You’ve spent years saving for retirement, faithfully setting aside money, watching your accounts grow, and maybe even dreaming of that first morning when you don’t have to set an alarm.
But here’s the next big question:
Once you stop earning a paycheck, how do you turn your savings into income that lasts the rest of your life?
It’s one thing to build your retirement fund...it’s another to make sure it supports you, no matter what the market, or life, throws your way.
Financial planners typically use three main strategies to help retirees turn assets into income. Each one has a slightly different philosophy and the best plan often blends more than one.
Let’s break them down in plain English.
1️⃣ The Systematic Withdrawal Approach: “Set a Plan and Stay the Course”
This one’s probably the most familiar. You keep your money invested across a mix of stocks and bonds that fits your comfort with risk, and then you withdraw a set amount each year. This is like paying yourself a salary.
For example:
If you retire with $1 million and use a 4% withdrawal rate, you’d take out $40,000 in the first year. In later years, you might adjust that amount for inflation so your purchasing power stays the same.
The beauty of this method? Predictability. You know how much you’ll receive, and your investments keep working for you in the background.
But there’s a catch: when markets drop, you’re still withdrawing from a smaller portfolio. That can speed up how fast your nest egg runs out, something called “sequence of returns risk.”
To smooth things out, some people adjust withdrawals a little each year based on market performance instead of taking the same amount no matter what. It’s a more flexible approach that can help your portfolio last longer.
2️⃣ The Bucket Approach: “Divide and Conquer”
Think of your retirement savings as a series of buckets, each meant for a different phase of your retirement.
- The first bucket (short-term) holds cash or low-risk investments to cover your spending for the next few years.
- The second bucket (mid-term) includes moderate-risk investments to replenish the first bucket later.
- The third bucket (long-term) holds your growth investments, usually stocks, that won’t be touched for a decade or more.
As time goes on, you refill the short-term bucket from the others.
The logic is simple and intuitive: you’re not selling stocks when the market is down, because your near-term income is already set aside. And clients tend to love this structure because it makes the abstract idea of “retirement investing” much more tangible.
The main risk? Timing. If markets haven’t recovered when it’s time to refill your next bucket, you may have to adjust. That’s why having clear guidelines, and a little flexibility, is key.
3️⃣ The Essential vs. Discretionary Approach: “Needs First, Wants Next”
This strategy, sometimes called flooring, starts by dividing your retirement expenses into two categories:
- Essential expenses: housing, groceries, health care, utilities - the basics.
- Discretionary expenses: travel, hobbies, dining out, gifts - the fun stuff.
Then you match your income sources accordingly.
You might use guaranteed income (like Social Security, pensions, or annuities) to cover essentials. That’s your income floor. Then rely on investments to fund the rest.
This approach gives peace of mind because no matter what happens in the markets, your necessities are covered. The tradeoff? It might mean committing more of your assets to lower-risk options, leaving less available for discretionary spending or future growth.
Still, for many retirees, that guaranteed “floor” is what helps them sleep at night.
Blending the Best of Each
Here’s the thing: real retirement income plans rarely fit neatly into one box. You might have an income floor to cover essentials (Approach 3), use a few buckets to manage your investments by time horizon (Approach 2), and still follow a structured withdrawal rate to guide spending (Approach 1).
A strong plan strikes the right balance between:
- Security: knowing your basics are covered
- Flexibility: being able to adjust as life changes
- Growth: keeping your money working for you
Because at the end of the day, retirement isn’t just about having “enough.” It’s about living confidently, knowing you can enjoy the life you’ve planned for without worrying about running out of money.
The Bottom Line
There’s no single “right” way to turn your savings into income. The best strategy depends on your goals, your comfort with risk, and how much flexibility you want.
The good news? You don’t have to figure it out alone. A skilled financial planner can help you mix and match these approaches so your retirement income works for you, in good markets, bad markets, and every moment in between.