Living in Retirement

Planning for retirement is not like living in retirement, and you need to understand how they differ.

FAQs: Creating Your Retirement Income Plan

How does planning in retirement differ from planning for retirement?

Retirement brings different questions

Retirement as we’ve known it is changing. You’ll probably be more active, live and work longer, and need to rely more on what you’ve saved for income than previous generations.

While most people understand the importance of saving money for retirement, the concept of income generation in retirement is less familiar. A retirement income plan involves transitioning from saving for retirement to using your hard-earned savings to generate some or all of your income.

But how do you get started on creating your retirement income plan? Below are answers to some frequently asked questions about developing a retirement income plan.

Keep in mind the issues involved are often complex and your plan should be unique to you and your individual needs and goals.

What challenges should I consider?

It’s important to have a plan to help manage potential challenges to your retirement security.

  • Market volatility: Market volatility will always be a concern. A severe market downturn just before retirement or at the start of your retirement could have a significant effect on your ability to generate adequate income throughout many years of retirement.
  • Withdrawing too much from your savings: A key to a solid retirement income plan is determining an appropriate withdrawal rate from your savings. Just as important is having ways to reduce your spending at times of market volatility or when unexpected expenses occur.
  • Inflation: The longer your time in retirement, the greater the potential inflation may erode the purchasing power of your savings and effect your lifestyle. A good retirement portfolio should balance the need for ongoing income with savings that have the potential to grow and last through the years.
  • Health care and other unexpected expenses: Be aware of the variety of expenses—including health care—you may face. Your plan should allow spending flexibility to be prepared for these expenses.
  • Longevity: Ensuring your assets last throughout retirement requires careful planning. Consider how the other challenges may affect your income over time. A financial advisor can help you develop a retirement income plan that helps protect against the risks to your retirement savings.

How much will I spend in retirement?

A truly realistic approach to retirement planning doesn’t just allow for changes in your personal and financial circumstances—it takes them as given. That’s why it’s important to estimate your expenses in retirement.

Understand your essential and discretionary expenses and how they may evolve throughout your retirement years.

  • Essential expenses are basic, ongoing expenses like food, mortgage or rent payments, transportation, insurance premiums, taxes, basic health care costs, and other nondiscretionary living expenses.
  • Discretionary expenses include entertainment, travel, recreation, charitable giving, and luxury purchases. Because these expenses are nonessential, you can potentially lower or postpone them if your financial situation or needs change.

Use our retirement worksheet (PDF) to help plan your retirement expenses.

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Where will my income come from?

Retirement income often comes from a variety of sources. Yours may include:

  • Retirement savings, including 401(k), 403(b) and 457 plans
  • Nonretirement savings, including brokerage accounts or savings accounts
  • Social Security
  • Traditional pension plans (defined benefit plans)
  • Annuities
  • Employment (full- or part-time)
  • Rental property you own

How you receive income from these sources can affect your tax situation from year to year. Your strategy can also influence how long your savings can continue to meet your income need.

Once you’ve estimated your expenses and income in retirement, see if there’s a gap between the two totals. If you don’t have enough money for your ideal retirement, consider modifying your retirement goals. A financial advisor may also be able to reallocate your portfolio to generate more income, keeping in mind your time horizon and risk tolerance.

How much can I withdraw?

For a long time, it was thought if you have 60% of your investments in stocks and 40% in bonds, you should be able to withdraw about 4% of your savings in your first year of retirement. After that you would adjust that amount for inflation.

This 4% rule of thumb was based on spending the investment returns from your portfolio and dipping into the principal for about 30 years. However, the rule is considered outdated today.

Many advisors now prefer a more sophisticated approach that includes flexible withdrawals based on portfolio performance. They encourage careful planning to keep fixed expenses low so discretionary expenses can be trimmed if needed.

Should I tap my taxable or tax-deferred accounts first?

Consult your tax advisor before assuming withdrawals from taxable accounts are your best first step.

Conventional wisdom leans toward withdrawing funds from taxable accounts first. By starting with these accounts, your tax-deferred assets can continue to enjoy the potential to grow on a tax-deferred basis. But that might not be the best approach for your situation. Consult your tax advisor before assuming withdrawals from taxable accounts are your best first step.

How can I help ensure I don’t outlive my savings?

To help protect against the risk of outliving your retirement savings, ensure that your essential expenses are covered by sources such as:

  • Social Security
  • Pensions
  • Annuity payments
  • Insurance benefits

By providing a fixed payment amount, these sources may help protect you from market volatility and lower your risk of outliving your money.

Next steps

  • List your sources of retirement income and expenses.
  • Use the retirement worksheet to help analyze your retirement expenses.
  • Talk to your financial advisor and tax advisor about possible approaches to retirement income.

Wells Fargo Advisors does not provide tax or legal advice. Please consult with your tax and/or legal advisors before taking any action that may have tax and/or legal consequences.