Originally published April 2023. Updated May 2026.

A common question as retirement approaches is how income will actually be generated. Most planning focuses on how to accumulate assets. The more complex challenge is how those assets are converted into reliable income while managing taxes, market variability, and longevity risk. A retirement income plan is where these decisions come together. The structure, timing, and sequencing of withdrawals can materially affect both after-tax income and how long a portfolio lasts.

What Is a Retirement Income Plan?

A retirement income plan is a roadmap you can follow to make sure you have sufficient income to meet the lifestyle you want to have in retirement. It will help you figure out how much money you have, what you’ll need, and the best way to manage your money once you can no longer rely on a regular paycheck. A good retirement income plan can provide you with a sufficient income stream and specify a sustainable strategy for withdrawing funds so that you can minimize the risk of outliving your nest egg. This is where a broader Retirement Planning process shifts from projections to implementation.

How Retirement Income Planning Works

There are four steps you can follow to develop a thorough retirement income plan. Gathering the information you will need may take some effort, but the details you collect will be instrumental to building your plan.

Step 1: Define Required Income and Lifestyle

Estimate what your expenses in retirement will be. If you’re a diligent planner who has always kept a monthly budget, you’re off to a good start. Many people aren’t that disciplined, though, and it can be easy not to track your income versus your spending when you’re earning a steady paycheck. To build an effective retirement income plan, you will need first to figure out what your expenses will be after stepping away from work.

So what is a good annual income for retirement? The general rule of thumb is that you will need 70% to 80% of your pre-retirement income to live on when you stop working, but your individual needs, lifestyle, and goals can raise or lower that number significantly.¹ So, try to account for all of your monthly expenses like housing, utilities, and transportation, in addition to discretionary spending like entertainment and travel. Will your house be paid off or will your household expenses actually go up if you plan to finance a second home?

If you intend to wait until you’re in your 60s to retire, being a “senior citizen” can offer certain privileges. Be sure to research the benefits seniors in your town may receive, like a potentially lower rate on property taxes.

How much traveling do you plan to do? If it’s a lot, be sure to budget for it. Don’t forget to plan for medical expenses, too. Even when you reach age 65 and can qualify for Medicare, you may still need supplemental insurance or have to pay for a variety of out-of-pocket medical expenses. Consider that your adult children and other family members may require some financial support, and you may want enough pocket money to spoil your grandchildren.

Step 2: Identify Income Sources

Take inventory of what all your sources of income will be. Your income in retirement could come from multiple sources, including your personal savings and investments, workplace retirement plans, and Social Security. Decisions around income sources are often coordinated alongside Tax Planning to manage how and when income is recognized. If you have worked at several firms over the course of your career and have vested retirement benefits with different past employers, be sure not to overlook any of those accounts. Adding up the balance of all these accounts will reveal the size of your nest egg.

If you’re still many years away from retirement, use modest estimates of what the future growth of your accounts may be. Using no more than an annual return of 6% on stocks, for example, may prevent you from overestimating the future growth your investments may experience.

You’ll also have to estimate how much you can safely withdraw from your investment accounts annually once you’re in retirement. If you don’t want to exhaust the principal of your accounts and run the risk of running out of money, the general rule is not to withdraw more than 3% to 4% per year of your nest egg’s balance,² but the appropriate withdrawal rate depends on age, portfolio allocation, tax situation, market conditions, spending needs, and legacy goals. Consider some retirement accounts may have Required Minimum Distributions RMDs), or minimum amounts that a retirement plan account owner must withdraw annually beginning at age 73, or age 75 for individuals born in 1960 or later.

Though they’re less prevalent today than they once were, you may also have a traditional pension. Unlike a 401(k) or a 403(b) plan, for which the value of your account depends on the performance of the investments you select, a traditional pension will provide a regular monthly benefit that is based on your earnings and years of service. The company or union you have your pension with can give you an estimate of what your monthly retirement benefits may be.

For Social Security, you can get an estimate of your future benefits that is based on your actual earnings. You may either get, complete, and return to the Social Security Administration the request for this benefits statement, or you can review your estimated benefits through your personal my Social Security account, which provides estimates based on your earnings record.

If you’re fortunate to have income from other sources, like annuities you invested in or rental income from properties you own, be sure to include those in your income projections. Don’t forget that you may also have to pay taxes on many of your sources of income, including Social Security benefits, so be sure to consult with a financial professional when mapping out your plan.

At this stage, it is also important to consider how different income sources are taxed. Withdrawals from IRAs, brokerage accounts, and Social Security are treated differently, and the sequence in which they are used can meaningfully affect after-tax income.

Step 3: Evaluate the Gap and Available Adjustments

Determine whether your income will fall short of your expenses, and if it does, come up with a plan for how to make up for the shortfall. If your income will exceed what you are likely to spend, congratulations. You have done a good job preparing for retirement. But if your income seems likely to fall below what your expenses will be, you’ll have to figure out how to make up the difference. The simplest solution may be to postpone your retirement date for a few years so that you have more time to save and invest.

Still, you may have other options. For example, if you’re an empty nester, would you be willing to reduce your housing expenses by downsizing to a smaller, more affordable home? Do you want to stop working completely? If not, would a part-time role help you make up your income shortfall? If you’re ready to bring your current career to a close, would you consider doing something completely different as a consultant or part-timer?

Step 4: Managing Your Investments

Determine how to manage your investments in retirement. When you’re investing for retirement, you have one primary investment objective – growing your principal. But as you approach retirement and once you enter it, two other words will become much more important to you – income and stability. Still, don’t assume you can go entirely conservative with your investments. Increasing life expectancies mean you could spend 20, 30, or even more years in retirement. To avoid running out of money, you may need some growth to combat the impact of inflation and to help ensure you do not exhaust your principal too soon.

The structure of withdrawals becomes especially important in this phase. The order and timing of withdrawals (from taxable, tax-deferred, and tax-free accounts) can influence both tax liability and portfolio longevity. A coordinated approach often allows for more stable income over time. Retirement income planning is an ongoing process. As markets, tax laws, and personal circumstances change, the plan must adjust with them. For many households, the complexity is not in any single decision, but in how those decisions interact over time.

Key Insight: Income Planning Is Not Just About Amount

A common assumption is that retirement success is determined by how much has been saved. In practice, outcomes are often shaped by how assets are used.

Even with similar portfolios, different withdrawal strategies can lead to materially different results over time, particularly after taxes. This is particularly relevant in the years surrounding retirement, often referred to as the “retirement red zone.” (See: Planning for the Retirement Red Zone)

Frequently Asked Questions

How do you generate income in retirement?

Income typically comes from a combination of Social Security, retirement accounts, and taxable investments.

What is a safe withdrawal rate?

A commonly cited range is 3-4% annually, but the appropriate rate depends on market conditions, time horizon, and tax considerations.

How are retirement withdrawals taxed?

Different accounts are taxed differently. Coordinating withdrawals can reduce total tax burden.

• Traditional IRAs/401(k)s are taxed as ordinary income
• Brokerage accounts are taxed as capital gains
• Roth accounts are generally tax-free

When should you start Social Security?

Timing affects lifetime income and tax exposure. Delaying benefits increases monthly payments but may not be optimal in all cases. This decision is typically evaluated within a broader retirement income plan.

Why does withdrawal order matter?

The sequence of withdrawals can affect both taxes and how long a portfolio lasts. Coordinated strategies can improve after-tax income over time.

This article was reviewed and updated in May 2026 to reflect current planning considerations. This material is intended for informational/educational purposes only and should not be construed as tax, legal or investment advice, a solicitation, or a recommendation to buy or sell any security or investment product. Investments are subject to risk, including the loss of principal. Some investments are not suitable for all investors, and there is no guarantee that any investing goal will be met. Certain sections of this material may contain forward-looking statements. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is no guarantee of future results. Third-party links are provided to you as a courtesy. We make no representation as to the completeness or accuracy of information provided at these websites. Information on such sites, including third-party links contained within, should not be construed as an endorsement or adoption of any kind. Please consult with your financial professional and/or a legal or tax professional regarding your specific situation and before making any investing decisions.

Endnotes

¹  Probasco, Jim. “How Much Do I Need to Save to Retire?” Investopedia, November 10, 2022.
https://www.investopedia.com/retirement/how-much-you-should-have-saved-age/.

²  Kagan, Julia. “What Is the 4% Rule for Withdrawals in Retirement and How Much Can You Spend?” Investopedia, September 21, 2022.
https://www.investopedia.com/terms/f/four-percent-rule.asp.