A retirement income plan is simply a clear picture of where your money will come from each month and where it will go. Without one, it’s easy to overspend in the early years of retirement or to underspend out of fear — both of which lead to retirements that don’t go the way they could have.
The plan doesn’t have to be complicated. The aim is to match the income you can reliably generate against the expenses you actually have, identify any gap, and decide how to close it. Done well, it lets you spend confidently in retirement instead of worrying constantly about running out.
Step one: estimate your real expenses
Most retirement planning starts with the wrong number — a generic rule of thumb like “80% of pre-retirement income.” That number is sometimes close, often wrong by 20% or more in either direction. The right starting point is your actual current spending, adjusted for what changes in retirement.
Pull 12 months of bank and credit card statements. Categorize the spending into:
- Essential fixed: Housing (mortgage or rent, taxes, insurance, HOA), utilities, food, transportation, healthcare premiums, minimum debt payments
- Essential variable: Groceries, gas, household supplies, prescriptions, regular medical
- Discretionary: Dining out, travel, entertainment, hobbies, gifts, subscriptions
- Irregular: Annual insurance premiums, property taxes (if not escrowed), holiday gifts, home repairs, replacement vehicles, dental and vision
Some categories will go down in retirement (commuting, work clothes, payroll taxes, retirement contributions). Others will likely go up (healthcare, travel, hobbies, home maintenance as you spend more time at home). Adjust each line accordingly. The output is a realistic monthly retirement budget — usually different from any rule of thumb.
Step two: list every income source
Your retirement income comes from several sources, each with different timing, tax treatment, and reliability.
- Social Security: Predictable, inflation-adjusted, taxed favorably (but partly taxed depending on other income)
- Pension (if any): Predictable monthly amount, may or may not be inflation-adjusted, taxed as ordinary income
- Required minimum distributions (RMDs): Mandatory withdrawals from traditional IRAs and 401(k)s starting at age 73, taxed as ordinary income
- Discretionary withdrawals: What you take from retirement accounts beyond RMDs, plus draws from taxable brokerage accounts
- Part-time work: Income from gigs, consulting, or part-time employment in early retirement
- Rental income or royalties: If applicable
- Annuity payments: If you’ve purchased an immediate annuity for guaranteed income
Estimate the monthly amount of each source at retirement age. For Social Security, use the estimates from ssa.gov at the age you plan to claim. For portfolio withdrawals, start with a sustainable rate (3.5% to 4.5% of the portfolio annually is a common range).
Step three: compare income to expenses
Add up monthly income. Add up monthly expenses. Compare. There are three possible outcomes:
Income exceeds expenses
Good news: you have margin. The plan is largely about how to invest the surplus, manage taxes efficiently, and decide what to do with extra capacity (more travel? gifts to family? legacy goals?). Tax planning — including Roth conversions during low-income years — becomes a high-leverage activity.
Income matches expenses closely
Workable but tight. The plan needs to focus on managing risk: protecting against market downturns in the early years, planning for inflation over a 25- to 30-year retirement, and preserving flexibility for unexpected expenses like healthcare or home repairs.
Income falls short of expenses
This is the most common situation, and it’s where the plan does the most work. Options include cutting expenses, working longer or part-time, downsizing housing, claiming Social Security strategically (sometimes earlier, sometimes later), or accepting a higher portfolio withdrawal rate with the longevity risk that comes with it. The earlier you identify the gap, the more options you have.
Build in inflation
A 65-year-old retiree may live another 25 to 30 years. Even at 2.5% inflation (below the long-run average), prices double in roughly 28 years. A retirement plan that ignores inflation will work for the early years and fail in the later ones.
Social Security includes annual COLA adjustments, which provides inflation protection on that portion of income. Most pensions don’t include COLAs — the same monthly amount over 25 years loses substantial purchasing power. Portfolio withdrawals can rise with inflation if the underlying investments grow, but only with appropriate equity exposure.
This is one of the strongest arguments for keeping a meaningful portion of a retirement portfolio in equities even in retirement — bonds alone don’t reliably keep pace with inflation across long horizons.
Build in healthcare and long-term care
Healthcare is one of the largest and most variable expenses in retirement. The annual budget should include Medicare premiums (Part B + Part D + a Medigap plan), deductibles and coinsurance, dental and vision, and a buffer for higher-cost years. Plan on $4,500 to $7,000 per person per year as a starting estimate, rising over time.
Long-term care is the hardest expense to plan for — potentially $50,000 to $120,000+ per year, but only for those who need it (about 70% of retirees will need some form of long-term care, but durations vary widely). Decide explicitly whether to self-fund, insure, or plan for Medicaid — not deciding is itself a decision.
Plan for taxes
Taxable retirement income includes most pension income, traditional IRA/401(k) withdrawals, RMDs, taxable interest and dividends, and a portion of Social Security. The order in which you draw from different account types — taxable, tax-deferred, Roth — can shift lifetime tax bills by tens of thousands of dollars.
A tax-efficient withdrawal sequence that fills lower brackets, avoids IRMAA thresholds, and makes use of capital-gains rate brackets is one of the most valuable parts of a retirement income plan. This is also where Roth conversions during low-income gap years (between retirement and Social Security/RMDs) earn their reputation as a high-impact planning move.
Stress-test the plan
A plan that works in a normal scenario may not survive a bad one. Run through a few stress scenarios:
- Bad early returns: A 20%+ market drop in year 1 or 2 of retirement
- Higher inflation: 4–5% sustained inflation rather than 2–3%
- Long retirement: Living to 95 or 100 instead of 85
- Major health expense: A long-term care need lasting 3–5 years
- Loss of a spouse: Income changes significantly — one Social Security check ends, tax brackets compress
If the plan fails any of these scenarios, that’s information — not a failure of planning, but a chance to build resilience before the scenario actually arrives. Often the fix is simple: a higher equity allocation, a delayed Social Security claim, a smaller initial withdrawal rate, or a different long-term care strategy.
Revisit annually
A retirement income plan isn’t a one-time document. Markets move, tax laws change, your spending changes, and your health changes. Each year — ideally in late fall, when you have most of the year’s income data and time to act before year-end — review the plan.
Annual checkpoints to consider:
- Did spending track the budget? Where did it deviate?
- Is the portfolio on the path you projected, or significantly ahead/behind?
- Are there Roth conversion opportunities this year given current tax brackets?
- Has any income source changed (Social Security COLA, pension adjustment)?
- Are healthcare plan choices still optimal during open enrollment?
- Have any major life changes (health, family, housing) shifted the longer-term plan?
This annual review is the difference between a plan that works on paper and a plan that actually delivers a comfortable retirement. The first version doesn’t need to be perfect — it needs to exist, and it needs to evolve.
Further Reading
- How Much Do You Need to Retire?
- Retirement Withdrawal Strategies
- Tax-Efficient Withdrawal Order in Retirement
- Roth Conversions Explained
- Healthcare Costs in Retirement
- Sequence of Returns Risk
This article is for general educational purposes only and does not constitute financial advice. Retirement income planning is highly individual — consult a fee-only financial advisor for guidance specific to your situation.