Retirement income, the basics.

Start with what you spend

A retirement income plan starts with spending, not savings. Split it in two. Essential costs are the ones you cannot skip: housing, food, utilities, insurance, health care and taxes. Discretionary costs are the ones you choose: travel, gifts, hobbies.

Some costs fall in retirement, such as commuting or saving for retirement itself. Others often rise, especially health care. A budget built from what you actually spend today is a sounder base than a rule of thumb.

Where the income can come from

Most retirees draw on several sources at once. Some pay a steady amount. Others depend on markets.

• Social Security retirement benefits.
• A pension from an employer, if you have one.
• Withdrawals from savings: workplace plans such as a 401(k) or 403(b), individual retirement accounts, and ordinary taxable accounts.
• Work, full time or part time, for as long as you choose to.
• Other income, such as rent from a property or income from a business.

Each source has its own timing and its own tax treatment. Withdrawals from traditional retirement accounts are generally taxed as income. Qualified withdrawals from Roth accounts generally are not. Federal law also sets an age at which you must start taking minimum withdrawals from many retirement accounts.

When to claim Social Security

You can start Social Security retirement benefits as early as age 62. Claiming before your full retirement age, which depends on the year you were born, permanently reduces your monthly benefit. Waiting past full retirement age raises it, up to age 70.

For a married couple, spousal and survivor benefits make the timing a joint decision. The choice one spouse makes can affect what the other receives for the rest of their life.

The Social Security Administration shows your own estimates at ssa.gov. Start there before you decide anything.

How long it has to last

The hardest number in a retirement plan is one nobody knows: how long you will live. Plan for a long retirement, and for the chance that one spouse lives many years longer than the other. Four risks run through every plan.

Longevity

Outliving your savings.

Inflation

Rising prices that make a fixed income buy less each year.

Market risk

Falls in the value of your investments. A fall early in retirement, while you are withdrawing, can do more lasting harm than the same fall later.

Health costs

Medical care and long-term care, which can be large and hard to predict.

Turning savings into a paycheck

There is no single method. Common approaches include:

• Covering essential costs with steady sources, such as Social Security and a pension, and using savings for the rest.
• Keeping the next few years of spending in cash or short-term holdings, so a market fall does not force a sale.
• Setting a yearly withdrawal and adjusting it as markets and spending change.

None of these removes risk. Each is a way of deciding, ahead of time, what you will do when markets or your plans change.

Setting a goal

A retirement income goal is the amount you want to spend each year, after tax. Subtract what your steady sources will pay, and the gap is what your savings have to provide. A plan then estimates future cash flows to see whether that can hold up over time.

Questions to answer first

1. When do you want to stop working, and would you work part time first?
2. What do you spend now, and what will change?
3. Where do you want to live?
4. When will you, and your spouse if you have one, claim Social Security?
5. What would you want to leave to others?
6. How would you react if your savings fell sharply in your first years of retirement?