How to Receive Income Once Retired: What You Need to Know Now, Not Later
One of the biggest financial transitions in life is going from earning a paycheck to generating income from the money you’ve saved. It sounds simple. Just withdraw what you need, right? But in reality, it's not just about pulling money out. It's about how you pull it out, when you do it, and from where. If done wrong, it can shorten the life of your portfolio. If done right, it creates peace of mind, freedom, and long-term sustainability.
I've been doing this long enough to see that there is no formula for what works. What works for some is not palatable for others. This article breaks down what you need to know about getting income from Social Security, IRAs, brokerage accounts, and how to protect yourself from one of retirement’s biggest hidden risks: the returns on your investments in the early years.
Let’s start with the basics.
Where Retirement Income Actually Comes From
For most people, income in retirement comes from a mix of three sources: Social Security, withdrawals from retirement accounts like IRAs and 401(k)s, and a taxable brokerage account.
Social Security is usually the foundation. It’s predictable, adjusts with inflation, and continues for as long as you’re alive. When you claim it makes a big difference. Taking it early at 62 locks in a permanent reduction. Waiting until full retirement age, usually around 66 or 67, gives you the full benefit. Delaying all the way until age 70 increases the benefit by roughly 8 percent per year.
There is no “right” answer because the goal isn’t just to get the biggest check or total lifetime amount. It’s to coordinate Social Security with your other income sources in a way that fits your life and your tax circumstances. For couples, spousal and survivor benefits must be analyzed to determine the impact of a reduced benefit to the surviving spouse. And yes, Social Security can be taxed. In 2025, married couples filing jointly will have 85% of their Social Security benefits subject to income tax if their combined income (which includes a portion of your Social Security benefits) exceeds $44,000. Single tax filers if combined income is over $34,000. A combined income lower than the limit causes what is known as the “tax torpedo,” where an additional dollar of taxable income results in another dollar of the Social Security benefit being taxed. That leads to circumstances where additional income in the “torpedo” could result in a marginal tax rate exceeding 40%. That often catches people off guard.
Next are your retirement accounts, such as IRAs and 401(k)s, and they’re often the largest part of a retiree’s portfolio. Once you start withdrawing from these accounts, those withdrawals are taxed as ordinary income, which also counts toward the calculation of how much of your Social Security is taxed. The technical term for an IRA is Individual Retirement Arrangement, not Account. The arrangement is that the government will tax the money inside the IRA at some point, and withdrawals are required at specific ages. These are called Required Minimum Distributions, or RMDs, and start at age 73 or 75, depending on your birth year. If you were born between 1951 and 1959, your required beginning date is the year you turn 73. Everyone born in 1960 or after must begin at age 75. You’re required to withdraw a certain percentage every year, even if you don’t need the money. The penalty for failing to take an RMD can be steep, up to 25% of the amount required to be withdrawn.
The planning opportunity here is about timing. In some cases, it makes sense to begin drawing from these accounts earlier, especially if you’re in a lower tax bracket during the early retirement years. In other cases, doing partial Roth conversions might reduce future RMDs and give you more flexibility down the road. A careful examination of current and expected future tax rates, along with anticipated spending, is necessary. Roth conversions shift the tax payment to the current year, rather than deferring it in the IRA. Typically, the option to defer paying taxes into the future is a sound strategy, especially if tax rates are expected to be lower. However, for retirees in their early retirement years, there may be a period when taxable income is very low, offering an opportunity to use their standard deduction to offset the tax impact of a Roth conversion. Definitely consult with a tax professional before making any decision.
Then we have the taxable brokerage account. This is often the most underutilized asset in retirement planning, despite its incredible flexibility. There are no age restrictions and no mandatory withdrawals. The tax treatment is generally favorable, particularly for long-term capital gains and qualified dividends. You can also take advantage of tax gain harvesting in low tax years, where income will be within the 0% long-term capital gains tax bracket. For investments at a loss, tax-loss harvesting can help offset any realized gains. This account can serve as an early retirement bridge or help you keep taxable income low while managing other parts of your plan.
The real value comes when you coordinate all three sources of income in a strategic way.
The Risk Nobody Talks About at the Retirement Party
People entering retirement often worry about inflation, rising health care costs, or running out of money. Those are real concerns. But one of the most overlooked risks is something called sequence of returns risk.
Here’s what that means in plain English. It’s not just about how much your portfolio earns over time. It’s about the order in which those returns show up. If the market performs poorly in the early years of retirement and you’re withdrawing income from that portfolio, the combination can cause real harm. Even if the long-term average return is decent, early losses combined with withdrawals can shorten the life of your portfolio dramatically.
Take two retirees with identical savings and identical withdrawal plans. One gets lucky and retires during a bull market. The other retires just before a market downturn. The difference in outcomes can be massive, even if they average the same return over thirty years.
The first five to ten years of retirement are the most vulnerable. This is when sequence risk is at its highest. If your plan doesn’t account for this risk, you may find yourself needing to make adjustments far earlier than expected.
So how do you protect yourself? There are a few key strategies that can help.
1. Keep a Cash Reserve
It’s boring, but it works. Having a reserve of cash or stable, short-term bonds can help cover your spending needs when the market is down. You can include access to things like a home equity line of credit or a line of credit on your non-IRA securities portfolio. That way, you’re not forced to sell stocks at a loss just to meet your income goals. A good rule of thumb is to keep at least one year in cash and up to three years when including lines of credit.
This gives your portfolio breathing room. If the market takes a dip, you have time for it to recover before drawing from it again. That protects your long-term investments and gives you peace of mind in the short term. You know you’ve got the next year or two covered no matter what the markets do.
2. Be Flexible with Your Spending
It’s vital to know the spending capacity your savings portfolio can support. Flexibility can extend the life of your portfolio more than almost anything else. The old 4 percent rule assumes you take out the same amount every year, adjusted for inflation. That approach can be too rigid and doesn’t follow the typical spending pattern in retirement. Real life requires adjustments.
Using guardrails to determine when and by how much adjustments to spending are necessary is important in two ways. First, it can inform you of how much risk you may be willing to tolerate within your portfolio. More uncertainty (stock exposure) can lead to more chances for a reduction in spending, but also provide more chances to increase spending over time. Less uncertainty (bonds and/or guaranteed income) can offer more stability, with less chance of higher future spending.
Second, you can plan for the impact of reaching a lower guardrail. During market downturns, emotions run high, and people often react by putting their lives on hold. That could mean delaying meaningful experiences at the very moment you most want to have them. Knowing what the bottom guardrail is and the extent to which spending needs to be adjusted is surprising to most people.
In most cases, reaching a bottom guardrail involves reductions of between 5% and 10%, not 50% or more. Historically, the markets go up more than they decline, but when they decline, it can be in dramatic fashion. Having a strategy in place to address the income needs to accomplish the non-negotiable despite market conditions leads to greater confidence. You give yourself permission to spend within a range, and you stay nimble. Retirement doesn’t need to be all or nothing. A little flexibility keeps you in control.
3. Consider Guaranteed Income
This isn’t for everyone, but for some retirees, locking in a portion of income can be incredibly helpful. It’s interesting, most people love their pension (if they have one) and Social Security, but they hate annuities. But pensions and Social Security are annuities! The difference is psychological. Money in a portfolio is like the old saying, “A bird in hand is worth two in the bush.” People tend to value money at their disposal more than if it were turned into a lifetime direct deposit.
A product like a Single Premium Immediate Annuity, or SPIA, can create a guaranteed monthly paycheck for life. That’s money you don’t have to worry about. It shows up every month and doesn’t care what the stock market is doing. The trade-off is that you trade a portion of your total savings for a lifetime direct deposit and that’s what people tend to recoil from. For example, Steve and Jane want $1,000 per month on top of their Social Security payments to ensure that the essential bills are paid. They would have to put approximately $177,000 in a SPIA to receive that amount.
This kind of approach can reduce pressure on your investment accounts and make it easier to ride out market volatility. You’re covering your essential expenses with guaranteed income and using your portfolio for extras or long-term growth. Just be sure to understand the tradeoffs. In Steven and Jane’s example, that’s $177,000 that will never grow or lose value, since it will not be invested. Once they hand over the lump sum for the annuity, they usually can’t access it again. So, this works best when used for a portion of your income, not all of it.
What a Real Plan Looks Like
A real retirement income plan brings all these pieces together in a way that fits your life. Maybe that means delaying Social Security until age 70 so you lock in the highest possible benefit. You use your brokerage account to fund the early years and reduce your tax bracket. You build a cash reserve and draw from it when needed. You do a few Roth conversions each year to lower future taxes. You keep your spending flexible and maybe add a small annuity to cover your fixed expenses.
There’s no one-size-fits-all answer. The important thing is that it’s intentional and coordinated. The plan should adapt over time as markets change, your needs evolve, and new opportunities come up.
Final Thought
Retirement isn’t just about stopping work. It’s about discovering your next step on your journey. Replacing your paycheck in a way that gives you stability, control, and confidence eases the burden of determining that next step by giving you time to discover it. That doesn’t happen by accident. It takes a plan.
If you don’t coordinate your withdrawals carefully, you may end up paying more taxes than you need to or exposing yourself to unnecessary risk. And if the market turns against you early in retirement, the consequences can be hard to reverse.
You worked hard to build your wealth. Now it’s time to make sure it works just as hard for you. The right income strategy doesn’t just preserve your portfolio. It gives you peace of mind so that you can build new memories with those who matter. And that’s what retirement should be about.