The Retirement Income Guide

Step 1: Add up what you have

List every account and roughly what's in it. How each is taxed matters as much as how much it holds.

• Pre-tax accounts: a 401(k), 403(b), 457(b), traditional TSP or traditional IRA. Every dollar you take out is taxed as income.
• Roth accounts: a Roth IRA, Roth 401(k) or Roth TSP. Qualified withdrawals are tax-free.
• Savings and taxable accounts: bank savings, CDs, money market funds and brokerage accounts. You've already paid tax on the money; only the growth is taxed.
• Guaranteed income: Social Security, any pension, and any annuity you already own.

Step 2: Find your income gap

Add up your essential monthly bills: housing, food, insurance, utilities, transport. Then add up the guaranteed income you'll have for life, usually Social Security plus any pension. The difference is the gap your savings have to fill, every month, for as long as you live.

Then do the same for the things you'd like to do: travel, helping family, hobbies. That second number can flex. The first can't.

Step 3: Choose how your savings fill the gap

There are three broad approaches, and most people end up with some of each.

• Withdrawals. Take a regular amount and keep the rest invested. Flexible, but exposed to the markets, especially in the first years of retirement, when a fall forces you to sell low to keep paying yourself.
• Guaranteed income. Use part of your savings to buy an annuity that pays a set amount for life, or one that protects the money from market drops while it grows. You trade some access to that money for certainty.
• An income floor. Cover the essential bills from Step 2 with guaranteed income, and invest the rest for growth and the things that can flex. If markets fall, the bills are still paid.

The annuities page explains the main types and what each costs you.

Step 4: Get the timing and the taxes right

• Age 59½. Before it, withdrawals from IRAs and most retirement plans usually carry a 10% penalty on top of income tax.
• Age 55. Leave your job in or after the year you turn 55 and that employer's 401(k), 403(b) or TSP can pay you without the penalty. An IRA can't.
• Social Security. You can claim from 62, but each year you wait past your full retirement age (67 for anyone born in 1960 or later) raises your benefit by 8%, up to age 70.
• Required minimum distributions. From pre-tax accounts they start at 73, or 75 if you were born in 1960 or later.
• Moving money between accounts. Use direct rollovers and trustee-to-trustee transfers. A check made out to you can mean 20% withheld and a 60-day deadline.

The risks worth planning for

• Living longer than you expect. A 65-year-old couple has a real chance that one of them reaches their 90s. Plan for a long life, not an average one.
• A bad market early on. Losses in the first few years of withdrawals do more damage than the same losses later.
• Inflation. Prices that rise 3% a year roughly double in 24 years.
• Health costs. Medicare doesn't cover everything, and long-term care can cost more than any other expense.

Questions to ask anyone who advises you

• How are you paid, and by whom?
• What would you do with my money if you were paid the same whatever I chose?
• What does this cost each year, and what does it cost me to change my mind?
• What happens to this money if I die, or if my spouse does?