Here is something most people approaching retirement do not realize until they sit down with the numbers: a 65-year-old woman in the United States has roughly a 50% chance of living to age 88, according to the Social Security Administration's life expectancy tables. That is 23 years of drawing down savings, managing healthcare costs, and covering daily expenses without a paycheck. A retirement income plan is not just about having enough money when you stop working. It is about structuring that money so it does not run out before you do.
Step 1: Track your actual monthly expenses
Most retirement projections use a rule of thumb: you will need 70-80% of your pre-retirement income. That number is fine as a starting point, but it rarely matches what people actually spend. Housing costs rarely drop the way projections assume, and healthcare spending tends to rise. Many people also travel more in early retirement than they expected.
For three months before you retire, track what you spend across these categories:
- Housing (mortgage or rent, property taxes, insurance, maintenance)
- Healthcare (premiums, prescriptions, out-of-pocket costs, dental, vision)
- Food and groceries
- Transportation (car payment, insurance, fuel, maintenance)
- Travel and leisure
- Utilities and subscriptions
- Gifts and family support
Use your real numbers. The gap between your projected expenses and your actual income sources is the problem you are solving.
Step 2: Map every income source
List every income stream you will have in retirement and the date each one begins. The major sources for most people are Social Security, employer pensions, and retirement account withdrawals.
With Social Security, you can claim as early as 62, but your benefit grows by roughly 8% for each year you wait past full retirement age (currently 66-67 for most people). The Social Security my Social Security portal shows your projected benefit at each claiming age. If you can cover your expenses from other sources in the meantime, waiting until 70 locks in the highest monthly payment for the rest of your life.
If you have a defined benefit pension, get a formal benefit estimate from your HR department before you retire, not a month before. If you are married, pay close attention to survivor benefit options. A pension that pays less per month but continues for your spouse can be worth more than a higher payment that stops when you die.
For 401(k) and IRA accounts, the traditional 4% withdrawal rate has guided planners for decades. Morningstar's more recent research puts the safer figure at 3.3% for someone retiring in their early 60s who may need 30 or more years of income. A $600,000 portfolio at that rate generates roughly $20,000 per year before taxes.
Part-time income also deserves a place on this list. Even $1,000 to $1,500 per month in early retirement dramatically reduces how much you need to pull from savings. Working a few years longer than planned, even part-time, can add years to a portfolio's lifespan. This option gets overlooked more than it should.
Step 3: Build a tax-smart withdrawal sequence
The order in which you draw from different accounts affects how much of your money you keep. A sequence that works for most people:
- Draw first from taxable brokerage accounts (long-term capital gains rates are generally favorable)
- Then from traditional IRAs and 401(k)s (withdrawals are taxed as ordinary income)
- Let Roth accounts grow as long as possible (qualified withdrawals are tax-free)
Required Minimum Distributions complicate this once you reach age 73. At that point, the IRS mandates minimum annual withdrawals from traditional retirement accounts whether you need the money or not. The IRS Required Minimum Distribution FAQ explains the rules clearly. A fee-only financial planner can run projections showing your estimated RMDs 10-15 years out, which helps you plan Roth conversions now to reduce that tax burden later.
Step 4: Price healthcare seriously
Healthcare is the most underestimated retirement expense. Fidelity's 2024 estimate puts the figure at approximately $165,000 per person in today's dollars for someone retiring at 65, not counting long-term care. For a couple, that is well over $300,000.
Medicare enrollment comes first. Most people should sign up for Part A and Part B at 65, because missing the initial enrollment window triggers permanent premium surcharges. Original Medicare covers roughly 80% of approved costs, and a Medigap supplemental policy or Medicare Advantage plan covers most of the rest. Compare plans at Medicare.gov each fall during open enrollment.
Long-term care is the expense that catches people off guard. According to the U.S. Administration for Community Living, about 70% of people over 65 will need some form of it. Assisted living or in-home care runs $4,000 to $10,000 or more per month, and a single extended care event can wipe out savings built over decades. A hybrid life insurance policy with a long-term care rider addresses this without the "use it or lose it" problem of traditional LTC insurance.
Step 5: Keep an accessible cash buffer
Sequence-of-returns risk is what retirement planners worry about most. A major market drop in the first few years of retirement forces you to sell shares at depressed prices to cover living expenses. Those shares cannot recover alongside the market because they are already gone.
Keeping 12 to 24 months of living expenses in cash or short-term bonds outside your investment portfolio gives you room to wait. You draw from the cash reserve during downturns and replenish it from investment gains when markets recover. This structure has helped many retirees through multi-year market drops without forcing sales at the worst possible moment.
Step 6: Account for inflation over the long run
At 3% average annual inflation, purchasing power cuts roughly in half every 24 years. For someone who retires at 62 and lives to 86, a fixed income that feels comfortable today will feel noticeably tighter two decades later.
Stocks have historically outpaced inflation over long periods, which is why keeping 40-60% of a portfolio in equities makes sense even after you retire. The academic evidence for equities as an inflation hedge is well-established, though short-term volatility is real and needs to be managed with the cash buffer from Step 5.
Delaying Social Security past full retirement age also helps more than most people realize. Benefits include annual cost-of-living adjustments, so a higher base amount means larger increases every year. A bigger benefit that grows with inflation beats a smaller one that does the same.
For the bond side of a portfolio, Treasury Inflation-Protected Securities (TIPS) adjust their principal with the Consumer Price Index. Unlike regular bonds, they do not quietly lose purchasing power as prices rise. A portion of your fixed-income allocation in TIPS adds a direct hedge that nominal bonds cannot provide.
Common questions
How much do I actually need to retire?
Multiply your annual spending gap (expenses minus guaranteed income from Social Security and any pension) by 25 to 30. That range corresponds to a 3.3% to 4% withdrawal rate. A $40,000 annual gap requires $1 million to $1.2 million in savings.
What if my savings fall short of that target?
Working two or three additional years, even part-time, does more for retirement security than almost any investment strategy. Downsizing, relocating to a lower-cost area, and delaying Social Security are the other levers with real impact.
Should I pay off my mortgage before retiring?
Not automatically. If your mortgage rate is low, keeping the loan and keeping that capital invested often wins on paper. Running your actual numbers with a fee-only planner is worth the cost. The Consumer Financial Protection Bureau's retirement planning tools offer a useful starting point.
When should I start this kind of planning?
Ten years before your target retirement date gives you the most flexibility. Five years still leaves time to make meaningful adjustments. Even at 60 with two years to go, knowing your numbers now beats discovering problems after the paychecks stop.
Revisit this plan every year and after any significant life change: a health event, a major market move, a change in housing, or a shift in Social Security claiming strategy. Think of it as something you adjust as your circumstances change, not a document you file and forget.
For deeper reading on the financial fundamentals, see our guide to essential retirement savings strategies and the detailed breakdown of whether $500,000 is enough for retirement. If you are weighing what a post-retirement life actually looks like day to day, the first month of retirement covers the transition in practical terms.