Retirement is a time of change. And one of the biggest changes is no longer receiving a paycheck from an employer. In retirement, you pay yourself—your savings accounts and retirement plans generally become the sources of your income. And that takes some planning. Answering these four questions can help you get started.

You need to prepare all your savings and retirement accounts to pay you throughout your retirement. But your accounts all have different withdrawal rules, and your retirement could last 20 to 30 or more years. So, you need to have a plan to help you enjoy your retirement with the confidence that you won’t run out of money. Retirement income planning can be complicated, and many preretirees seek the advice of a tax or other financial professional for help. Whether you’re doing it yourself or getting some guidance, the answers to these four questions can help you put together your plan for retirement income.

1 How much will you spend in retirement?

You know how much you’re spending now, either because you follow a budget or because you just “have a feel for it.” Figuring out how much you’ll spend in retirement will require you to picture your retirement:

• When do you want to retire?
• Where do you want to live?
• What will you do in your free time?
• Will you get a part-time job or start a second career?

How different will your life be, and how can that change your spending? A helpful way of looking at your spending is to break it out into four categories: basics, healthcare, nonessentials, and debt.

Basics are the things you can’t live without, such as groceries, housing, a car, gas, heat, and insurance. The price of many basics will depend on where you plan to live in retirement—so if you plan to move, make sure you know the difference in the cost of living.

Healthcare spending will likely increase as you age—so think about your health today, any health conditions you have, and how they might change in retirement. You may need to include insurance, Medicare, and Medicaid payments, as well as out-of-pocket expenses, in your budget.

Nonessentials are the fun stuff—what you’ll do in retirement, whether that’s eating out more, joining a club, or spending money on things such as hobbies, entertainment, and other leisure activities.

Debt refers to your loans—e.g., a car loan or a mortgage—and credit cards. How much are you spending on loan payments and credit card charges? You should consider paying off or lowering as many of your debt payments as you can before you retire.

Create your retirement spending budget

You may notice that as you get older, some of your costs will stay the same, and some will be different. Your spending is likely to be higher in the beginning—as you travel, eat out, and are generally active. It may then slow down for a bit, and then go up again as your healthcare expenses may increase. 

2 Where will your retirement income come from?

Your workplace retirement plan and Social Security are two sources of retirement income. You may have others—make a list of additional funds you may be able to put toward your retirement budget.

• Savings
• Investments
• Retirement accounts
• Retirement household income
• Inheritance
• Social Security—go to ssa.gov/myaccount to get an estimate of your Social Security payments

Learn your retirement plan’s rules for withdrawals

If you have a workplace retirement plan, check with your employer to find out your retirement plan’s rules for withdrawing from your retirement plan. Some plans allow you to take a little at a time, some allow you to set up recurring withdrawals, and some require that you take it all out at once.

3 What’s the gap between your retirement spending and income?

If it looks like your income will be more than your spending, that’s great. If it looks like your spending will be more than your income, you may need to cut back your retirement spending, find ways to earn more income in retirement, or try saving more today.

Catch-up contributions can help you save more

The IRS sets limits for the amount you can contribute to your retirement plan annually. In 2023, the limit for certain workplace plans, including 401(k), 403(b), and profit-sharing plans, is $22,500—unless you’re older than 50. People 50 and older are eligible to make catch-up contributions, which, in 2023, means you can save another $7,500, for a total of $30,000.

4 How will you take your money out in retirement?

Figuring out how to draw down the money in your accounts takes some research and planning. Each of your savings, investments, and retirement accounts may have different rules for how to take out the money, as well as different tax treatment, which could have an impact on your income taxes. As a result, some preretirees work with a tax or financial professional to create what’s known as a drawdown strategy.

There are a few methods you can use to turn your accounts into retirement income—a few popular ones you could look in to include the time segmentation (bucket) method, systematic withdrawals, and earnings only. What they all have in common is that they help you withdraw your money in a way that balances your need for income with the need to make your money last for the length of your retirement.

Plan for required minimum distributions (RMDs)

The IRS requires that, beyond a certain age, you must take RMDs annually—meaning you must take a minimum amount of money out of your qualified accounts, such as employer-sponsored retirement plans.

Have a plan for your income in retirement

You’ve pictured what you want to do in retirement—whether it’s pursuing a passion, spending time with friends, babysitting grandchildren, or just plain enjoying life. Whatever you put in that picture, you want to be sure you have the funds to do everything that’s in it, as well as pay for the potential increased healthcare expenses of your later years. Putting together a plan for your retirement income can help you make that picture come to life.