A retirement income plan is a vital element of a solid financial plan. In essence, it is the other side of the “how much money do I need to save” equation. Retirement income planning involves the best way to distribute the money you have diligently accumulated, taking into account many factors such as inflation, taxes, market fluctuations, and asset sequencing.

While approaches and strategies vary greatly depending on individual needs, working with a professional who specializes in retirement planning can help ensure that your retirement income plan is on track. 

Well, you may be wondering, how do you create a retirement income plan? Which strategies are the most efficient for me? And how do I minimize taxes? Here are some of the answers to your most nagging questions; let's dive in!

How to Create a Retirement Income Plan

A retirement income plan is a distribution road map that considers the best way for you to live on your accumulated assets. Although this is often done when you are close to retirement, the earlier you start developing an actual distribution/income plan, the better off your accumulation efforts will likely be. Too few people consider the distribution phase of retirement planning, solely focusing on the accumulation phase. This can cause a bit of frantic planning the closer you get to retirement if left unaddressed. 

Factors to Consider While Creating a Retirement Income Plan

There are several factors to consider when creating a retirement income plan, including: 

  • Your age, health, and expected lifespan.
  • How will you generate income during retirement? Will you rely on Social Security, pensions, or savings?
  • Taxes are the largest fee you face in retirement income planning. How will you minimize them? How can you create as many tax-free streams of income as possible?
  • How will you address inflation and market risks?
  • How will your income plan cover unexpected costs, such as long-term care needs or short-term emergencies?
  • How will you cover your monthly costs and make sure you have enough? How will you stress test your plan?
  • In what order should my retirement assets be utilized (asset sequencing)?
  • How much should you save each year, and what vehicles are the most efficient?


Now, What is The Plan?
Employ these three steps and develop a strategy for transitioning from saving to spending in retirement:

  • Determine your retirement income goal: It will help you determine how much money you need to save each month to reach your goal. Start by estimating how much money you'll need each year to live comfortably. It will vary depending on your lifestyle and spending habits, but do not buy into the myth that you will need less income in retirement. Generally, expenses do not drop in retirement, they change.
  • Evaluate your retirement savings: Once you determine your retirement income goal, you can estimate your retirement expenses. It includes everything from housing costs to healthcare expenses. Working towards a retirement savings goal of 10-15 times your annual income is a good target. However, you will want to consider inflation, taxes, and market fluctuations when developing your target amount. These factors can significantly affect your savings target.
  • Match your current income to your projected retirement expense: Figure out how to bridge the gap between your retirement income goal and your estimated retirement expenses. One strategy is to cover your fundamental needs with projected income sources, such as social security or pensions. Unless it doesn't cover all of your necessary expenses, use your variable income streams to make up the difference and handle the fun stuff like travel, leisure, and other bucket-list items.

And, don't navigate this difficult process alone; work with a professional that can review your options with you.

What Is The Most Popular Retirement Income Plan?
In the past, workers could rely on an employer-sponsored pension plan and Social Security to fulfill their expenses in retirement. Pensions are becoming increasingly rare, and Social Security isn't a sure thing for future generations.

There are a lot of different retirement income plans out there, and it can be tough to decide which one is right for you. Here is a look at some of the most popular retirement plans:

Pre-tax Retirement Accounts
One of the most popular retirement plans is the Individual Retirement Account (IRA). An individual can open an IRA at a financial institution, such as a bank, brokerage business, or insurance company, to hold financial instruments allocated for retirement.

While there are numerous types of pre-tax retirement vehicles, the traditional IRA is the most common. However, savers should be aware that traditional IRAs (and other pre-tax vehicles such as 401(k)s, 403(b)s, TSPs, etc.) are typically very poor income generating vehicles. This is due to their tax inefficiencies during the distribution (income) phase of retirement. Further, pre-tax retirement vehicles usually trigger taxes on social security benefits, creating an unexpected tax-burden for many retirees.

For a more in depth (and perhaps shocking) discussion on the tax-cost of pre-tax retirement accounts in retirement, please see our blog post How Much Does My 401K Save Me in Taxes?

Traditional IRAs and 401(k)s allow you to contribute pre-tax money, which will grow tax-deferred until you retire. While a few exceptions apply, withdrawals prior to 59 ½ will likely trigger a penalty tax above and beyond ordinary income taxes on the withdrawal. Remembering that we lose deductions in retirement and that taxes generally increase over time, extreme care should be had in deciding to save for retirement in a pre-tax account.

How Do I Minimize Taxes On My Retirement Income?
One of the biggest concerns people have as they approach retirement is how they will manage to live on a fixed income. Taxes are by far the largest fee (and threat) we face in retirement planning, but there are many ways to minimize them.

So, there are a few things that you can do to minimize the taxes that you have to pay on your retirement income.

  • Make sure that you take advantage of all of the tax breaks available.
  • Save for retirement in tax-efficient vehicles, such Roth 401(k)s, Roth IRAs, and Life Insurance Retirement Plans (LIRP). These vehicles do not trigger taxes on your social security benefits.
  • Make sure that you do not have more than a 6 month emergency fund in liquid vehicles, such as bank accounts, CDs, money market accounts, or brokerage accounts. Having more than this can cause you to pay unnecessary taxes on money you are not even using.

If you need help, work with a professional advisor. Our organization has professional advisors who have specialized in assisting people in developing effective retirement plans. You can always get in touch.

Working with a Professional Advisor

Retirement income planning can be a daunting task. There are some landmines out there that can cause unexpected turns if you are not careful. It is essential to have a plan to make sure you have enough money to cover your expenses in retirement. This article offered some tips on how to create a retirement income plan.

If you need help, work with a professional advisor. Our organization has professional advisors who have specialized in assisting people in developing effective retirement income plans. You can always get in touch.

For more information about our firm and the services we offer, send us a quick email or call the office. We would welcome the opportunity to speak with you.

kcooper@axioscapital.com | (435) 868-3160