Taking Inventory of all Sources of Retirement Income 

An important first step in the process of income planning in retirement is taking an inventory of all financial resources that could be used to generate income in retirement. These might include:

  • Retirement account such as
    • A 401(k)
    • IRA accounts, Roth or traditional
    • A 403(b)
    • A 457
  • Investments held in taxable accounts
    • Social Security
    • A pension
    • Ownership of a business
    • Stock-based compensation from an employer such as options or restricted stock units (RSUs)
  • An inheritance
  • Real estate

It’s important to be sure that you have your arms around all potential sources of retirement income for planning purposes. As part of the process you should also think through how each source of income will be tapped for retirement income, any timing issues and any tax implications connecting with the type of asset.

Deciding Upon a Withdrawal Strategy 

It’s important to decide on a withdrawal strategy as you move into retirement. The 4% rule has received a lot of publicity in the financial press, both positive and negative.

This rule was devised by a prominent financial planner a number of years ago. It says that a retiree should be able to safely withdraw 4% of their nest egg each year during retirement based on a few assumptions.

While this and other similar rules-of-thumb can be helpful “back of the napkin” calculations, we believe that a withdrawal strategy based on your own unique situation is the way to go.

Additionally, this withdrawal strategy will likely evolve and change over time, or even year-to-year. For example, early in retirement you may still be working full or part-time, this might include income from either employment or self-employment.

This could reduce your need to withdraw funds from retirement accounts or other investment accounts designated for retirement.

As time moves on, this employment income may go away or be reduced. A pension if you have one and/or Social Security may offset some of this.

As you reach age 72, you will need to commence your required minimum distributions (RMDs) from retirement accounts such as an IRA, a 401(k) and others.

All of these factors must be considered in formulating a retirement withdrawal strategy. Another key issue is your tax situation each year. This is why it’s important to formulate an initial retirement withdrawal strategy, but it’s equally important to review and adjust this strategy on a regular basis to suit your evolving situation in retirement.

Deciding Which Income Sources to Tap First 

This is a process that takes a number of factors into account. These include:

  • Your age
  • Your income, including whether or not you are working
  • Your tax situation
  • Other sources of income

Income planning in retirement is not a static process. By this we mean that your initial plan should be revisited periodically and revised as needed. Here are some general thoughts on various types of accounts and sources of income, but the strategy will vary for each of these based on each person’s individual and unique situation.

Taxable accounts

Taxable investment accounts can be the most tax-efficient accounts to tap first. Selling investments held here can trigger capital gains taxes, but if these gains are long-term capital gains then the tax rate is generally lower than for ordinary income. Distributions from non-Roth retirement accounts are taxed as ordinary income.

Traditional IRAs and other retirement accounts 

Distributions from IRAs, 401(k)s and other employer-sponsored retirement accounts are taxed at ordinary income tax rates. The exception is qualified withdrawals from a Roth account. Additionally these non-Roth accounts are subject to required minimum distributions at age 72.

To the extent possible, it can make sense for many people to allow the money in these accounts to grow on a tax-deferred basis for as long as possible. In many cases, it will make sense to defer taking distributions from these accounts in favor of taxable accounts earlier in retirement, this may not always be the case.

In years leading up to the time you must start your RMDs it can make sense to tap these accounts in years where your income may be low for whatever reason. Or if you are solidly in a given marginal tax bracket, it can make sense to take enough in distributions to fill up that tax bracket.

The reason is that taking some distributions from these accounts prior to when RMDs will commence can help lower your RMDs down the road. For those with large amounts in tax-deferred retirement accounts, this can help with their future tax planning.

Roth accounts

Qualified distributions from a Roth IRA are not taxed, nor are they subject to RMDs. Roth 401(k) accounts are subject to RMDs, but these are not taxed if they are qualified. A Roth 401(k) can be rolled over to a Roth IRA to avoid the need to take these RMDs.

The reason to generally defer Roth account distributions as long as possible is that these distributions are not taxed. This provides an option for tax-free withdrawals if needed.

If not needed Roth IRAs can play a significant role in your estate planning based on new rules for inherited IRAs under the SECURE Act enacted at the end of 2019.

Roth conversions 

Converting a traditional IRA or 401(k) to a Roth account can make a lot sense as part of your retirement income planning.

Converting a traditional account to a Roth involves paying tax at ordinary income tax rates on the amount converted in the year of the conversion. For 2020 there are a few advantages that might make this attractive for a number of account holders.

First, tax rates are at historically low levels due to the tax reform legislation passed at the end of 2017. These rates may or may not change based on the outcome of the upcoming elections. For 2020, the CARES Act provided a waiver of RMDs for virtually all types of retirement accounts.

At the very least, it might make sense to do a Roth conversion for at least the amount of the RMD that would have been required. This wouldn’t cause them to pay any additional taxes over what would have been required under normal circumstances.

The Roth conversion accomplishes two things. First it reduces the amount potentially subject to RMDs in the future, all else being equal. It also serves to diversify your tax base for retirement income, none of us knows what the future holds in terms of the tax laws. 

When to claim Social Security 

Even though it shouldn’t be your primary source of retirement income, Social Security is an important component of the retirement income for most retirees. As such it’s important to make an informed decision about when to claim your benefit.

You are first eligible to claim your benefit at age 62, but your benefit will be substantially reduced from your full retirement age (FRA) and from the benefit you would get at age 70, the age where your initial benefit reaches its maximum amount. For those born in 1960 or later, their FRA is age 67.

For those born before that but in 1955 or later, it is age 66 and a few months. For example, for someone born in 1959 their FRA is 66 and 10 months. (source Social Security website – Retirement Benefits Starting Your Benefits Early)

For example, for someone born in 1957, taking their benefit at age 62 versus their FRA results in a permanent reduction of 27.5%. (same source as above) This reduction narrows a bit for each year between age 62 and their FRA that they wait before claiming their benefit. Additionally, their initial benefit amount increases 8% on an annualized basis for each year they wait to claim between their FRA and age 70.

While it often makes sense to wait as late as possible to claim you benefit in order to maximize it, this will vary based on each person’s circumstances.

Some reasons to claim your benefits earlier than your FRA might include:

  • A need for cash flow.
  • Health issues that might impact your longevity.
    • Claiming you benefit early may allow you to receive a greater lifetime benefit than waiting in this case.

Issues for couples

Couples should look at the benefits for each spouse in making the decision when each spouse should claim their benefit.

If their benefits are roughly the same, it may make sense for each to wait as long as possible to claim their benefit. This is especially true if both spouses are close in age.

If the benefit for one spouse is significantly higher than for the other, it often makes sense for that spouse to claim as late as possible, including waiting until age 70, to maximize the spousal benefit for the other spouse. This is even more critical if that spouse is younger.

Issues for those who are divorced

For those who are divorced, they may be able to collect a benefit based on their ex-spouse’s earnings record. The rules for doing this include:

  • They must have been married to their ex-spouse for at least ten years.
  • They must not currently be married.
  • They must be at least age 62.
  • Their own benefit must be less than the benefit under their ex-spouse’s earnings record.
  • The ex-spouse is entitled to Social Security retirement or disability benefits.
  • If they remarry, they lose the ability to draw a benefit based upon their ex-spouse’s earnings record.

Note the most that you can collect on an ex-spouse’s earnings record is 50% of their primary insurance amount. (reference for this section – Am I Entitled to My Ex-Spouse’s Social Security? AARP website)

Issues for widows and widowers 

Widowers and widowers are eligible to claim a survivor’s benefit as early as age 60, though that benefit will increase annually until they reach their full retirement age. If their own benefit would be higher, they can claim the survivor’s benefit and then switch to their own benefit as early as age 62 and as late as age 70.

Medicare issues 

Income planning consideration is the impact your income can have on your Medicare Part B premiums. These premiums are based on your modified adjusted gross income from a prior year base period.

For 2020 the base year is 2018. If your income exceeds a certain level it could push you into a higher premium level for Medicare for a future year.

Implications of RMDs 

For anyone with non-Roth retirement accounts RMDs commence at age 72 under the new rules under the SECURE Act passed at the end of 2020. For those who had reached age 70 ½ prior to January 1, 2020 their RMDs continue as prior.

The issue as far as retirement income planning often revolves around whether a person needs the money from their RMDs and more so if they can avoid the taxes associated with the RMDs.

If the answer is that you don’t need the money to live on then it makes sense to consider ways to reduce the amount of the RMD prior to reaching age 72. Two ways to do this, as mentioned above, are:

  • Roth conversions
  • Taking distributions from non-Roth accounts prior to reaching age 72

In both cases you will want to look at your entire tax picture to help facilitate the maximum benefit from doing this, both in that year and potentially over the rest of your retirement years.

One other tactic for those who are charitably inclined is the qualified charitable distribution (QCD). This allows those taking RMDs from an IRA to divert up to $100,000 from their RMD to a qualified charitable organization. The benefit is the amount of the QCD is not subject to taxes.

Besides the obvious benefit of reduced taxes, QCDs can help reduce taxable income which can impact your costs for Medicare Part B coverage.

Working in retirement 

Working into retirement is more common than in the past and can have an impact on retirement income planning.

Income from employment or self-employment can reduce the amount needed from retirement accounts during those years when you are working. This allows this money to remain invested.

In the case of retirement accounts, the money continues to grow tax-deferred (or tax-free in the case of a Roth account). In the case of retirement accounts, taxable distributions can be reduced or eliminated due to this earned income.

If you are working in retirement, this can impact Social Security in a couple of ways. For those earning over a certain amount, $18,240 in 2020, there is a $1 reduction in their benefit for every $2 in earned income.

Those limits increase in the year that you reach your full retirement age. There are no reductions once you reach your FRA.

These benefit reductions are repaid to you once you reach your FRA. For those who will be working prior to reaching their FRA, it probably makes sense to wait until then to claim their benefit.

The other issue to consider is the taxation of Social Security. Working at any age can trigger the taxation of 50% to 80% of your benefits regardless of your age.

Additionally, the income considered in determining if your benefit is taxed is not limited to earned income from employment or self-employment. While there are probably no actions to take to avoid this, it is something you should be aware of.


Income planning as you enter retirement is a critical piece of the retirement planning puzzle. How much income will you need each year? How does this compare with your financial resources?

A key part of the process is determining which accounts to tap and in what order. Social Security and any pensions you may have will play into this equation. Taxes and RMDs are also considerations.

Lastly, this is not a “one and done” analysis. Income planning should be revisited on a regular basis during retirement. Have things changed? Do adjustments need to be made so you don’t outlive your nest egg and so you have the income you need throughout your retirement?

Income planning is a priority for us in working with our clients who are retired and those who are approaching retirement. Schedule a complimentary financial assessment to discuss your retirement and financial planning needs, we’d love to be of help.