Building a Retirement Income Plan That Actually Works

For most of your investing life, your portfolio has been a growth engine. You've been planting seeds, hoping for a harvest years down the line. But retirement flips that script. Now, the portfolio must start harvesting-turning its value into a steady income stream to cover your living expenses. This isn't just a change in timing; it's a fundamental shift in purpose, and it introduces a whole new set of risks.

The first and most obvious change is the portfolio's role. While you were saving, the primary goal was capital appreciation. You could afford to ride out market volatility because you had time on your side. Now, you need to draw income. This means the portfolio must generate cash flow, not just grow in value. The risk management focus naturally shifts from chasing returns to protecting the capital that funds your daily life.

Three risks loom large over this new phase. The first is geopolitical instability and its potential to drive structurally higher inflation. Numerous political, military, and macroeconomic issues mean that geopolitical risk will remain elevated. This can push up commodity prices and disrupt supply chains, making it harder for central banks to bring inflation back to target. For retirees living on fixed income, this is a direct threat to their purchasing power. A bond that pays $1,000 a year today buys less tomorrow if inflation persists.

The second, and perhaps most dangerous, risk is sequence-of-returns. This is the danger of selling assets to fund living expenses right when the market is down. Imagine needing to withdraw money during a bear market. You're forced to sell stocks at depressed prices, locking in losses. This can permanently damage the portfolio's ability to recover, even if the market eventually bounces back. The timing of your withdrawals can have a lasting impact on your nest egg's longevity.

The third risk is longevity itself. You might outlive your savings, especially if your portfolio underperforms or inflation erodes its value faster than expected. This isn't a distant fear; it's a core calculation for any retirement plan.

The thesis is clear: a successful retirement income plan isn't about maximizing growth. It's about protecting your purchasing power through a disciplined, three-part approach. You need a strategy that manages sequence-of-returns risk, hedges against persistent inflation, and ensures your money lasts for as long as you do. The focus must shift from planting seeds to harvesting them wisely.

The Three-Legged Stool: Your Sources of Income

Your retirement income plan is like a three-legged stool. Each leg is essential; remove one, and the whole thing wobbles. The three pillars are Social Security, annuities, and your tax-deferred savings. Understanding how they work-and how they don't-forms the foundation of a stable income stream.

The first leg is Social Security. For many households, it's not a side dish; it's the main course. For many people, it "can represent anywhere from 25% to 35% of their income during retirement." This is guaranteed income based on your lifetime earnings history, making it a critical anchor. The benefit amount is calculated using your top 35 years of earnings, so it's vital to verify your Social Security statement for accuracy. A missing or incorrect year of earnings can permanently lower your benefit. This isn't a discretionary choice; it's a core, non-negotiable part of your retirement budget.

The second leg is annuities. These are insurance contracts designed to provide a guaranteed income stream for life. A common misconception is that buying an annuity reduces your Social Security benefit. That's not true. Annuity income payments will not impact this benefit amount because they are not viewed as wages. The annuity and Social Security are separate. However, annuity payments do count as income when determining if your Social Security benefit is taxable. This is a key tax consideration, not a reduction in the benefit itself.

The third leg is your tax-deferred savings-your 401(k)s, IRAs, and similar accounts. These are the growth engines you've been building for decades. The money inside grows tax-free until you start taking it out. The rules require you to begin withdrawing a minimum amount, known as a Required Minimum Distribution (RMD), at age 73. This is the bridge from accumulation to distribution, turning your nest egg into spendable cash.

The real power comes from how these three legs interact. Social Security provides a stable, inflation-adjusted base. Annuities can fill in gaps, offering predictable income that lasts as long as you do. Your tax-deferred accounts provide flexibility and growth potential, but they also introduce the sequence-of-returns risk we discussed earlier. A well-constructed plan doesn't rely on just one leg. It weaves these sources together, using the guaranteed income to cover essential expenses and freeing up your savings to handle variable costs and market fluctuations. This is how you build a stool that won't tip.

The Action Plan: A Simple, Annual Review

The good news is that you don't need a complex, quarterly audit. A disciplined, once-a-year review is plenty to keep your plan on track. Think of it as an annual tune-up for your financial engine. The key is to focus on three practical actions that address your spending, taxes, and peace of mind.

First, revisit your withdrawal rate. The 4% guideline is a decent starting point for those just starting retirement. But it's not a one-size-fits-all rule set in stone. Your actual spending rate should be a number you calculate each year. Divide your portfolio balance at the start of the year by your expected spending for the year, including taxes. Is that rate still reasonable given how your portfolio has performed and your current needs? If stocks have had a strong run, you might be able to take a slightly higher withdrawal. If the market has been choppy, you might need to be more conservative. The goal is to adjust your "harvest" based on the health of the "crop."

Second, manage your tax bill proactively. Year-end is a prime time to use two tools. Tax-loss harvesting lets you sell losing investments to offset gains, reducing your capital gains tax. More importantly, if you're charitably inclined, consider a qualified charitable distribution (QCD). This allows you to send money directly from your IRA to a charity, which counts toward your Required Minimum Distribution (RMD) but isn't included in your taxable income. For 2025, the limit is $108,000. This is a smart way to support causes you care about while lowering your tax bill.

The third and most powerful action is to "check off the basics." This is the core of building confidence. The Check Off the Basics approach focuses on finding ways to help cover your essential expenses – things like a mortgage, utilities, groceries and transportation – with protected lifetime income. Start by listing your must-pay monthly costs. Then, combine your guaranteed sources: Social Security, pensions, and annuities. If these protected payments cover your essentials, you've checked off the most important box. This frees up your other savings-your tax-deferred accounts and taxable investments-to fund discretionary spending without the constant anxiety of running out of money. It turns your portfolio from a source of worry into a tool for enjoying your retirement.

Catalysts and Watchpoints

Your retirement income plan isn't a set-it-and-forget-it project. It needs regular check-ins, but the real work happens when key signals tell you it's time to adjust. Think of these catalysts and watchpoints as your plan's early warning system. They help you stay proactive, not reactive, to the forces that can derail your financial security.

The first and most critical watchpoint is the sequence of returns. This is the danger of selling your investments to fund living expenses right when the market is down. As investors focus more on harvesting the returns of their portfolios and less on planting the seeds of future growth, risk management should naturally be top of mind. The worst time for withdrawals is a poor market start to retirement. If your portfolio takes a hit early, you may be forced to sell assets at depressed prices, locking in losses that can cripple its ability to recover. The key is to monitor your portfolio's performance relative to your withdrawal needs, especially in the first few years of retirement. If the market is weak, it may be wise to draw from other sources first-like your taxable accounts or a portion of your annuity-before touching your core equity holdings.

The second major catalyst is inflation and interest rates. These forces directly attack the purchasing power of your fixed-income assets. Geopolitical risk will remain elevated in 2025, which can push up commodity prices and increase the risk of structurally higher inflation. This matters because inflation eats away at the real return on bonds and savings. If interest rates stay high or rise further, it could make it harder for governments to manage their debt, potentially leading to economic instability. Your watchpoint here is to monitor inflation data and interest rate trends. If inflation persists, you may need to adjust your spending assumptions or consider assets that historically hedge against it, like Treasury Inflation-Protected Securities (TIPS) or certain equities.

The third, and often overlooked, watchpoint is your Social Security benefit statement. This is your guaranteed income, and errors in your earnings history can permanently reduce it. The benefit is calculated based on 35 years of working and earnings history. Loren Merkle notes that we have seen, over the last number of years, a lot of mistakes on that statement. A missing year of earnings, perhaps due to a temporary leave or a reporting error, can lower your benefit. The practical takeaway is to review your Social Security statement annually, especially in the years leading up to retirement. Correcting an error now is far easier than discovering a shortfall after you've already started drawing benefits.

Monitoring these three catalysts-market timing, inflation, and benefit accuracy-gives you a clear framework for when to act. It transforms your retirement plan from a static document into a living strategy, ready to adapt to the real-world conditions you'll face.