What Are the Best Retirement Income Planning Strategies?

Written by True Tamplin, BSc, CEPF®

Reviewed by Subject Matter Experts

Updated on February 23, 2024

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Your retirement income planning strategies will depend on your circumstances.

Some key factors to consider include:

  • Your total retirement savings (including any pension benefits you may be entitled to receive).
  • The age at which you wish to start taking an annual income from these savings.
  • Your level of income and expenditure in retirement.

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There are many possible retirement income planning strategies, but the most common are described below.

Annuitization

This involves converting a sum of money into an annual income that will last for the rest of your life.

The amount you receive each year will depend on the age at which you begin taking annuities, your sex, and the prevailing interest rates.

One advantage of annuitization is that it provides a guaranteed income for life.

This can be reassuring for retirees who are concerned about outliving their savings.

Additionally, annuitization can offer tax advantages in some cases.

Pension Drawdown

This involves taking a portion of your pension savings as an income while leaving the remainder invested.

The advantage of pension drawdown is that it allows you to retain some control over your investment portfolio, and can offer a higher income than annuitization.

However, there is also a greater risk that you will outlive your savings if you choose this option.

Lump-Sum Distribution

This is simply taking a one-time payment from your retirement savings.

This can be a risky option, as you may run out of money if you live for a long time.

However, it can also be the most tax-efficient way to withdraw your savings and can provide a higher income than annuitization or pension drawdown.

Reverse Mortgages

This involves using your home to generate an income in retirement, by either taking out a loan secured on your property or by selling part of the equity in the house.

However, there are some associated risks with these strategies, including falling house prices and interest rate fluctuations.

Roth IRA Conversion Ladder

This can be an effective savings strategy for higher-income earners.

Under this approach, you gradually move assets from a traditional IRA to a Roth IRA over the course of several years.

This reduces your tax burden, allowing your savings to continue growing more quickly.

However, it is important to consider how quickly you expect your income to grow in retirement, as this will determine how long you need to maintain the conversion ladder.

Taxes on Social Security Benefits

Your Social Security benefits may be taxable, depending on your total income in retirement.

It is important to understand the tax implications of any retirement income planning strategies you consider, as this can affect how much money you have available to spend each year.

When it comes to generating a reliable stream of retirement income, there are many different options to choose from.

However, it is important to consider how well your chosen strategy would work in the event of a significant drop in investment returns, as this could have serious consequences for your overall financial security in retirement.

Minimize Taxes on Your Social Security Benefits

One way to reduce the amount of taxes you pay on your Social Security benefits is to delay taking them as long as possible.

This can be a good strategy if you have other sources of retirement income, as it will allow you to keep more of your benefits.

Another option is to claim just one-half of your benefits at full retirement age and then switch to the other half at age 70.

This will allow you to take a smaller monthly benefit that increases with inflation, while still giving you access to the larger payment when you turn 70.

Stick to the Right Asset Allocation

As you are making your retirement income plan, it is also important to consider your investment strategy.

This is because how well your savings perform in the future will have a major impact on how much money you make from annuities or pension drawdown.

For example, if you buy an annuity with a high equity allocation using stock index funds, you could see a significant drop in income if the stock market falls.

Conversely, if you have a low equity allocation, your annuity payments may not keep up with inflation.

It is therefore important to maintain the right asset allocation for your specific situation so that you are not too exposed to either risk or volatility.

You can use a tool such as the Retirement Income Planner from T. Rowe Price to help you decide what your asset allocation should be and whether you could benefit from making any changes.

An important factor to consider is that these tools use historical returns to estimate future performance, and there is no guarantee that future investments will produce the same results.

The Bottom Line

When it comes to retirement income planning, there are many different options to choose from.

However, it is important to consider how well your chosen strategy would work in the event of a significant drop in investment returns, as this could have serious consequences for your overall financial security in retirement.

It is important to consult with a financial advisor to create a retirement income plan that is tailored to your specific needs and goals.

By doing so, you can be sure that you are making the most of your hard-earned savings and have the peace of mind that comes with knowing you are on track for a financially secure retirement.

Retirement Income Planning Strategies FAQs

About the Author

True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website or view his author profiles on Amazon, Nasdaq and Forbes.

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