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4 Tips for Planning for Income in Retirement

Happy senior couple discusses their plans for income in retirement

Establishing Income to Cover Your Retirement Living Expenses

Congratulations! After years of planning and saving, you’re finally nearing retirement! This stage in life comes with a mix of emotions, but with careful planning, you can turn your retirement savings into a source of monthly income to cover your living expenses. Here are four important tips to help you plan for income in retirement.

#1 – Make a plan.

The first step in preparing for retirement income is to have a comprehensive financial plan in place. A custom financial plan serves as a blueprint to inform your financial decision-making and help ensure all aspects of your financial life are working together to achieve your goals.

Ultimately, a solid financial plan puts you in control of your financial future and provides you with the confidence of knowing you have a plan in place to generate retirement income.

#2 – Properly structure your portfolio.

One of the best ways to generate income in retirement is by striking a balance between short- and long-term investment accounts.

At Creative Planning, we typically recommend our clients maintain three to five years of living expenses in a short-term, semi-liquid investment account. A mix of bond funds typically works well, as it provides capital for opportunistic rebalancing as well as a monthly income. Having a short-term allocation to bonds can prevent you from being forced to sell out to equities at a loss when markets are low.

It’s also important to continue growing your assets throughout retirement in order to help offset inflation and ensure you have enough income to last throughout retirement. We often recommend that our clients invest any assets not necessary to fund their short-term needs in a diversified portfolio that focuses on growth and inflation protection. While this portfolio should be in line with your overall risk tolerance and investment objectives, it can be invested in riskier assets than your short-term account. Throughout retirement, your wealth manager will help you identify opportune times to transfer assets from your long-term savings to your short-term savings in a tax-efficient manner.

#3 – Implement a tax-efficient withdrawal strategy.

Ideally, you’ve been saving in multiple retirement accounts with different tax treatments, such as traditional IRAs, Roth IRAs, 401ks and taxable accounts. If so, you may have an opportunity to maximize your retirement income by strategically withdrawing from different accounts in different circumstances. We call this tax diversification.

  • Taxable (non-retirement) accounts – These accounts offer the benefits of tax-loss harvesting and have fewer restrictions on contribution amounts as well as fewer distribution penalties.
  • Tax-deferred retirement accounts, such as pre-tax IRAs and 401ks – Withdrawals from these accounts trigger ordinary income taxes, as they’ve enjoyed tax-deferred growth.
  • Tax-exempt accounts, such as Roth IRAs –These accounts allow tax-exempt investments to grow for as long as possible, and qualified withdrawals are tax-free.

There are two main withdrawal strategies to consider based on your specific goals, tax situation and income needs.

  • Traditional approach –Using this approach, you would withdraw from one account at a time. Typically, the order of withdrawals is from taxable accounts first, followed by tax-deferred accounts and, finally, tax-exempt accounts. This approach allows the tax-advantaged accounts to continue growing tax-deferred and tax-free for a longer period of time. However, it may result in uneven taxable income.
  • Proportional approach –This withdrawal strategy establishes a target percentage that will be withdrawn from each account each year. The amount is typically based on the proportion of retirement savings in each account type. This practice can help ensure a more stable tax bill from year to year and can also help you save on taxes over the course of your retirement.

The benefit of following a disciplined approach is that you won’t be tempted to spend more than you can afford in any given year (or less than you’re able to!). This practice can help you maintain adequate assets to last a lifetime, regardless of market volatility. An advisor can assist you with creating a distribution strategy aligned with your financial needs and tax bracket on a year-by-year basis, whether through a traditional approach, a proportional approach or some combination of the two.

#4 – Regularly Revisit and readjust.

Given the potential longevity of retirement, periodic reviews of your financial plan and income strategy are essential. Work with a qualified wealth manager who can help you understand how regulatory and market changes may impact you, and adapt your plan as needed to align with your evolving goals and needs.

Could you use some help planning for income in retirement? Creative Planning is here for you. Our experienced teams work together to help ensure your financial life is optimized and working to achieve your personal financial goals. For more information, schedule a call with a member of our team. We look forward to getting to know you.

This commentary is provided for general information purposes only, should not be construed as investment, tax or legal advice, and does not constitute an attorney/client relationship. Past performance of any market results is no assurance of future performance. The information contained herein has been obtained from sources deemed reliable but is not guaranteed.


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