Saving for retirement and living off retirement savings are two completely different skills. You spend decades accumulating — now you need a plan for decumulating in a way that makes your money last 20-30 years, manages taxes efficiently, and adapts to unexpected expenses. Here's how to build that plan step by step.
Start with what you need to spend each year. Most financial planners use 70-80% of pre-retirement income as a starting point, then adjust for your specific situation.
Essential expenses (non-negotiable):
Discretionary expenses (lifestyle):
Build your retirement budget honestly. Most retirees spend more in early retirement (travel, active lifestyle) and less later. Healthcare costs typically increase significantly after 75.
Map out every source of retirement income:
| Income Source | Monthly Amount | Inflation-Adjusted? | Guaranteed? |
|---|---|---|---|
| Social Security | $______ | Yes (COLA) | Yes |
| Pension | $______ | Sometimes | Yes |
| Annuity income | $______ | Sometimes | Yes |
| Rental income | $______ | Yes | Mostly |
| Part-time work | $______ | Yes | No |
| Investment portfolio | $______ | Yes | No |
The income gap — the difference between your guaranteed income and your spending need — is what your investment portfolio must cover.
The 4% rule says you can withdraw 4% of your portfolio in year one, then adjust for inflation each year, with a high probability of your money lasting 30 years. This is a guideline, not a guarantee.
Example:
Important caveat: The 4% rule was established based on historical US market returns. Some planners now recommend 3-3.5% for retirees who may live 35+ years or retire in a low-return environment. A variable withdrawal rate (reduce spending in down markets) provides more security.
Withdraw a fixed percentage (4%) from your portfolio annually, rebalancing as you go. Simple, transparent, and flexible. Works well if you can tolerate some spending variability in bad market years.
Divide your assets into three "buckets" based on time horizon:
Cover all essential expenses with guaranteed income (Social Security + pension + annuity). Use your investment portfolio only for discretionary spending. This eliminates sequence-of-returns risk for necessities and lets you take more risk with growth assets.
The order in which you draw down accounts dramatically affects your lifetime tax bill:
| Account Type | Tax Treatment | Withdrawal Order |
|---|---|---|
| Taxable brokerage | Capital gains rates | First (often lowest tax) |
| Traditional IRA / 401(k) | Ordinary income | Second |
| Roth IRA / Roth 401(k) | Tax-free | Last (let it grow) |
The conventional wisdom is taxable → Traditional → Roth. But the optimal sequence often involves strategic Traditional IRA withdrawals in lower-income years to fill lower tax brackets before RMDs force larger withdrawals at 73.
Starting at age 73, the IRS requires you to withdraw minimum amounts from Traditional IRAs and 401(k)s annually. These RMDs can push you into higher tax brackets and increase Medicare premiums if not planned for.
Strategies to manage RMDs:
Healthcare is often the largest wildcard in retirement. Key benchmarks:
Consider long-term care insurance, a dedicated healthcare savings fund, or a hybrid life insurance/LTC policy to address this risk.
Use our retirement calculator to see exactly how long your savings will last at different withdrawal rates.
Use the Retirement Calculator →A retirement income plan is not a one-time calculation — it's a living document you revisit every year. The core framework: know your spending, identify your income gap, apply a sustainable withdrawal rate, sequence withdrawals for tax efficiency, and plan for healthcare. The earlier you build this plan, the more time you have to optimize it.
For informational and educational purposes only. Retirement planning involves complex variables. Consult a certified financial planner for a personalized retirement income plan.