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Planning for the income you will need in retirement

Apr 6, 2023 | 17 min. read

You don’t have to be wealthy to have a successful and fulfilling retirement. But, you will need to deftly maneuver through a series of important decisions to create a predictable stream of income that will support the life you envision.

Retirement planning falls into two distinct stages that financial advisors typically refer to as accumulation and distribution. The first stage, of course, is all about saving and investing for a retirement that is years or, in many cases, decades away. The second stage is about figuring out how to turn the benefits and assets you’ve earned or accumulated during your working years into a reliable lifelong stream of income. It’s that second stage, often referred to as retirement income planning, that we will focus on in this article.

Key Points

  • An effective retirement income plan should be diversified, with both guaranteed income sources and a mix of investments that have historically kept pace with inflation.
  • Having military retirement income may influence how you choose to allocate your investable assets.
  • Making smart, informed decisions about when to claim your Social Security benefits can help maximize your guaranteed income.
  • A Roth conversion – or series of Roth conversions – before you retire could be an effective way for you to reduce your taxes in retirement.
  • A financial advisor can work with you to build a comprehensive but flexible retirement income plan.

How much money will I need in retirement?

A good place to begin the retirement income planning process is by figuring out how much money you will need in retirement. For years, a popular rule of thumb was that you would need 70 to 80 percent of your pre-retirement income. That was based on the idea that you would no longer have to worry about work-related expenses like the cost of commuting, clothing, lunches out, etc. But in our post-pandemic, more casual, work-from-home world, many of us spend less on those things than we did in the past. If you’re in that camp, it’s less likely that your expenses will substantially decline when you stop working.  

Even more significantly, this rule of thumb fails to take into account the fact that you will likely have much more free time in retirement. What you choose to do with all of that free time may, ultimately, be the single biggest determinant of how much money you will need in retirement. So if you envision an active retirement filled with activities and travel, it’s entirely possible you’ll need to replace 100 percent or more of your pre-retirement income. But if you’re looking forward to slowing down in retirement, or plan to stay busy pursuing less expensive hobbies or outdoor activities, that 70 to 80 percent rule of thumb might be entirely appropriate. That’s why it’s a good idea to begin thinking about what sort of retirement you want well before you actually get there.

How will I know if I’m financially prepared to retire?

Once you have an idea of how you want to live in retirement, a good first step in building a retirement income plan is to tally up all of your anticipated expenses and then compare them to the approximate income you anticipate will be available to you. This will give you a good sense of how well prepared you are for retirement. To assist you in that effort, here are some reminders about the different types of expenses and income that may apply to your situation.


Expenses can typically be divided into two categories – essential needs like housing, food, clothing, utilities, transportation, medical expenses, maintenance, taxes and insurance; and discretionary or “fun” spending on things like dining out, entertainment, travel, and gifts.

Pie chart showing potential essential expenses.


There are three possible types of income – guaranteed, one-time and variable. Guaranteed income comes from sources like Social Security, military retirement income, or annuities. One-time sources of income include inheritances, life insurance proceeds or profits from the sale of real estate or other assets. Variable income generally comes from sources like your investments (401(k), TSP, IRA, taxable stocks, bonds, or mutual funds), rental property, or even a part-time job. Keep in mind that you will have to begin making required minimum distributions (RMDs) from traditional (non-Roth) IRA accounts beginning at age 73 (or age 75 beginning in 2033), whether you need that money or not, and will need to plan accordingly.

Pie chart showing potential sources of guaranteed income.

If your anticipated expenses significantly exceed your anticipated income, it might be a sign that you need to push back your planned retirement date. Doing so can:

  • Increase your monthly Social Security benefit
  • Allow you more time to save
  • Give your investments an opportunity to grow
  • Potentially save you thousands of dollars by extending the time in which you and any dependents are covered by your employer’s health insurance (this is particularly true if you are not yet eligible for Medicare).

If you don’t want to postpone retirement, another option to consider is working part-time in retirement – at least initially – to make up for the gap in your income.

Should I pay off my mortgage before I retire?

To be sure, the idea of paying off your mortgage before retiring has considerable appeal. Eliminating the significant expense of your monthly principal and interest payments would allow you to live on less. The trade-off is that you would be giving up liquidity. It’s a lot easier to make a withdrawal from a bank account or sell shares of an investment than it is to tap the equity in your home.

Making the best decision for your particular situation depends on a number of factors, including the interest rate on your loan and the rate of return you would expect to earn if you chose to invest your money instead of using it to pay off your mortgage. In theory at least, the lower your interest rate, the more likely it is that you could earn a higher return by investing your money. There’s one additional factor to keep in mind: if you’re claiming itemized deductions when you file your income tax return, paying off your mortgage means that you would no longer be able to claim the interest on your mortgage payments.

The bottom line is that there is no one right answer to this question for everybody because there are so many variables. But it is worth noting that the Center for Retirement Research at Boston College conducted a study of retirees, incomes, and mortgages. It considered both risk and taxes and found that, for most retired people, paying off their mortgage is the best option if they have the means to do so. The small percentage of people for whom the study found that not paying off a home loan was best were willing to invest an amount in stocks equal to or more than the amount they borrowed for their mortgage. Willing, in other words, to take on some additional risk in pursuit of higher returns.

How does my military retirement fit into my retirement income plan?

Having a military pension offers significant advantages when constructing a retirement income plan. First and most obvious, of course, is the fact that it provides a substantial amount of guaranteed, lifelong income, making it less likely that you will need to seek additional guaranteed income through the purchase of products like annuities.

But there’s also a trickle-down effect in that having more guaranteed income means you won’t have to withdraw as much money from your investments. That’s likely to impact how you choose to allocate those funds, potentially allowing you to focus less on short-term liquidity and more on long-term growth, and putting you in a better position to combat the erosive effects of inflation over time. A financial advisor who is familiar with military benefits can assess your situation and recommend an asset allocation that is aligned with your circumstances, goals, and tolerance for risk.

When should I begin taking Social Security?

Social Security is a key component of most retirement income plans. In fact, according to the Center on Budget and Policy, half of older Americans rely on Social Security for at least 50% of their income, and 25% rely on it for 90% of their income. That’s why it’s important to carefully consider your circumstances, objectives and options when deciding when to begin receiving your Social Security benefits. For those born in 1960 or later, claiming benefits at your full retirement age (FRA) of 67 rather than when they are first available to you at age 62 will increase every monthly check you receive for the rest of your life by 30 percent. And for every year you delay past your FRA until you’re 70, you will receive an additional 8 percent.

All things being equal, if your goal is to maximize your monthly Social Security benefit, it’s best to put off claiming it for as long as possible. But that doesn’t mean it’s the best choice for everyone. If you have health issues or simply can’t afford to retire when you want to without the additional income provided by Social Security, the trade-off of receiving a smaller benefit sooner may be worth it to you. Similarly, if you are single and want to invest money now to leave a legacy for loved ones or charity, you may want to take your benefits sooner. If you are not already working with a financial advisor, a First Command Financial Advisor can walk you through the various scenarios and help you determine what claiming strategy makes the most sense for you. Click here to Get Started.

Do I need an annuity?

An annuity is a contract between you and an insurance company that requires the insurer to make payments to you for an agreed-upon period of time. If you have earned a military pension, which is effectively a lifetime annuity, and will receive Social Security benefits, which also function as a lifetime annuity, you probably don’t need the additional guaranteed income that an annuity would provide. But for those individuals seeking additional sources of guaranteed income, an annuity may be worthy of consideration. Here’s a summary of some of the pros and cons of annuities.

How should I allocate my investment portfolio for retirement?

You probably won’t be surprised to learn that the answer to this often-asked question is…it depends. Because retirement generally constitutes a shift from a growth and accumulation mindset to more of a protect and preserve mindset, it seems logical to begin positioning your portfolio more conservatively as you approach retirement. But what does that mean? Should you put half of your money in stocks and half in bonds? Should you increase your cash holdings? Should you focus more on conservative, dividend-paying stocks and less on volatile growth stocks?

This is where the “it depends” part comes in. Generally speaking, the more guaranteed sources of income (think military retirement income, corporate pension, Social Security, or annuity) you have and the less you anticipate having to withdraw from your investments every month, the more aggressive you can afford to be with your asset allocation and the less cash you need to have on hand. But if Social Security is your only guaranteed source of income and you anticipate needing to withdraw 4 or 5 percent of the value of your portfolio each year, it’s more important to mute the volatility in your portfolio by holding a more conservative mix of stocks and bonds, and a good idea to maintain enough cash – perhaps as much as two or three years’ worth of living expenses -  to carry you through the inevitable market corrections and bear markets you are likely to encounter during the course of your retirement. Your financial advisor can work with you to assess your situation, review your financial plan, and recommend an appropriate asset allocation.

The benefits of rebalancing

Regardless of what the proper allocation turns out to be for you, though, over time your portfolio may drift away from its target allocation. And an out-of-balance portfolio can leave you with more risk or less potential for growth than intended. That’s why you’ll want to have a plan for periodically “rebalancing” your assets back to your target allocation.

Don’t forget about diversification

Finally, regardless of your target allocation, just as is true in the accumulation phase of your retirement journey, it’s prudent to diversify both your equity and fixed-income investments. Within equities, this means investing in both growth and value stocks, domestic and foreign stocks, and perhaps even small and large-company stocks. And within fixed income, this means owning both government and corporate bonds of varying maturities, and perhaps municipal bonds, depending on your tax bracket. The reason for this is simple, from year to year, nobody knows which investments will perform best – or worst. And diversification is a way to ensure that you will always have some of your money in the best-performing asset classes, and never have all of your money in the worst-performing asset classes.

Strategies for withdrawing your money

Assuming that you will need to supplement your military pension, Social Security, and any other guaranteed sources of income with variable income from your investments, you’ll need to decide what withdrawal strategy makes the most sense for you. Here are three of the most frequently recommended strategies.

The 4 percent rule

Perhaps the most common of all retirement withdrawal strategies, the 4 percent rule calls for a person to withdraw 4 percent of their savings in the first year of retirement, and then to adjust that amount to account for inflation in each subsequent year. So if you have $1 million saved for retirement, you would spend $40,000 the first year, and if inflation is 2% the following year, you would take out $40,800 that year.

The 4 percent rule was devised in 1994 by now retired financial advisor Bill Bengen, who was seeking to identify a “safe” withdrawal rate that would prevent people from outliving their money. It assumes that when you retire, your portfolio is evenly split between stocks and bonds. A recent study by Chicago-based investment research firm Morningstar suggests that the 4 percent withdrawal rate may be too aggressive. Its research recommends a 3.3% starting withdrawal rate. One of the key findings of the Morningstar study was that the more flexible retirees are with their spending, the greater the chance they can raise the withdrawal rate over time.

The bucket strategy 

The retirement bucket strategy recommends creating three buckets for your money – short-term, intermediate, and long-term. This approach is intended to withstand short-term dips in the market, provide a predictable stream of income and prevent investors from having to sell low to cover monthly expenses. For a more detailed explanation of this approach, check out this article by investment research firm Morningstar.

Dynamic withdrawals 

Unlike the 4 percent rule, dynamic withdrawals allow you to change how much you take out of your accounts each year, with an annual spending floor and ceiling to help you stay within an appropriate range. This allows you to adjust for market fluctuations, withdrawing more in years when your investment returns are higher. In some cases, a dynamic approach also adjusts for inflation. Since you can take out less money if you need to, this approach can help ensure your savings last the length of your retirement. 

Regardless of the approach you choose, it’s a good idea to try to match specific sources of income to certain types of expenses. Many planners, for example, advocate using your guaranteed sources of income to pay for your fixed expenses and your discretionary income to pay for your variable expenses. There are some distinct advantages to this approach:

  • You won’t have to worry about being forced to withdraw from investments to pay for basic expenses like your mortgage, property taxes or insurance when financial markets are down.
  • You can adjust your discretionary spending depending on whether the value of your investments is up or down.
  • You can invest more aggressively to keep up with or outpace inflation in the knowledge that you won’t be forced to withdraw from your investments at an inopportune time.

The impact of taxes on your retirement income

Based on their annual income, many retirees will owe taxes on their Social Security benefits, and some may owe taxes on their pension or annuity payments. When you’re budgeting for retirement, it’s important to consider how much you’ll have to pay each year in taxes – because the number that really matters is your after-tax income. And unlike during your working years, taxes may not be automatically deducted from your paycheck, so you’ll need to make sure you have the money available when the time comes.

You may also owe taxes on the money you withdraw from your retirement savings accounts. Figuring out how to make tax-savvy withdrawals can be challenging, especially when drawing from multiple accounts with unique tax implications. Here are some general guidelines for how withdrawals from different types of accounts are taxed.

    • If you’re withdrawing from a traditional 401(k) or IRA, you will owe ordinary income tax on that money. 
    • Withdrawals from a Roth 401(k) or Roth IRA are generally tax free, as you’ve already paid taxes on your contributions. 
    • If you have traditional and Roth dollars, you may consider fully utilizing either one first, or taking a proportionate mix in order to stabilize the tax impact over time. It’s important to consider both the short term and long term tax impacts when picking your approach. A number of factors go into this decision, and a qualified advisor can help make a plan that fits your specific needs. 
    • There may be tax penalties for taking distributions from a tax-qualified retirement account (IRA, TSP, 401(k)) before age 59 1/2.

Your income sources will vary in retirement, and it might not be easy to keep track of the taxes you owe. Learn more about how different sources of retirement income are taxed. 

The potential tax benefits of a Roth conversion

One way to lower your tax liability in retirement is by moving money out of tax-deferred accounts like a traditional IRA or 401(k) through what is known as a “Roth conversion.” You’ll owe taxes on any previously untaxed funds at the time of the conversion, but the additional dollars in your Roth account will grow tax-free from that point forward and will not be taxed when you withdraw them. There are several ways you can minimize the taxes you will owe as a result of doing a Roth conversion, including:

  • Taking an incremental approach by converting smaller amounts over several years. This may not only make paying the resulting taxes more affordable, but also help you avoid the possibility of being pushed into a higher tax bracket.
  • Executing a Roth conversion while financial markets – and the value of your shares – are temporarily down. If holdings that were worth $100,000 decline in value to $80,000 as the result of a bear market, you would be able to convert the same number of shares, but have to report 20 percent less taxable ordinary income on the conversion.

Begin preparing now

Flow chart showing age-based milestones to keep in mind on your retirement journey. Age 62 is the earliest you can claim social security income. Age 65 is the age most people can enroll in Medicare. Age 73 is the age most people must begin withdrawing from your traditional IRAs via Required Minimum Distributions.

Even if you’re still a few years away from retirement, there are preparatory steps you can begin taking now:

  1. Envision the retirement lifestyle you want and estimate how much monthly and annual income you will need.
  2. Tally up your sources of guaranteed income and the current value of your investments. You can review your estimated Social Security benefits here.
  3. Begin building your cash reserves. You’ll need more liquidity once you stop working. Strive to accumulate at least enough to cover one year’s worth of your estimated retirement expenses.

Once you’ve done those things, meet with your financial advisor to share this information and begin mapping out a more detailed plan of action. Talk about:

  • When you want to retire and what is realistic
  • When you should begin taking Social Security
  • How your portfolio should be allocated in retirement and what tax-efficient steps you can begin taking now to get there
  • If it makes sense to pay off your mortgage and, if so, how you should do it
  • Whether you should consider a Roth conversion

Yes, there are lots of things to be considered and many decisions to be made. That’s why you’ll benefit from working with someone who has the knowledge, experience, and professional support to build a retirement income plan based on your unique needs and objectives.

Coaching center line.

©2023 First Command Financial Services, Inc. parent of First Command Brokerage Services, Inc. (Member SIPC, FINRA), First Command Advisory Services, Inc., First Command Insurance Services, Inc. and First Command Bank. Securities products and brokerage services are provided by First Command Brokerage Services, Inc., a broker-dealer. Financial planning and investment advisory services are provided by First Command Advisory Services, Inc., an investment adviser. Insurance products and services are provided by First Command Insurance Services, Inc. Banking products and services are provided by First Command Bank (Member FDIC, Equal Housing Lender). Securities are not FDIC insured, have no bank guarantee and may lose value. A financial plan, by itself, cannot assure that retirement or other financial goals will be met.

In the United Kingdom, investment and insurance products and services are offered through First Command Europe Ltd. First Command Europe Ltd. is a wholly owned subsidiary of First Command Financial Services, Inc. and is authorized and regulated by the Financial Conduct Authority. Certain products and services offered in the United States may not be available through First Command Europe Ltd. In Germany, we provide financial planning services through Financial Planners associated with First Command Europe Ltd.

TSP funds have very low administrative and investment expenses and, low expenses can have a positive effect on the rate of return of your investment.

The information in this article is provided for informational purposes only and is based on known and unknown risks, assumptions, uncertainties and other factors. The information is not appropriate for the purposes of making a decision to carry out a transaction or trade nor does it provide any form of investment advice, or make any recommendations regarding particular financial instruments, investments, or products. Actual results, performance, or achievements may differ materially from any future results, performance, or achievements expressed or implied herein. Investing in securities has an inherent risk and your investments may lose value. Always seek the advice of a competent financial advisor who will evaluate and make recommendations based on your specific financial situation.

Diversification, asset allocation and portfolio rebalancing do not guarantee a profit or protect against a loss in a declining market. They are methods used to help manage risk. Investment returns and principal value will fluctuate and your investment, when redeemed, may be worth more or less than its original cost. Sales charges and taxes may apply.

Guarantee depends on the claims-paying ability of the issuing insurance company and does not apply to the investment return or principal value of the separate account. Before buying an annuity, you should find out about the particular annuity you are considering. Request a prospectus from your Financial Advisor and read it carefully. The prospectus contains important information about the annuity contract, including fees and charges, investment options, death benefits and annuity payment options.

First Command does not provide legal or tax advice, and this article does not contain any legal or tax advice. Any recommendations provided to you in this article are strictly for financial planning purposes only. Should you require legal or tax advice, you should consult with your attorney or tax advisor.

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