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3 Retirement Income Challenges You Might Not Expect

When it’s time to make the shift from saving for retirement to living off your retirement savings, what’s the best way to create a steady stream of income that lasts as long as you do?

“If you want your portfolio to go the distance, it helps to have a plan,” says Rob Williams, vice president of income planning at the Schwab Center for Financial Research. It’s not just a matter of selling a few assets and pocketing the proceeds, he says. You need to think about how your withdrawals will work with other sources of income, such as dividends, interest, and Social Security, and how they’ll affect the future growth potential of your portfolio. You also need to consider important factors that might shift over time, such as your expenses, the market, and your tax situation.  

Here are three common challenges you might face once you start tapping your portfolio for income.

Challenge 1: Changes in your spending needs 

So much of retirement planning relies on assumptions. How much income you’ll need. How much you’ll earn from your investments each year. How long you’ll live. “You can make educated guesses, but they’re just that—guesses,” Rob says. “And that makes it difficult to know how long your money will really last.”

For example, if you need more retirement income than you anticipated—for health care costs or other needs—how will that affect the longevity of your savings? If you rerun the numbers and discover your retirement savings are likely to fall short, how do you make ends meet without sacrificing your lifestyle in retirement?

It’s also possible that your portfolio may perform better than expected. In that case, you may be able to spend more. Still, it can be difficult to determine if you should increase spending.

“There are plenty of things you can do to accommodate a significant change,” Rob says. “But the challenge becomes figuring out what you should do—and that’s where expert help and a comprehensive retirement income plan can be helpful.”

Challenge 2: Ups and downs in the market  

No investor wants to go through a market downturn or see their portfolio fall. “But when you’re retired or nearing retirement, it’s particularly scary,” Rob says.

At the same time, you don’t want to reduce your exposure to stocks so much that you inhibit future growth potential. Fortunately there are ways to insulate your retirement savings from the effects of a major market decline, while still leaving room for growth.

“One key is a well-structured retirement portfolio that supports your short-term, medium-term, and long-term needs and goals,” says Rob.  

For example, you might keep a year’s worth of cash in a relatively safe, liquid account for immediate spending, put money you’ll need in the next two to four years in investments that tend to perform better in a down market, and invest the rest in stocks for potential growth.

By doing this, you’re giving yourself a cushion—which could help you cover expenses and avoid selling long-term growth investments for quick cash in a down market.

Challenge 3: Minimizing taxes in retirement 

Another common challenge is figuring out how to withdraw money from your retirement portfolio in tax-smart ways.

“The most tax-efficient withdrawal strategy for you will depend on the type of income and assets you have, your specific spending needs, and other factors,” says Hayden Adams, CPA, CFP®, and director of tax planning at the Schwab Center for Financial Research.

While conventional wisdom often recommends tapping taxable accounts first and letting tax deferred accounts (like your 401(k) or traditional IRA) grow until RMDs kick in, a recent study by the Schwab Center for Financial Research shows some investors fare better by drawing down tax-deferred and taxable accounts simultaneously before RMD age.

If your risk of being pushed into a higher tax bracket by RMDs is low, the conventional approach may make sense. “But in cases where RMDs or a future change in tax law could push you into a higher tax bracket and cause a tax spike, drawing down tax-deferred accounts earlier may give you a better outcome,” says Hayden.  

Depending on your specific needs and goals, other tactics—like a tax-free Roth IRA or tax-loss harvesting—may also help you minimize taxes in retirement.

The RMD Reality

Many retirees are surprised by the size of their RMDs, especially as they age. Here’s a look at RMDs for accounts of various sizes.

Higher total tax-deferred account balances mean higher RMD owed.
Total tax-deferred account balances RMD required at age: 
72 75 80 85 90
$500,000 $19,966 $23,650 $30,837 $39,209 $47,185
$1,000,000 $39,932 $47,300 $61,675 $78,417 $94,369
$1,500,000 $59,898 $70,950 $92,512 $117,626 $141,554

Source: RMD Calculator. This example is hypothetical and provided for illustrative purposes only. It assumes a birth date of 01/01/1949 and 6% average annual returns. RMDs are subject to ordinary income tax rates.

Don’t go it alone

Creating a lasting retirement income plan requires a fair deal of planning, organization, and oversight to achieve optimal results. But you don’t have to figure it out on your own.

“From traditional investment advisors to technology-based solutions, there are plenty of places to turn for help,” Rob says. “The important thing to remember is that the sooner you get a handle on your retirement income plan, the more time you’ll have to make adjustments to help ensure your savings can go the distance.”