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.


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.

In this guide we’ll cover:

  • Why changes in the market affect you differently in retirement
  • How to help keep bad timing from ruining your retirement
  • How to decide which accounts to withdraw from first
  • How Betterment helps take the guesswork out of your retirement income

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 help 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 an emergency fund

Even in retirement, it’s important to have an emergency fund. If you keep a separate 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:

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

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.

For example, when you withdraw from your taxable accounts, you only pay taxes on the capital gains, not the full amount you withdraw. With a tax-deferred account like a Traditional 401(k), you usually 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, while we’re not a tax advisor, and none of this information should be considered advice for your specific situation, the ideal withdrawal order generally-speaking is:

  1. Taxable accounts
  2. Tax-deferred accounts
  3. Tax-free accounts

But there are a few exceptions.

Incorporating minimum distributions

Once you reach a certain age, you must generally begin taking required minimum distributions (RMDs) from your tax-deferred accounts. Failure to do so results in a steep penalty on the amount you were supposed to take.

This changes things—but only slightly. At this point, you may want to consider following a new order:

  1. Withdraw your RMDs.
  2. If you still need more, then pull from taxable accounts.
  3. When there’s nothing left in those, start withdrawing from your tax-deferred accounts.
  4. Pull money from tax-free accounts.

Smoothing out bumps in your tax bracket

In retirement, you’ll likely have multiple sources of non-investment income, coming from Social Security, defined benefit pensions, rental income, part-time work, and/or RMDs. Since these income streams vary from year to year, your tax bracket may fluctuate throughout retirement. With a little extra planning, you can sometimes use these fluctuations to your advantage.

For years where you’re in a lower bracket than usual–say, if you’re retiring before you plan on claiming Social Security benefits–it may make sense to fill these low brackets with withdrawals from tax-deferred accounts before touching your taxable accounts, and possibly consider Roth conversions.

For years where you’re in a higher tax bracket, like if you sell a home and end up with large capital gains–it may make sense to pull from tax-free accounts first to minimize the effect of higher tax rates. Remember, higher taxes mean larger withdrawals and less money staying invested.

How Betterment helps take the guesswork out of your retirement income

If all of the above sounds confusing, you’re not alone. It’s why we developed a dynamic income solution specifically for retirees. Our expert-built technology factors in the unique goal details that you provide when creating your retirement account to help advise you on the optimal amount for withdrawal over the coming year, with the intention of fostering year-to-year income consistency. And it’s all managed through our existing platform, making for a seamless process. You can even set up automatic withdrawals from your Betterment account to your checking account, helping you maintain a personalized payment schedule.

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