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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

The Internal Revenue Code (IRC) requires that IRA owners and participants in qualified employer sponsored retirement plans (QRPs) such as 401(k)s, 403(b)s, and governmental 457(b)s must begin taking distributions annually from these accounts. These distributions are referred to as RMDs.

Once you reach your required beginning date (RBD), you will begin taking RMDs from any Traditional, SEP, and SIMPLE IRAs that you have, as well as from any QRPs left at previous employers. Your RBD is April 1 following the year you turn age 72, if you turn age 72 before 2023. Your RBD is April 1 following the year you turn age 73, if you turn age 73 in 2023 or later.

Failure to take your RMD on time or in the right amount may subject you to an IRS 25% excise tax. This tax can be reduced to 10% if corrected within two years from the date the tax is imposed.

*Social Security Administration,

Wells Fargo & Company and its affiliates do not provide tax or legal advice. This communication cannot be relied upon to avoid tax penalties. Please consult your tax and legal advisors to determine how this information may apply to your own situation. Whether any planned tax result is realized by you depends on the specific facts of your own situation at the time your tax return is filed.