Retirement Income Planning Strategies

For decades, your financial life likely had one clear directive: Accumulate. You contributed to your 401(k), maximized your match, and watched the balance grow.

But as you cross the threshold into retirement, the objective flips. The goal is no longer just to grow the pile, but to distribute it to turn a lump sum of savings into a reliable paycheck that lasts as long as you do. This phase, known as distribution planning, requires a fundamentally different set of strategies than the accumulation phase.

For retirees in our area, where specific state-level tax benefits can significantly impact your take-home income, getting this right is critical. With that in mind, let’s look at how to structure your income streams and the strategies to avoid the number one threat to your nest egg: panic selling.

What Is Retirement Income Planning?

Retirement income planning is the process of coordinating your various assets Social Security, pensions, and investment portfolios to create a durable, tax-efficient stream of cash flow.

Unlike simple investing, which focuses on returns, income planning focuses on sustainability. It answers the question: "How do I ensure I can pay my bills in a down market without selling stocks at a loss?"

Strategy 1: The "Cash Wedge" (Avoiding Panic Selling)

The greatest risk to a retiree is Sequence of Returns Risk, the danger of experiencing a market crash early in retirement. If you are forced to sell depreciated assets to pay for groceries or property taxes, you lock in losses that your portfolio may never recover from.  

The Solution: The Cash Wedge Instead of holding one big bucket of "investments," consider segmenting your money by time.  

• Bucket 1 (1-2 Years): Keep 12 to 24 months of living expenses in cash or ultra-short-term treasuries. This is your "sleep well at night" money. If the market drops 20%, you don't panic, you simply spend from this cash bucket and wait for the market to recover.  

• Bucket 2 (3-10 Years): Invest in high-quality bonds and dividend-paying stocks to replenish Bucket 1.

• Bucket 3 (10+ Years): Invest in growth equities to fight inflation and fund your later years.

Strategy 2: Optimizing Income Sources for Local Taxes

Living in our jurisdiction offers distinct advantages that should dictate which account you pull money from first.

1. Social Security Coordination

Because our state does not tax Social Security benefits, this is one of your most valuable income sources.  

• The Strategy: Delaying Social Security until age 70 increases your guaranteed, tax-free (at the state level) income. You can bridge the gap from age 65 to 70 by withdrawing from taxable brokerage accounts or Traditional IRAs.  

2. Maximizing the Retirement Income Deduction

For residents age 65 and older, our state allows a significant deduction currently up to $10,000 on qualified retirement income (such as pensions, 401(k) withdrawals, or IRA distributions).  

• The Strategy: Even if you don't need the money, it often makes sense to withdraw at least enough from your pre-tax IRA to fill this deduction bucket every year. If you don't use this deduction in a given tax year, you lose it forever.

Strategy 3: The Tax-Efficient Withdrawal Order

Most people withdraw from their accounts in a random order, or strictly from their checking account. A structured withdrawal strategy can extend the life of your portfolio.  

• Conventional Wisdom: Spend taxable money first, then tax-deferred (IRA), then tax-free (Roth).

• The "Proportional" Approach: In some years, it may be better to blend withdrawals. For example, if you need $80,000 for living expenses, you might take:

  • $30,000 from Social Security (State Tax-Free).

  • $10,000 from an IRA (State Tax-Deductible).  

  • $40,000 from a Roth IRA (Tax-Free).

  • Result: You meet your spending needs while keeping your reported taxable income extremely low.

How to Approach the Decision

Building a retirement income plan is not a "set it and forget it" exercise. It requires ongoing management. A prudent process includes:

1. Calculate Your "Gap": Determine your essential monthly expenses. Subtract your guaranteed income (Social Security, Pensions). The remaining number is the "Gap" your portfolio must cover.  

2. Build Your Moat: Before you retire, ensure you have your "Cash Wedge" fully funded so you aren't reliant on the stock market for next month's bills.

3. Review State-Specific Opportunities: Check your eligibility for local benefits like the Homestead Exemption, which can exempt the first $50,000 of your home's fair market value from property taxes if you are over 65 and have lived in the state for a year.  

4. Consult a Fiduciary: Work with a financial planner who specializes in distribution planning. They can help you model different withdrawal scenarios to ensure you aren't missing out on tax deductions or exposing yourself to unnecessary market risk.

Important Disclosures

This material is general in nature and for informational purposes only. It does not take into account your specific objectives, financial situation, or needs and does not constitute personalized investment, tax, or legal advice. All investing involves risk, including the possible loss of principal. Past performance is not a guarantee of future results. State tax laws, including deductions and exemptions, are subject to change. Before making any decision about your retirement income strategy, you should carefully review your options and consult a qualified tax advisor and a certified financial planner.