How To Manage Your Income In Retirement

An income strategy during retirement can help make your portfolio last longer, while also easing potential tax burdens.


In 10 seconds

How you manage your retirement income can have a significant impact on how long your savings last. Adjust your asset allocation over time and withdraw from your accounts in the right order to help stretch your money further.

In 1 minute

Retirement planning doesn’t end when you retire. To have the retirement you’ve been dreaming of, you need to ensure your savings will last. And how much you withdraw each month isn’t all that matters.

If you’re not careful, market downswings can dramatically lower the value of your portfolio—and once you start making withdrawals, it’s much harder to rebound with the market. It’s important to prepare for the risk.

As retirement draws nearer, you should consider adjusting your asset allocation to take on less risk. During retirement, you may gradually shift to an allocation of just 30% stocks, with the remainder going toward less volatile assets, like bonds. As you make withdrawals and earn dividends, you’ll likely want to rebalance your portfolio, either manually or through automated services like those at Betterment, based on the market and your target allocation.

Even though you're retired, a financial safety net is still essential. You should strongly consider maintaining enough funds for three to six months of expenses in a low-risk, accessible account, so if things take a turn for the worse, you have something to fall back on.

Supplemental income helps, too. Social Security, rental income, a part-time job, or pension withdrawals can help you maintain your lifestyle in retirement and leave more of your nest egg in growth mode.

It’s also a good idea to withdraw from your accounts in the right order. Generally you should consider starting with taxable accounts first, then tax-deferred accounts, and save the tax-free accounts for last. One exception is when you have Required Minimum Distributions (RMDs). In that case, you can withdraw your RMDs first, then take anything else you need from your taxable accounts, then tax-deferred, and finally tax-free accounts. Another exception is when your tax bracket is higher/lower than usual.

Sound complicated? Betterment can help you decide exactly how much to withdraw based on your timeline and portfolio.

In 5 minutes

In this guide we’ll cover:

  • Why changes in the market affect you differently in retirement
  • How to keep bad timing from ruining your retirement
  • How to decide which accounts to withdraw from first

Part of retirement planning involves thinking about your retirement budget. But whether you’re already retired or you’re simply thinking ahead, it’s also important to think about how you’ll manage your income in retirement.

Retirement is a huge milestone. And reaching it changes how you have to think about taxes, your investments, and your income.

For starters, changes in the market can seriously affect how long your money lasts.

Why changes in the market affect you differently in retirement

Stock markets can swing up or down at any time. They’re volatile. When you’re saving for a distant retirement, you usually don’t have to worry as much about temporary dips. But during retirement, market volatility can have a dramatic effect on your savings.

An investment account is a collection of individual assets. When you make a withdrawal from your retirement account, you’re selling off assets to equal the amount you want to withdraw.

So say the market is going through a temporary dip. Since you’re retired, you have to continue making withdrawals in order to maintain your income. During the dip, your investment assets may have less value, so you have to sell more of them to equal the same amount of money. When the market goes back up, you have fewer assets that benefit from the rebound.

The opposite is true, too. When the market is up, you don’t have to sell as many of your assets to maintain your income.

There will always be good years and bad years in the market. How your withdrawals line up with the market’s volatility is called the “sequence of returns.” Unfortunately, you can’t control it. In many ways, it’s the luck of the withdrawal. Still, there are ways to decrease the potential impact of a bad sequence of returns.

How to keep bad timing from ruining your retirement

The last thing you want is to retire and then lose your savings to market volatility. So you’ll want to take some steps to try and protect your retirement from a bad sequence of returns.

Adjust your level of risk

As you near or enter retirement, it’s likely time to start cranking down your stock-to-bond allocation. Invest too heavily in stocks, and your retirement savings could tank right when you need them. Betterment generally recommends turning down your ratio to about 56% stocks in early retirement, then gradually decreasing to about 30% toward the end of retirement.

Rebalance your portfolio

During retirement, the two most common cash flows in/out of your investment accounts will likely be dividends you earn and withdrawals you make. If you’re strategic, you can use these cash flows as opportunities to rebalance your portfolio.

For example, if stocks are down at the moment, you likely want to withdraw from your bonds instead. This can help prevent you from selling stocks at a loss. Alternatively, if stocks are rallying, you may want to reinvest your dividends into bonds (instead of cashing them out) in order to bring your portfolio back into balance with your preferred ratio of stocks to bonds.

Keep a safety net

Even in retirement, it’s important to have an emergency fund. If you keep a separate, low-risk account in your portfolio with enough money to cover three to six months of expenses, you can likely cushion—or ride out altogether—the blow of a bad sequence of returns.

Supplement your income

Hopefully, you’ll have enough retirement savings to produce a steady income from withdrawals. But it’s nice to have other income sources, too, to minimize your reliance on investment withdrawals in the first place.

Social Security might be enough—although a pandemic or other disaster can deplete these funds faster than expected. Maybe you have a pension you can withdraw from, too. Or a part-time job. Or rental properties. Along with the other precautions above, these additional income sources can help counter bad returns early in retirement.

While you can’t control your sequence of returns, you can control the order you withdraw from your accounts. And that’s important, too.

How to decide which accounts to withdraw from first

In retirement, taxes are usually one of your biggest expenses. They’re right up there with healthcare costs. When it comes to your retirement savings, there are three “tax pools” your accounts can fall under:

  1. Taxable accounts: individual accounts, joint accounts, and trusts
  2. Tax-deferred accounts: individual retirement accounts (IRAs), 401(k)s, 403(b)s, and Thrift Savings Plans
  3. Tax-free accounts: Roth IRAs, Roth 401(k)s

Each of these account types (taxable, tax-deferred, and tax-free) are taxed differently—and that’s important to understand when you start making withdrawals. Here’s how taxes work with each of these account types.

When you have funds in all three tax pools, this is known as “tax diversification.” This strategy can create some unique opportunities for managing your retirement income.

Withdrawing from your taxable accounts first usually gives your portfolio more time to grow. This is because you only pay taxes on the capital gains, so more money stays in your account. With a tax-deferred account like a 401(k), you pay taxes on the full amount you withdraw, so with each withdrawal, taxes take more away from your portfolio’s future earning potential.

Since you don’t have to pay taxes on withdrawals from your tax-free accounts, it’s typically best to save these for last. You want as much tax-free money as possible, right?

So the ideal withdrawal order is generally:

  • Taxable accounts
  • Tax-deferred accounts
  • Tax-free accounts

But in abnormal years, where you find your tax bracket either higher or lower than usual, you likely will want to deviate from this strategy, and attempt to “smooth” out your tax bracket. This is more advanced, but can help you take advantage of lower tax years and minimize the impact of higher tax years.

There’s just one other thing to consider: Required Minimum Distributions (RMDs). When you reach a certain age, you’re required to take a certain amount from your tax-deferred accounts each month—or else you’ll lose 50% of the required amount. If that applies to you, you’ll want to take out your RMD first, then follow the order above. So it goes: Required Minimum Distributions, taxable accounts, tax-deferred accounts, tax-free accounts.

Withdraw your retirement income from your accounts in that order, and you’ll likely help your savings last as long as possible.

Take the guesswork out of your retirement income

Sometimes it’s hard to decide how much to withdraw from your retirement savings. And as you enjoy years of retirement, when and how should you adjust your asset allocation?

Betterment helps you with both of these decisions. As a Betterment investor, when you designate yourself a retiree, you can set up a goal called “Retirement Income.” Our algorithm will automatically calculate a safe withdrawal amount and recommend an asset allocation based on where you’re at and what you have to work with. You can set up automatic withdrawals from your Betterment account to your checking account, helping you maintain a personalized payment schedule.

Ready to get started? Set up a Retirement Income goal today. Or, see the rest of our retirement advice.

Betterment is not a tax advisor, nor should any information herein be considered tax advice. Please consult a qualified tax professional.