of your investments will fluctuate, altering your desired asset allocation. Regularly rebalancing your portfolio ensures that it stays aligned with your risk tolerance and retirement goals. This process involves selling some assets and buying others to maintain your target allocation.

Another way to diversify is through insurance products, such as annuities, which can provide a steady income stream in retirement, helping to manage longevity risk — i.e., the risk of outliving your savings. Annuities convert a lump sum into a series of payments, which you can tailor to your income needs and lifespan.

Healthcare expenses can be significant in retirement and unpredictable. Setting aside funds in a health savings account (HSA) or purchasing long-term care insurance can help cover these costs, protecting your retirement income from unexpected medical expenses.

Finally, maintaining an emergency fund provides a financial buffer against unforeseen expenses, so they don’t derail your retirement income plan. This fund should cover several months of living expenses and be easily accessible.

Bottom Line

Crafting a retirement income plan is a meticulous process that requires evaluating your current financial situation, estimating future expenses and identifying diverse sources of income. By strategically assessing your savings, investments and potential pension benefits, you can develop a withdrawal strategy that’s tailored to your lifestyle and longevity expectations. When you make a plan for retirement income that considers all these factors, you will end up with a robust and reliable financial framework that can allow you to enjoy a secure and fulfilling retirement.

Tips for Retirement Planning

A financial advisor can help you make a long-term retirement plan and help you find ways to create the income you need during your golden years. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
If you aren’t sure how much money you need to save for retirement, consider using SmartAsset’s free retirement calculator to get an estimate.