How to Create a Retirement Income Plan: Turning Savings into Reliable Income

Building a retirement income plan may feel intimidating, but it’s ultimately about answering three questions: What will I spend? How long do I need my money to last? How should I structure my savings so my income is reliable? With a bit of forecasting and a clear strategy, you can convert a lifetime of savings into income that supports both your essentials and the lifestyle you want.

This guide walks through the planning steps, the main income strategies (including annuities, drawdowns, and bucket approaches), and how to account for taxes and longevity.

1. Estimate Your Spending: Essential vs. Discretionary Expenses

The foundation of any retirement income plan is a realistic understanding of what you’ll spend. Estimating costs in two categories helps:

Essential Expenses

These are the non-negotiables:

• Housing (rent, mortgage, taxes, insurance, maintenance)

• Utilities

• Groceries

• Transportation

• Healthcare and insurance premiums

• Basic clothing, household needs

• Minimum debt payments

You’ll want a plan that ensures guaranteed or highly predictable income covers these expenses. That might include Social Security, pensions, annuities, or very conservative investment withdrawals.

Discretionary Expenses

These support your desired lifestyle:

• Travel

• Dining out

• Hobbies

• Gifts

• Upgrades to home or vehicles

• Entertainment

Discretionary spending can fluctuate year to year. It’s usually funded through withdrawals from investment accounts or flexible income sources.

Inflation

Assume that both categories will increase over time. Healthcare costs, in particular, tend to rise faster than the general inflation rate. A plan that doesn’t consider inflation will fall behind quickly.

2. Estimate Your Longevity

Planning for a retirement that lasts too long is far safer than planning for one that’s too short. People routinely underestimate how long they’ll live, and longevity risk becomes more important as health care advances.

You can use:

• Life expectancy calculators

• Family health history

• Personal health profile

Many planners assume at least one spouse lives to 90 or 95. A plan that can survive that long helps guard against both longevity risk and market downturns.

3. Understand Your Retirement Income Sources

Most people build income from several places. Common sources include:

Social Security

Often the largest and most predictable income source. Delaying benefits increases lifetime income significantly, especially if you expect longevity.

Pensions

These function like a personal annuity and are typically used to cover essential expenses.

Investment Accounts

These include traditional IRAs, Roth IRAs, 401(k)s, brokerage accounts, and taxable investments. They support both essential and discretionary income depending on risk tolerance and the withdrawal method used.

Real Estate Income

Rental properties can provide steady cash flow, although they require management and can be unpredictable.

Part-Time Work

Some retirees choose part-time work for supplemental income early in retirement.

4. Turn Savings Into Reliable Retirement Income

There are several strategies for converting your nest egg into ongoing income. Each has strengths and trade-offs.

A. Systematic Withdrawals (Drawdown Strategy)

This is the most flexible approach: you withdraw a percentage of your portfolio each year, adjusting as needed. For decades, the “4 percent rule” has been a common guideline, though modern research suggests being more flexible, especially during downturns.

Advantages

• High flexibility

• Can preserve or grow the portfolio

• Allows variable spending

Risks

• Market volatility can erode savings

• Risk of withdrawing too much early on

• No guaranteed lifetime income

Best practices

• Base withdrawals on essential and discretionary needs

• Consider dynamic withdrawal methods (e.g., reducing spending in poor market years)

• Keep a mix of high-quality bonds and equities for long-term growth

B. Annuities

Annuities convert a lump sum into a guaranteed income stream. They can be a core tool for covering essential expenses.

Types

• Immediate Annuities: Begin paying right away

• Deferred Income Annuities: Begin paying later (often age 80)

• Fixed Indexed Annuities: Offer upside potential with protection from market losses

• Variable Annuities: Invested in markets and can rise or fall

Advantages

• Predictable, sometimes guaranteed, lifetime income

• Reduces longevity risk

• Good for covering essential expenses

Risks

• Reduced access to principal

• Contract complexity

• Potential fees

Best uses

• Pair them with Social Security to ensure basic needs are covered

• Use deferred income annuities to insure late-life income

C. Bond Ladders

Bond ladders involve buying bonds that mature at staggered intervals (e.g., annually for 10 or 20 years). Each maturity becomes income.

Advantages

• Predictable cash flow

• Reduced interest-rate risk

• No ongoing product fees

Risks

• Requires large savings to generate significant income

• Income ends once the ladder runs out unless extended

• Inflation can erode purchasing power

D. Dividend Income Strategies

Relying on stocks with consistent dividends is popular but risky if used alone.

Advantages

• Income can grow over time

• Total portfolio value may appreciate

Risks

• Dividends are not guaranteed

• Market downturns can reduce income

• Concentrated portfolios raise risk

Dividend strategies are best used as a supplement rather than the primary source of essential income.

E. The Bucket Strategy

The bucket strategy groups your investments by time horizon. It’s intuitive and helps manage both market risk and behavioral stress.

Typical setup

• Bucket 1: Cash (1 to 3 years of expenses)

• Bucket 2: Bonds and conservative investments (3 to 10 years)

• Bucket 3: Stocks and growth assets (10-plus years)

How it works

• You pull income from Bucket 1

• Refill Bucket 1 periodically with gains from Bucket 2 or 3

• Long-term buckets grow and replenish the shorter-term ones

Advantages

• Protects against forced selling in recessions

• Helps manage emotional reactions to market swings

• Allows growth assets to recover over time

Risks

• Requires monitoring and periodic rebalancing

• Not a guaranteed-income strategy

5. Integrate Taxes Into Your Retirement Income Plan

Taxes can significantly change how long your money lasts. Managing withdrawals across different accounts is essential.

Key tax considerations

Required Minimum Distributions (RMDs)

Traditional IRAs, 401(k)s, and similar accounts require mandatory withdrawals starting in your early 70s. These withdrawals increase taxable income.

Roth Accounts

Withdrawals from Roth IRAs and Roth 401(k)s are tax-free if rules are met. They’re valuable for:

• Managing tax brackets

• Funding discretionary expenses

• Leaving tax-efficient inheritances

Social Security Taxation

Up to 85 percent of Social Security benefits may be taxable depending on your income from other sources.

Withdrawal Sequencing

General guidelines (though individual planning varies):

1. Use interest or dividends from taxable accounts

2. Draw from taxable accounts (to reduce future capital gains)

3. Take withdrawals from tax-deferred accounts up to your target income bracket

4. Use Roth withdrawals to avoid pushing yourself into higher brackets

Smart tax planning can extend the life of your portfolio by several years.

6. Protect Against Risks

Every retirement plan must account for risks that can derail income.

A. Market Risk

Diversification across stocks, bonds, and cash buffers helps. Buckets and dynamic withdrawal rules reduce exposure.

B. Longevity Risk

Annuities or delayed Social Security claiming help safeguard late-life income.

C. Health Care and Long-Term Care

Long-term care insurance, hybrid life/long-term care products, or setting aside assets helps manage potential high-cost events.

D. Inflation

Ensure part of your portfolio is in growth investments, even during retirement.

7. Build a Written Plan

A retirement income plan should be documented. Your plan may include:

• Annual spending estimates

• A clear breakdown of essential vs discretionary expenses

• Social Security claiming strategy

• Asset allocation and withdrawal strategy

• Contingency plans for downturns or unexpected expenses

• Expected tax bracket management

• Long-term care strategy

• Steps for your spouse or heirs if you die first

A written plan makes decisions easier and reduces emotional, reactive choices during market volatility.

8. Example of a Simple Retirement Income Framework

Imagine a couple retiring at 66 with:

• Social Security covering 40 percent of essential expenses

• A portfolio of tax-deferred, taxable, and Roth accounts

• A desire for stable income for essentials and flexible income for travel

Their plan might look like:

1. Cover essential expenses with:

   • Social Security

   • A small immediate fixed annuity

   • Bond ladder supporting first 10 years of needs not covered by guaranteed income

2. Cover discretionary spending through:

   • Drawdowns from a diversified investment portfolio

   • Temporary part-time income for first few years, if desired

3. Structure accounts with:

   • A 3-year cash buffer

   • 7-year bond bucket

   • Long-term stock bucket for growth

4. Tax management by:

   • Using Roth withdrawals to stay in preferred brackets

   • Strategic partial Roth conversions before RMD age

5. Longevity protection with:

   • Consideration of a deferred annuity starting at age 80

6. Inflation protection through:

   • Equity allocation for long-term growth

Conclusion

A retirement income plan isn’t about guessing the future with perfect precision. It’s about building a flexible, sustainable structure that balances guaranteed income, growth, risk management, and tax efficiency. By estimating essential and discretionary expenses, planning for longevity, and choosing the right mix of withdrawal strategies, annuities, and investment buckets, you can turn your savings into income that lasts as long as you do.

The most resilient plans blend predictability with flexibility. They give you a stable foundation for needs and room to adapt as life unfolds. With clear preparation, your retirement income can be reliable, long-lasting, and aligned with the lifestyle you want.