Creating a Retirement Income Plan That Meets Your Needs: A Step-by-Step Guide

Retirement is filled with possibilities, freedom — and perhaps a few lingering uncertainties.

As exciting as this new chapter may be, certain questions tend to keep retirees awake at night:

“Can I afford my lifestyle?”

“How much should I withdraw each year?”

“Which accounts should I tap into first?”

“What happens if the market swings unexpectedly?”

Fortunately, it’s not a guessing game. A retirement income plan can help structure your finances to support your ideal lifestyle, whether you want to travel the world, start a passion project, or simply enjoy more time with family.

In this article, we’ll help you not only understand the variables that impact retirement planning — such as spending, taxes, inflation, and healthcare — but also develop a framework for a retirement income strategy that balances stability, growth, and flexibility.

When you hear “retirement,” where does your mind go? 

Are you cross-country traveling in an RV? 

Exploring a different career path that you could never quite justify financially? 

Pursuing a lifelong hobby that you never had the time for? 

It’s easy to lose yourself in the numbers of retirement planning, but we all have to see the forest for the trees. By painting the big picture (i.e., the life you want) the finer details can fall into place. 

Start by asking yourself two questions:

1. What do I need? Essentials like housing, food, healthcare, and insurance will form the backbone of your retirement budget.
2. What do I want? Believe it or not, you’re allowed to have fun during retirement. Experiences, hobbies, travel, home renovations, or even a vacation home — this is your time to explore new possibilities. 

Establish a Realistic Retirement Baseline

Now, for those finer details. According to the Bureau of Labor Statistics, the average household led by someone 65 or older spends roughly $57,818 per year, with housing, transportation, and healthcare comprising the bulk of costs.1

• Housing: $20,362 (35%)
• Transportation: $8,172 (14%)
• Healthcare: $7,540 (13%)
• Food: $7,306 (13%)
• Cash contributions: $4,443 (8%)
• Pensions & Social Security: $3,289 (6%)
• Entertainment: $2,672 (5%)
• Other: $4,034 (7%)

There are two major caveats to averages though:

1. They don’t necessarily apply to you because spending is personal. You might align perfectly with these averages or not at all. The only “wrong” spending rate is one that can’t be sustained or planned for.  
2. They don’t capture variance because spending is also variable. Realistically, you won’t spend exactly $57,818 every year. Expenses fluctuate. Some years will be more expensive (big trips, home projects, medical costs), while others may be lighter. And that’s okay. 

Whatever you ultimately calculate for your budget, add a 10% buffer as a margin of safety for inevitable surprises. And, equally important, assume annual inflation of 3–4%.

Now, the other side of your retirement equation: income.  

Guaranteed income helps keep your retirement plan stable — even when markets fluctuate. Let’s break down how to evaluate and maximize your inflows step by step.

Step 1: List Your Guaranteed Income Streams

Begin by identifying the stable income sources that will continue throughout your retirement. These often include:

• Social Security: The most common income stream for retirees.
• Pension Payments: Defined benefit plans that provide lifetime income.
• Annuities: Private contracts that offer guaranteed payments over time.
• Rental Income: Though not entirely “guaranteed,” consistent rental payments can mimic predictable income.
• Part-Time Work: Retirement looks different for everyone. You may prefer to continue working in some capacity, which can help extend your retirement savings considerably. 

Step 2: Understand Your Social Security Options

Social Security plays a significant role for most retirees, but when you file dramatically affects your monthly benefit. There are effectively three retirement age milestones:

If you claim before your full retirement age (FRA), your Social Security benefit is reduced by as much as 30%.2 This penalty will gradually lessen (about 0.5% per month) as you approach your FRA, which ranges between 66 and 67 depending on birth year.

The longer you wait to claim your benefits — up until age 70 — the larger your monthly benefit will be. But how do you know if you can afford to wait? Many retirees use a rule of thumb called “retirement income guardrails” to help them decide (more on this later). 

If delaying Social Security forces you to withdraw more than 6% of your portfolio annually to cover expenses, it’s likely that your portfolio would begin to decline, because your withdrawals may exceed asset growth. In this case, filing for Social Security sooner could make more sense.

However, if you can afford to delay and stay within those 6% guardrails, you allow your Social Security benefit to grow between 5% and 8% each year — providing a notable boost to your guaranteed income for the rest of your retirement. 

Step 3: Evaluate Pension and Annuity Options

If you’re fortunate enough to have a pension, congratulations — this is an increasingly rare retirement benefit. However, you will face a tough decision: 

1. 1. Take a lump sum upfront and manage the proceeds yourself. This grants you total investment control, which could be an advantage or disadvantage depending on investment performance. If you’re confident in your investment management abilities (or plan to work with an advisor), the immediate payout could be the better option. 
   2. Opt for annuity payments. Although you limit growth potential, this results in guaranteed, regular income for life. The annuity option allows you to forego the responsibility of managing a portfolio and can also provide peace of mind through spousal plan options (e.g., 100% joint and survivor).

Each option comes with trade-offs, and the “right” choice is subjective. You should factor in convenience, risk tolerance, inflation, family longevity, and spousal needs into this decision. 

Step 4: Estimate Gaps in Income

It’s normal to have a gap between your guaranteed income (like Social Security or pensions) and your actual expenses — most retirees do. 

To bridge the difference, you’ll likely rely on investment accounts and retirement savings. 

There are countless generalized guidelines to estimate how much to withdraw each year. Whether you subscribe to the 4% rule (which has its fair share of critics) or the bucket strategy, know this: these are not one-size-fits-all solutions; they are starting points that should be further tailored to your specific situation. 

Need help modeling different scenarios? Schedule a free consultation with a Pine Grove advisor

Shifting from years of disciplined saving to finally drawing down your retirement accounts can feel unsettling. After all, for decades, the goal was to accumulate wealth — now, you’re pivoting to a spending mindset. This psychological adjustment can create apprehension, even for the most well-prepared retirees. 

That’s why understanding how each account functions — and how to draw from them strategically — is essential. These accounts will bridge the gap between guaranteed income (like Social Security or pensions) and your desired lifestyle. With a thoughtful plan, you can spend confidently, knowing your wealth is positioned to last.

Identify Your Accounts and Their Tax Treatment

Review all accounts that can be used to generate additional income in retirement. These typically include 401(k)s, IRAs, and taxable investment accounts, as well as any other savings or investment vehicles.

Here’s an overview of different types of accounts, their tax implications, and withdrawal rules. Keep in mind, the IRS requires you to withdraw a portion of your tax-deferred savings annually once you turn 73 (i.e., required minimum distributions, or RMDs).3 If you don’t, the amount not withdrawn could be penalized in the form of a 25% excise tax.

Set Your Withdrawal Strategy

There is no silver bullet for structuring retirement withdrawals — different strategies suit different retirement goals, risk tolerances, and market conditions. Below are a few widely used approaches to help retirees balance income needs with long-term portfolio preservation. Note that these are, at best, initial frameworks to build your withdrawal strategy around. 

The 4% Rule 

Coined in the 1990s by financial planner William Bengen, the 4% rule is rooted in a four-decade analysis of historical market returns. The premise is simple: if you assume a 30-year retirement, withdrawing 4% of your portfolio annually (adjusted for inflation) should prevent you from outliving your savings.

However, this rule is rigid, assuming fixed annual expenses, a 50/50 stock-to-bond allocation, and a 30-year retirement window. On top of that, taxes aren’t adequately accounted for. While it offers a helpful benchmark, modern retirees typically need more flexibility to account for variable spending and market volatility.

The Bucket Strategy 

The bucket strategy separates your portfolio into three distinct, time-oriented “buckets”: short-term, medium-term, and long-term. The exact duration of these buckets can be personalized to your needs, goals, and risk tolerance; here’s an example: 

Retirees draw first from the short-term bucket, replenishing it by shifting assets from growth-oriented buckets as needed. This strategy requires regular rebalancing, but it also enables more personalization. 

Dynamic Withdrawals

Dynamic withdrawals (also called retirement income guardrails) offer the most flexibility of the strategies we’ve discussed.

Rather than adhering to a fixed percentage each year, your spending rate adjusts based on market performance and the value of your portfolio. When markets perform well, you can withdraw more and increase your discretionary spending. When markets dip, you reduce withdrawals to preserve your portfolio.

Historical data should be taken with a grain of salt, but the market produces positive returns about 7 out of every 10 years. So, in theory, this strategy should lead to more years of comfort than belt-tightening.4  

The challenge of this approach is calculating (and sticking to) your own guardrails. Generally, the parameters of your spending are set at +/- 20% of your initial distribution. 

For instance, let’s say you have a $1.2 million portfolio and set your initial distribution rate at 5% — that’s $60,000 per year or $5,000 per month. Your guardrails in this case would be 4% and 6%, based on a 20% buffer (20% of 5% = 1%). 

Consequently, if your portfolio’s value falls to $950,000, your $5,000 monthly withdrawal would then represent a 6.3% withdrawal rate — which is outside of your 6% guardrail and would require you to cut spending. 

The same process would apply in the inverse scenario. If your portfolio’s value increased beyond $1.5 million, you’d surpass your guardrail ($60,000 / $1.5 million = 4%) and could boost your monthly withdrawal amount. 

While this is a simplified explanation, dynamic withdrawals can extend the life of a portfolio more effectively than static strategies. 

Even in retirement, your portfolio shouldn’t sit still. Investing for retirement is striking the right balance of growth, preservation, and liquidity to meet evolving needs.

Here’s a breakdown of popular retirement investments and how they can fit into your income plan.

Low-Cost ETFs

Exchange-traded funds (ETFs) offer diversified, low-cost exposure to industries, sectors, themes, strategies, and markets as a whole. For instance, the SPDR S&P 500 ETF (ticker: SPY) is one of the most popular index funds, tracking the S&P 500 index and providing general market-weighted exposure to the U.S. stock market. 

How much you allocate to specific asset classes is wholly dependent on your needs, goals, risk tolerance, and timeline. That said, ETFs are a relatively straightforward investment vehicle that add flexibility and liquidity to retirement income strategies. 

Municipal Bonds for Tax-Free Income

Municipal bonds (munis) are debt securities issued by state and local governments. They’re popular for generating tax-free income at the federal level — and at the state level if you reside where the bond is issued.

Why munis?

• Tax-free interest helps keep more money in your accounts.
• Generally considered less risky compared to corporate bonds.
• Munis can provide predictable cash flow to cover routine expenses.

Potential drawbacks

• Lower risk equates to lower returns, especially relative to other investments like equities.
• Be aware of an issuer’s credit rating, which indicates the likelihood of making all of its payments and avoiding default. Credit risk varies by issuer — ratings above BBB- and Baa3 are considered “investment grade.”

Real Assets to Hedge Against Inflation

Real assets like real estate, commodities, and infrastructure tend to rise in value alongside increasing prices, helping preserve your purchase power. Moreover, these investments can also be a source of income (e.g., rent or dividends). Examples include:

• Real Estate Investment Trusts (REITs): Investments in income-producing properties without direct ownership.
• Commodities: Investments in gold, silver, and other materials, which are popular inflation hedges.
• Infrastructure Funds: Investments in a broad range of development projects, such as airports, tunnels, pipelines, gas distribution systems, water collection, and so on. 

Potential drawbacks:

• Direct real estate and some infrastructure investments can be harder to sell.
• Commodities and infrastructure funds may require specialized knowledge.

Annuities for Guaranteed Income

In the simplest terms, annuities are designed to mitigate the risk of outliving your money. These contracts can supplement your other guaranteed income and help stabilize your retirement. There are several basic types:

• Immediate Annuities: Payments start right away.
• Deferred Annuities: Payments start later, offering growth potential in the interim.
• Fixed Annuities: Payments are steady, but returns are generally unremarkable.
• Variable Annuities: Payments fluctuate based on market performance.

Potential drawbacks:

• Annuities often charge higher fees than traditional investments.
• Funds are typically locked up for several years. Early withdrawals may incur penalties.

Just like retirement, retirement planning isn’t static — it’s fluid. 

Your spending habits might change, markets may take a turn, or life itself could throw a curveball. That’s why it’s important to check in on your plan regularly — at least annually, and whenever major life changes occur (e.g., medical expenses, family needs, or big-ticket purchases). 

To summarize, here are the steps to build an income strategy for retirement:

1. 1. Define your retirement goals and budget — because your desired lifestyle ultimately drives your plan.
   2. Assess your guaranteed income, which should provide stability and help cover essential spending needs.
   3. Evaluate your retirement savings, as these funds will bridge any gap between your spending rate and guaranteed income. 
   4. Set your withdrawal strategy, but don’t trust general rules of thumb blindly. 
   5. Determine the best retirement investments for your portfolio based on your spending needs, goals, and risk tolerance. 
   6. Regularly review and adjust your plan, especially as your lifestyle evolves. 

Frankly speaking, we’ve covered a lot. From Social Security strategies to withdrawal frameworks, income planning can feel like a full-time job — which is the opposite of what retirement should be. And while articles like this can get you started, nothing can replace direct guidance based on your exact situation.

If you’re ready to take the next step, Pine Grove is here to help. Schedule a free consultation with one of our advisors today to build a personalized plan that grows and evolves with you.

1. Bureau of Labor Statistics, “Consumer expenditures in 2022”
2. Social Security Administration, “Early or Late Retirement?”
3. Internal Revenue Service, “Retirement plan and IRA required minimum distributions FAQs”
4. S&P 500 data