A retirement income strategy that’s tailored to fit your specific needs can help you maintain the lifestyle you want for as long as you live.

Track your current expenses

A retirement income strategy should put you in position to fund your lifestyle after you stop working. Typically, retirees want to maintain a similar lifestyle to the one they’ve established during their career. That’s why tracking your current expenses is an important first step in creating a holistic retirement strategy.

Your financial professional can help you create an expense-focused budget to gain more insight into your current spending. If you plan on making big changes to your lifestyle in retirement, factor those into your budget. Likewise, if you expect to have major medical expenses, or you have significant charitable giving and/or legacy goals, be sure to include them as well.

Once you and your financial professional have created the budget, you can use it to begin creating an income strategy.

Identify sources of retirement income

You will likely be drawing from multiple sources of income in retirement. Identifying all of them gives you the information you need to create an effective strategy with your financial professional.

After you list all potential income sources, you can match them to your short-, medium-, and long-term spending needs, taking into account the tax and investment considerations related to each one.

Your sources may include:

Tax-deferred accounts

This category includes:

• 401(k) plans

• 403(b) plans

• 457 plans

• Traditional IRAs

• Most pension plans

For many professionals, accounts in this category will be a primary source of retirement savings. Tax-deferred accounts allow you to realize tax deductions when you contribute to them, but withdrawals from these accounts in retirement are taxed as ordinary income. In addition, many require minimum distributions, currently starting at age 72, to avoid penalties.

Roth accounts

Tax-advantaged Roth IRAs and 401(k)s may provide several benefits to retirees. These accounts allow tax-free withdrawals, and Roth IRAs have no requirement to take distributions at any age. In addition, because you can hold onto the savings in your Roth accounts indefinitely, they can be passed on to heirs as a source of tax-free income.

Taxable brokerage accounts

This category includes all accounts outside of the qualified retirement plans listed above. These accounts are sometimes called taxable accounts, since any income you draw from them is generally taxed as capital gains, at a generally lower rate than income taxes.

Cash

Your cash category includes any money in savings accounts, CDs or money market accounts, as well as any cash cushion within brokerage accounts.

Social Security

Social Security is guaranteed income that becomes available to you starting as early as age 62. However, it’s often wise to delay collecting Social Security until you reach your full retirement age, determined by the Social Security Administration.

Annuities

Annuities guarantee a steady stream of income for many years, most commonly for life. Deferred annuities (as opposed to immediate annuities) have an accumulation phase, during which you contribute money over a period of time, as well as an annuitization phase, when you receive regular payments. Annuities can help cover essential expenses and may come with advantageous tax benefits when combined with other sources of income.

Life insurance

The primary purpose of life insurance is to provide financial protection for loved ones upon your death. However, many types of life insurance can also provide a valuable source of income during retirement. Since life insurance can provide tax-deferred growth and allow for tax-efficient distributions, it can play an important role in a retirement income tax arbitrage strategy.

Other assets

You may also have access to income from real estate properties, from executive benefits such as non-qualified deferred compensation (NQDC), stock options or corporate stock, or from other sources. These each have their own unique tax implications.

Retirement withdrawal considerations

The questions of how much to withdraw and when to withdraw from which accounts are central to any retirement income strategy. The appropriate strategy depends on your age, tax status, and financial objectives, among other considerations.

Various guidelines exist that can help you determine how much it’s possible to withdraw sustainably while achieving your retirement lifestyle goals. Many retirees settle on somewhere in the neighborhood of 3% to 5% of their total invested assets in order to sustain their incomes for their entire lives. However, the figure will differ from individual to individual and possibly from year to year. Your financial professional can help you fine-tune your withdrawal percentage based on tax considerations, market performance and other factors.

After determining the amount of your withdrawals, you need to decide which accounts you’ll withdraw from and when. During your working years, you’ve likely invested in a range of the accounts listed above. In retirement, you have the opportunity to draw from them in tax-efficient ways that make the most of your assets.

Different accounts receive distinct tax treatments; using them strategically can help minimize your tax liability. For example, using tax-deferred accounts as the sole source of income in the early stages of your retirement could bump you into the next tax bracket, resulting in higher income taxes and potentially higher rates on some capital gains. Alternatively, you might be able to reduce your tax bill by generating a portion of your income from sales in taxable brokerage or Roth accounts. Your withdrawal strategy also can take into account tax loss harvesting, a tactic that involves selling assets at a loss to offset taxes on gains and income.

Taxation of Most Common Retirement Income Sources
TAX STATUS	SOURCES
Tax-Free Income	Roth IRA, Roth 401(k), Roth 403(b) withdrawals Municipal Bond Interest Taxable Brokerage – interest, withdrawal of principle Loans and Withdrawals from Life Insurance Cash Value (up to the investment in the contract) 15% of Social Security income
Taxed as Capital Gains	Qualified Stock dividends Brokerage Account withdrawals (gains, based on cost basis)
Taxed as Ordinary Income	IRA, 401(k), 403(b), 457 plan withdrawals Most Non-Qualified Deferred Compensation distributions Ordinary Interest income Ordinary Bond dividends Pension Plan distributions Annuity distributions above cost basis 85% of Social Security income

The conventional wisdom is to withdraw from your accounts in the following order:

Withdrawing first from taxable accounts can help to minimize income tax early in retirement. At the same time, it can give assets in tax-deferred and Roth accounts more time for potential compound growth. This strategy should be augmented with a strategic cash allocation for near-term expenses. Keeping a portion of your portfolio in liquid funds provides a cushion for emergency expenses and helps you avoid the need to sell in down markets for cash-flow purposes.

These general guidelines leave room for significant variation depending on individual circumstances. It’s important for you and your financial professional to tailor your strategy based on your evolving circumstances.

Take the next step now…

Your M Financial professional has the knowledge and experience to guide you through the process of creating and implementing a retirement income strategy as part of a holistic financial plan.

Any strategy you decide to pursue should also involve the legal, accounting, and financial professionals who fully understand your personal goals, preferences, and risk profile. Your M Financial professional is prepared to work with your team to customize retirement income solutions that address your specific needs.