Securing your financial future means leaving nothing to chance. But since retirement may last 20 years or more, it’s natural to wonder how you can make your savings go the distance and provide a reliable income. Retirement income planning starts with understanding your options.

In this article, we’ll cover some key retirement income planning strategies and steps to help you prepare for a healthy financial future.

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What’s retirement planning? 

The purpose of retirement planning is to help you reach the following age-related investment goals. The milestones below represent the minimum investment amount required for a comfortable retirement:

• Total invested by 30: 1x your annual income.
• Total invested by 40: 3x your annual income.
• Total invested by 50: 6x your annual income.
• Total invested by 60: 8x your annual income.
• Total invested by retirement: 10x your annual income.

While the numbers may appear high, these goals are actually conservative. Let’s compare them with the gold standard of retirement income plans: investing 15% of your pay throughout your career. 

For example, if you earn an average household income of $80,000 over your career, investing 15% produces the following (assuming investment in a U.S. market index fund, like the S&P 500^®):

• Investing 15% over 25 years: approximately $1 million (13x your annual income).
• Investing 15% over 35 years: approximately $3.2 million (40x your annual income).
• Investing 15% over 45 years: approximately $8.6 million (107x your annual income).

The above illustrations are based on historical average U.S. market returns. While past data doesn’t guarantee future results, it can serve as a helpful guide for projections.

The goal is to build a nest egg that can generate a sufficient income without depleting the fund (principal). This means ensuring your annual retirement withdrawals of 4–6% cover your lifestyle needs. It calls for investing in assets that deliver an average annual return above 6% to sustain the portfolio’s growth across time.

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Key steps to create a retirement income plan

Planning your retirement income involves following these essential steps.

Determine your retirement income needs

For a comfortable retirement, aim to replace 55–80% of your current income. Social Security may cover part of that amount, meaning you need to fund about 45% through 4–6% withdrawals from your investment portfolio.

With that said, one size doesn’t fit all — while replacing 45% of pre-retirement income could be comfortable for some, it may not align with everyone’s needs.

To gauge your own baseline retirement income needs, estimate your foreseeable essential, discretionary, and seasonal expenses:

• Essential expenses: Your rent or mortgage, utilities, groceries, healthcare, and insurance payments — forming the foundation of your monthly budget.
• Discretionary expenses: Your non-essential expenses, including dining out, hobbies, and travel. 
• Seasonal expenses: Your costs that recur at specific times of year, such as holiday gifts, annual insurance premiums, and property taxes.

In retirement, consider investing a portion of your portfolio in a fixed income-generating asset to cover these expenses. 

Tip: Try not to rely on Social Security for your retirement income. Unless Congress intervenes before 2033, the Old-Age Survivors Insurance (OASI) Trust Fund’s reserves will become depleted and continuing Social Security income will only cover 79% of scheduled retirement benefits.

Calculate your expected income

To build your retirement portfolio, focus on investment vehicles that have a proven track record of reliability, diversification, and broad support. Because investments that meet these criteria provide medium to long-term stability, they enable more reliable income projections than speculative assets.

• Diversification: Over time, investments with broad market exposure generally outperform more narrowly focused ones. This is because spreading risk reduces the impact of any single underperforming area.
• Historical viability: Prioritize vehicles with a demonstrated history of stable growth and resilience across different market cycles.
• Government and institutional backing: The backing of government regulations and large institutions typically coincides with broad market trust. This foundation helps keep trading smooth and prices stable.

Many broad-based equities fit these criteria. For example, S&P 500^® index funds are diversified (providing exposure to the broad U.S. market), historically dependable (with a 100-year average return of 10%), and widely backed by major institutions.

Consider yourself in the scenario of our earlier example. Over 35 years, investing 15% of your $80,000 salary into an S&P 500^® index fund totals approximately $3.2 million. Knowing this can help you calculate your retirement income — you may decide you want to live off 6%, or $192,000. How, and through which vehicle, you withdraw that 6% comes down to preference.

And, remember, these figures are based on historical average U.S. market returns. While past data doesn’t guarantee future results, it can serve as a helpful guide for projections.

Prepare an investment portfolio 

To ensure you’re positioned for long-term financial success, account for the following factors as you prepare your investment portfolio: 

Tax

Consider how tax impacts an asset's funding, growth, withdrawals, and income. 

For example, if you want a steady income in retirement, you can roll your 401(k) into an annuity — preserving its tax-deferred growth. But once you begin receiving annuity payments, the IRS typically taxes them at ordinary income rates — similar to 401(k) distributions.

Just don’t let taxes catch you off guard. Sit down with a tax professional to ensure you’re aware of your obligations.

Liquidity

Liquidity refers to how easily you can convert an asset into cash. 

Retirement portfolios generally contain a mix of liquid and illiquid assets. Note that some assets may offer benefits in exchange for illiquidity, while others may experience increased volatility due to higher liquidity.

Let’s take a look at an example: Annuities.

Annuities are a common type of income-generating illiquid asset. In return for providing a reliable income stream and guaranteed principal protection (a benefit), retirees generally can’t access more than 10% of their annuity’s principal annually without taking on penalties or surrender charges.

Tip: 4–6% fixed annuity payments may not cover all unexpected emergencies. Consider building an emergency fund equivalent to six months of living expenses, and hold it in an easily accessible, high-yield bank account. And consider investing in a Health Savings Account (HSA) to further cover unforeseen medical expenses.

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4 retirement income planning strategies

While investing isn’t one-size-fits-all, we can consider the broad adoption of 401(k)s or IRAs for building wealth and annuities and treasury bonds for maintaining it. 

Let’s explore these four common retirement planning strategies in more detail.

1. 401(k)s

401(k)s are a sound investment vehicle offered by employers — 80% of U.S. millionaires used theirs. For many, 401(k)s are the foundation of their guaranteed retirement income plan. 

Employees use pre-tax money to fund their 401(k) and their fund grows tax-deferred. In most cases, employers match employee contributions of up to 6% of their salary. While 401(k)s offer a limited selection of investments, they often include solid options, such as broad-based equity funds that provide diversified exposure to the stock market.

2. IRAs

Unlike 401(k)s, investors fund IRAs with after-tax dollars. IRAs fall into two main categories: traditional and Roth. 

With traditional IRAs, you contribute pre-tax dollars and pay taxes on withdrawals in retirement. With Roth IRAs, you contribute after-tax dollars, and qualified withdrawals in retirement are tax-free. 

Both 401(k)s and IRAs have maximum annual investment caps. A good general rule is to use your 401(k) as your primary retirement vehicle — aiming to invest 15% of your income. If you reach its ceiling, consider an IRA that suits your preferences. 

3. Fixed index annuities

Fixed index annuities (FIAs) offer tax-deferred growth based on the performance of a market index, like the S&P 500^®, and downside protection. While contracts vary, FIAs commonly offer a 0% floor. This ensures you won’t lose your money, even if the market drops. 

Certain FIAs offer more than principal protection to also provide guaranteed retirement income — generally in the form of a guaranteed withdrawal lifetime benefit (GWLB) or another similar contract add-on (called a rider). 

4. Treasury bonds

The U.S. government issues treasury bonds to raise capital, promising to pay back the principal plus interest on a specified date (called the maturity date). 

Treasury bonds offer a fixed income in the form of interest — with payments usually occurring every six months. Many retirees consider Treasury bonds low-risk because they’re backed by the government’s credit and taxing authority. 

Tip: While annuities and treasury bonds offer a fixed income, they don’t alone ensure long-term, notable portfolio growth. Further diversify with investment vehicles that historically outpace inflation while producing reliable medium to long-term capital gains, such as  precious metals, real estate investment trusts (REITs), and broad-based index funds.

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FAQs

When should you start planning for retirement?

If you haven’t started your retirement income planning, the best time to begin is now. The sooner you start, the more time your money has to experience compounded growth. 

What’s the $1,000-a-month rule for retirement?

The $1,000-a-month rule suggests that for every $240,000 you invest, you can withdraw $1,000 per month in retirement — equivalent to an annual withdrawal rate of about 5%. 

Under this rule, if you have your sights set on earning $6,000 a month during retirement, you need a nest egg of approximately $1,440,000.

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This communication is for informational purposes only. It is not intended to provide, and should not be interpreted as, individualized investment, legal, or tax advice.