Building a Retirement Income Strategy

Accumulating assets for retirement is only half the challenge. The other half — and arguably the more complex half — is converting those assets into a reliable, tax-efficient income stream that lasts as long as you do. Without a deliberate strategy, retirees risk either running out of money or living far below their means out of fear.

A foundational concept in retirement income planning is the 'bucket strategy,' which divides assets into time-based segments. Short-term buckets hold one to three years of living expenses in cash or near-cash equivalents, providing stability and eliminating the need to sell investments during market downturns. Medium and long-term buckets hold growth-oriented assets that have time to recover from volatility.

Social Security and any pension income form the base of most retirement income plans. These guaranteed income sources should be maximized before drawing heavily on investment portfolios. Delaying Social Security, even by a few years, can significantly increase this guaranteed base.

Sequence-of-returns risk — the danger of experiencing poor investment returns early in retirement — is one of the most significant threats to a retirement income plan. A major market decline in the first few years of retirement, combined with ongoing withdrawals, can permanently impair a portfolio's ability to recover. The bucket strategy and maintaining a cash reserve directly address this risk.

Tax diversification is equally important. Having assets in taxable accounts, tax-deferred accounts (traditional IRA, 401k), and tax-free accounts (Roth IRA) gives you flexibility to manage your tax bracket each year. In low-income years, you can draw from tax-deferred accounts or execute Roth conversions. In high-income years, you can lean on Roth or taxable accounts.

Annuities — particularly income annuities — can play a role in guaranteeing a base level of income beyond Social Security. While they involve trade-offs in liquidity and flexibility, the certainty they provide can allow the rest of your portfolio to remain invested for growth. The right allocation to annuities depends on your other guaranteed income, risk tolerance, and legacy goals.