Accumulating a retirement nest egg is half the challenge. The other half — turning assets into sustainable income that lasts 30+ years — requires deliberate strategy. Most people plan the accumulation and wing the distribution.
The income sources in retirement
- Social Security (70% replacement at FRA for median earner, more with delay)
- Portfolio withdrawals (traditional IRA, 401k, Roth IRA)
- Pension (if you have one)
- Part-time work (increasingly common, especially in FIRE community)
- Rental income
- Annuity payments (for those who purchased)
The bucket strategy for retirement income
- Bucket 1 (0–2 years): 2 years of expenses in cash or money market. Never sell investments for immediate needs — withdraw from here.
- Bucket 2 (2–10 years): Conservative investments — short/medium term bonds, dividend stocks. Replenishes Bucket 1 annually.
- Bucket 3 (10+ years): Growth investments — equity index funds. Long time horizon allows riding out market downturns.
Withdrawal sequencing: which accounts to draw first?
General order: Taxable accounts first (most tax-efficient drawdown), then traditional IRA/401k (ordinary income, get out before RMDs force large distributions), Roth last (tax-free growth continues, no RMDs). Exception: optimize for bracket management — consider traditional IRA withdrawals in years when income is low to stay in lower tax bracket.
The annuity role: when it makes sense
A simple income annuity (SPIA) converts a lump sum to guaranteed lifetime income. Useful: if you're worried about outliving assets (longevity risk), if your Social Security + pension don't cover basic expenses, or if you have no heirs and value certainty over bequest. Annuitizing 20–30% of assets to cover fixed expenses while keeping 70–80% invested is the balanced approach most advisors recommend.
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