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, CFP®, RICP®, and managing director of financial planning, retirement income, and wealth management 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 investment sales will work with other sources of income, such as dividends, interest, and Social Security, and how they'll deliver the income you need now and in the future. You also need to continue to monitor—and adjust to—important factors that may shift, such as your expenses, the market, your tax situation, and your time horizon."

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 if your money will last long enough."

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

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. That's where expert help and a comprehensive retirement income plan that's updated and revised at least every few years, if not annually, can be helpful." This way, you can make small adjustments where appropriate, which may help you head off the potential for big adjustments later.

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. Research shows that losses from investments can be more painful emotionally—and practically—when you have to live off the money soon.

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 help 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," Rob says.

To do this, Rob suggests holding money you'll need within the next year in the form of cash or cash investments, within a relatively safe, liquid account for immediate spending. Put money you'll need during the next two to four years in investments that are generally more stable and tend to hold their value in a down market, such as certificates of deposit (CDs) with maturity dates that are more than one year out, high-quality short-term bonds, or bond funds. Finally, invest the rest in higher-earning investments for higher income and 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. Every penny you keep after tax is more money you can use for retirement.

"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 Rob, Hayden, and the Schwab Center for Financial Research shows that many investors may be better off if they draw down tax-deferred and taxable accounts simultaneously before they reach RMD age.

"This strategy can be especially useful in cases where RMDs or future changes in tax laws could push you into a higher tax bracket and cause a spike in your tax bill," says Hayden. "By drawing down tax-deferred accounts prior to your RMD age, you may be able to smooth out or reduce taxes in retirement. However, if your risk of being pushed into a higher tax bracket by RMDs is relatively low, the conventional withdrawal approach could still make sense."

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

The RMD Reality

Many retirees are surprised by the size of their RMDs, especially as they age. Here's a look at RMDs for someone who is 73 years old in 2023. The chart estimates the RMDs for various account sizes and projects future RMDs.

Higher total tax-deferred account balances mean higher RMDs owed

Higher total tax-deferred account balances mean higher RMD owed.
Total tax-deferred account balances RMD required at age: 
73 75 80 85 90
$500,000 $18,868 $21,210 $27,980 $36,356 $45,420
$1,000,000 $37,736 $42,419 $55,961 $72,712 $90,840
$1,500,000 $56,604 $63,629 $83,941 $109,067 $136,260

Source: RMD Calculator. This example is hypothetical and provided for illustrative purposes only. It assumes a birth date of 01/01/1950 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.

"There are plenty of places to turn for help," Rob says. "If you prefer a more hands-on approach, consider working with a professional financial planner or qualified investment advisor. There are also technology-based solutions, like robo-advisors, that use personalized algorithms, guidelines, and investment performance to manage your portfolio for you. 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—and the more confident you'll likely feel in retirement."