Retirement Income Planning: 5 Steps to Take Now
Retirement income planning is a key part of preparing for the next chapter in life.
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Retirement income planning is the process of assessing your anticipated retirement income and expenses to ensure that you’ll have sufficient resources stashed in a tax-efficient way to maintain your lifestyle during retirement.
Here are five steps to planning your retirement income.
1. Estimate your retirement expenses
The first step in retirement income planning is to estimate your expenses in retirement so you can determine how much retirement income you will need. Typical expenses in retirement can include:
Mortgage, rent and other property-related expenses. You’ll need a place to live, so be sure to consider your mortgage and/or rent, property taxes, repairs and other property-related expenses.
Taxes. Aside from withdrawals from a Roth IRA after age 59½, most (if not all) of your retirement income is taxable (even Social Security).
Medical expenses. According to a 2024 study from Fidelity, the average 65-year-old may expect to spend $165,000 on medical expenses in retirement.
Car payments. Typical car-related expenses in retirement include car loan payments, repairs, fines and insurance.
Food and personal items. You’ll still need to eat, bathe and clothe yourself in retirement, so be sure to budget for those expenses.
Travel. Unless you plan on staying put for all of your retirement, travel is another expense you’ll typically have in retirement.
Entertainment. This includes things such as subscriptions, movie tickets and social events.
Estimate your Social Security retirement benefits
Your actual benefit may be lower or higher than estimate made with this calculator, because it does not take into account your actual earnings history.
We assume you have earnings every year until you begin receiving Social Security benefits. If you had several years of noncovered employment or your earnings changed significantly from year to year, this calculator will overestimate or underestimate your benefit.
Did you know that Medicare Part B premiums are usually automatically deducted from your Social Security retirement checks? Learn more about how much Medicare actually costs.
2. Identify your sources of retirement income
Consider whether the source guarantees income for a lifetime and how it’ll affect your tax liability. (Some are fully taxable; others are tax-deferred or tax-free.) Typical sources of retirement income include:
Social Security. Starting at age 62, you may qualify for Social Security retirement benefits.
Retirement accounts. This includes money you’ve saved in 401(k)s and IRAs (Roth, traditional and SEP). These accounts typically have required minimum distributions.
Brokerage accounts. Money in brokerage accounts, including dividends from stocks held in those accounts, can be a source of retirement income.
Pensions. Depending on where you’ve worked, you may have a pension plan that provides retirement income.
Savings. This includes money you have in savings accounts, certificates of deposit or checking accounts.
Rental income. If you own a rental property that you plan to keep during retirement, your rental income should be part of your retirement income.
If your planned retirement income doesn’t fully cover your anticipated retirement expenses, there are a number of ways you can increase or supplement your retirement income.
Rent out a room in your home. Not only does renting a room provide additional income, but it can help prevent loneliness and isolation in retirement.
Buy and rent out an investment property. Purchasing and renting out an investment property can supplement your retirement income if the rent is more than what you pay for the property’s mortgage and other expenses (such as property taxes, repairs and rental management fees).
Capitalize on your hobbies. Hidden talents can turn into income, such as turning a love for gardening into cash from selling your crop at your local farmers’ market.
Borrow money. This may not always be the best or easiest option. For one thing, it can be harder to borrow money when you’re retired, because your retirement income may be lower than your working income. Additionally, you’ll likely pay interest, which can decrease your income in the long run.
Retirement income planning tools
Use our calculator to estimate your Social Security retirement benefits.
Calculate how long your retirement money will last.
Check out 5 great ways to cut taxes in retirement.
» Want help with retirement income planning? Learn how to choose a financial advisor.
3. Strategize how you’ll tap into retirement income
How you approach tapping into your retirement income could make all the difference when it comes to having the money you need when you need it throughout retirement. A strategy may include:
Diversifying your income sources. You’ll want a mix of guaranteed income sources and invested assets that can sustain your lifestyle for your lifetime.
Deciding how you’ll approach withdrawals. There are several common withdrawal strategies you could follow to maximize the longevity of your retirement savings.
Delaying collecting Social Security retirement benefits. You can claim Social Security as early as age 62, but you don’t receive 100% of your benefits unless you wait until you reach full retirement age (full retirement age varies with birth year, but it is 67 for people born in 1960 or later). If you can hold off even longer (say, to age 68 or 69), your monthly benefit could increase by as much as 8% a year. (There is no financial incentive to wait past 70 to start taking Social Security.)
Managing your tax liability. As noted, most of your retirement income may be taxed. Having a tax-efficient strategy could save you money down the road.
4. Adjust your portfolio for retirement
Entering retirement means your focus is shifting from accumulating savings to living on it. And so your investment strategies will need to change, as well.
Shift to income-generating assets. Rebalancing your investment portfolio toward high-dividend ETFs or stocks can generate a regular stream of income.
Reduce your risk. Including more lower-volatility assets like bonds will help to protect your retirement income from major swings in the market.
Watch out for inflation. While reducing risk is important, you may want to keep some portion of your portfolio invested in assets that help your savings stay ahead of inflation.
Consider how your needs might shift as you age. Ensuring some part of your portfolio is still growing could be crucial if you experience health complications and need long-term care, or if you dream about leaving a gift for your loved ones.
5. Look for ways to decrease your retirement expenses
Even if your anticipated retirement income is higher than your anticipated expenses, you may find more financial security by lowering your retirement expenses. Below are some ways you can decrease your expenses in retirement.
Pay off the mortgage before you retire. Not having a mortgage payment can help keep your housing expenses low during retirement.
Enroll in Medicare. To help with medical expenses, be sure to enroll in Medicare (you can first enroll in the three months before turning 65).
Downsize your home. Selling your home and moving to a smaller one or even an apartment or condo can reduce costs.
Move to a cheaper city. Although jobs in bigger cities sometimes come with bigger salaries, when you retire you don’t need to worry about a salary. Consider reducing your expenses by moving to a city with a lower cost of living.
Drive a less expensive car. Unless your car is already paid for in full, consider trading in your car for one with a lower monthly payment.
