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Managing your income in retirement

What are some steps for creating an income strategy?

Retirement planning isn’t just about what you do during the decades you spend working, earning a paycheck, and saving for retirement. It also involves using your various income sources in retirement to help pay your expenses while avoiding outliving your savings.

Whether you’re approaching retirement or already in it, you should have an income strategy. Here are seven important steps for creating one:

1. Take stock of your income sources

Reviewing your potential retirement income sources is a good place to start. You’ll likely see there are some that are tied to market performance and, as a result, are likely to fluctuate in value. These include:

  • Employer-sponsored qualified retirement plans (QRPs), such as 401(k), 403(b), and 457 plans
  • Traditional and Roth IRAs
  • Taxable investment accounts

Others will probably be more stable, such as:

  • Social Security
  • Pension plans (defined benefit plans)
  • Annuities

2. Estimate your expenses

How you spend your retirement will significantly affect what your expenses will be, so it’s good to start with a well-thought-out plan. Using it, you can estimate what you will spend annually and break that down into two categories:

  • Essential expenses are ones that would be difficult to reduce, eliminate, or put off, like food, mortgage or rent payments, transportation, insurance premiums, taxes, and health care.
  • Discretionary expenses include entertainment, travel, recreation, charitable giving, and luxury purchases. You can potentially lower, do away with, or postpone these when necessary.

Our retirement expense planning worksheet (PDF) can help with this.

When you’re finished, you should have a good idea of how much income you’ll need to cover your expenses.

3. Use Social Security wisely

Social Security benefits are considered one of the most stable income sources, and they can be useful for covering essential expenses. There are a number of important factors to consider before you claim these benefits.

Even if you have modest goals for your retirement, it’s unlikely that Social Security will be enough to cover all your expenses. To make ends meet, you’ll probably need to tap into your other income sources, including your investments.

4. Consider your life expectancy

While none of us can predict how long we’ll live, it’s helpful to know that, on average, an American at age 65 will spend approximately 20 years in retirement.* In fact, some will spend more time in retirement than they spent working.

Consider your family history and personal health. What age did your parents and grandparents live to? Are you taking good care of yourself? If you think you’ll live to a ripe old age, you’ll need to employ strategies to help ensure your assets last as long as you do.

5. Be flexible with withdrawals

Employing a flexible withdrawal strategy is one way to help ensure your investments last as long as you do. This involves reducing your discretionary spending when there’s market volatility and, as a result, withdrawing less from your portfolio during these periods.

Using this strategy should leave more in your portfolio for use down the road. If the markets recover, you may then be able to return your discretionary spending and withdrawals to what they were prior to the volatility.

To enhance a flexible withdrawal strategy, it’s a good idea to have a cash reserve available in a stable account, such as a bank savings account, to tap into when there’s market volatility.

6. Factor in inflation

Even relatively low inflation may erode your savings’ purchasing power over time and affect your lifestyle. The longer you spend in retirement, the greater its potential effect.

It’s important to strive to outpace inflation, and that may mean holding an allocation to stocks for their growth potential. However, you’ll also need to keep your risk tolerance in mind.

7. Remember required minimum distributions

Required minimum distributions (RMDs) are annual withdrawals that must be taken from traditional, SEP, and SIMPLE IRAs and QRPs. Remembering to take them should be a key part of your strategy because missing one or withdrawing less than the required amount can result in a hefty IRS 50% excise tax for every dollar you failed to distribute.

The starting age used to be 70½, but the Setting Every Community Up For Retirement Enhancement (SECURE) Act raised it to 72, which means individuals have until April 1 of the year following the year they turn age 72 to take their first RMD. This change did not affect individuals who turned 70½ on or before December 31, 2019.

*Social Security Administration,

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.