How to Master the Retirement Income Trinity: Cash Flow, Longevity Risk and Tax Efficiency

Retirement should be a time we look forward to — those hard-earned years when we can relax after decades of dedicated work and enjoy life with minimal stress.

Yet, many people worry about retirement well before then for a variety of financially related reasons.

The 2025 Protected Retirement Income and Planning Study revealed that 30% of non-retired consumers ages of 61 to 65 consider delaying retirement, and 54% are fearful they'll outlive their savings.

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These statistics reflect the importance of income planning for retirement. Here are some reasons it's essential, as well as steps for how to address the key pieces of planning:

Building consistent cash flow

Many people in retirement are uncomfortable about spending, because for so long, they've had a steady paycheck and been in a save/accumulate phase. Switching to a distribution phase can be an unsettling mindset challenge, especially if you're worried about outliving your money.

However, a clear income plan helps you structure a reliable monthly or yearly cash flow so you can maintain your lifestyle without worrying that your savings won't last.

Keys to building cash flow:

Organize your budget. Investigate how much you spend on a monthly basis, and organize your expenses into two categories: necessary vs discretionary. Factor in that some retirement years will require more spending than others.

Early in retirement, for example, you might spend more on traveling or hobbies. There could also be big expenses, such as your children's weddings, new vehicles and, at some point, you might face large, unexpected expenses, including home or auto repairs. Keep building that emergency fund.

Analyze guaranteed income sources and assets. When laying out your income plan and focusing on cash flow, you should start by totaling your guaranteed income sources, such as Social Security, pensions, annuities, laddered government bonds and rental properties.

You can then determine how much you need to supplement your income with the assets you have saved.

Anticipate health care costs. Plan for potentially high health care costs in retirement, including insurance premiums, deductibles and long-term care. Since Medicare doesn't cover all medical expenses, you need to explore additional options.

Purchasing long-term care insurance can protect your savings, although it's best to buy it well before retirement, when premiums are lower.

Some hybrid policies combine life insurance or annuities with a long-term care rider. Health savings accounts offer tax advantages: Contributions are tax-deductible, funds grow tax-free, and withdrawals for qualified medical expenses are tax-free.

Pay down debt. Reduce or eliminate high-interest debt, such as credit card balances and mortgages, before retirement to free up more of your cash flow.

Managing longevity risk

People are living longer, and without an income plan, there's a real risk of outliving savings. Solid income planning accounts for different life spans and creates strategies to stretch assets.

Keys to managing longevity risk:

Delay Social Security benefits. Your monthly payout increases every year you wait past your full retirement age, up to age 70. That approach allows you a larger, inflation-adjusted income stream throughout retirement.

Leverage your pension plan. It's advisable in the longevity context to take the payout in guaranteed monthly payments rather than in a lump sum.

Consider annuities. These are insurance contracts that provide a guaranteed income stream for either a set period or for life.

Two examples are a deferred income annuity and a guaranteed minimum withdrawal benefit (GMWB). With the former, you pay a lump sum up front for income that starts at a future date. The GMWB provides a lifetime income floor, protected if the underlying investments perform poorly.

Diversify your portfolio. Doing so across asset classes such as stocks, bonds and real estate can help your money grow to keep pace with inflation while mitigating market volatility.

Income planning with a diversified portfolio balances growth and security, ensuring you're not overly conservative (risking inflation eating away at your purchasing power) or overly aggressive (risking big market losses).

Creating an income plan with long-term projections allows you to diversify your portfolio appropriately and ensures that you're allocated correctly, providing the income you need while in retirement. It also still allows you to grow your assets to meet the goals that you have set for yourself.

Creating tax efficiency

Retirement income often comes from multiple sources (Social Security, pensions, IRAs, investments, etc.). Coordinating withdrawals in a tax-efficient way can reduce tax costs in retirement and preserve wealth.

Required minimum distributions (RMDs), which for most people begin at age 73, can push you into a higher tax bracket, increase your Medicare premiums and lead to as much as 85% of your Social Security being taxed.

Keys to creating tax efficiency in retirement:

Roth conversions. While it's nice to build a large nest egg with a traditional, employer-sponsored 401(k), having a tax-deferred account can be costly in terms of taxes when you withdraw those funds in retirement.

However, consistently converting assets from a traditional 401(k) or other tax-deferred accounts to a Roth IRA or a Roth 401(k) — and, ideally, doing so during a series of years well before retirement — can save you a significant amount in taxes.

Though you must pay income tax on the conversions, withdrawals are tax-free if you're at least 59½ years old and have had the account for at least five years. Roth IRAs are not subject to RMDs.

Conventional withdrawal strategy. This approach involves withdrawing money in retirement first from your taxable accounts — brokerage accounts, CDs, bonds, savings accounts — while allowing your tax-free and tax-deferred accounts time to grow.

When you withdraw from taxable accounts, the growth in them is subject to capital gains, which are taxed at a lower rate than ordinary income. You only pay tax on the gains, not the principal.

Unlike tax-deferred accounts, which have RMDs, withdrawals from taxable accounts are voluntary, and you can choose when to sell assets, giving you control of your taxable income.

By withdrawing from taxable accounts first, you can delay taking from tax-deferred accounts and keep your ordinary income lower in the early years of retirement.

Your second group of withdrawals would come from tax-deferred accounts (traditional IRAs and 401(k) accounts). With Roth 401(k) and Roth IRA accounts being tax-free, save those withdrawals for last.

Proportional withdrawal strategy. Review your balances in different accounts, and take withdrawals from them each year in proportion to those balances. This is a way to balance your tax liability.

Conversely, if in one year you withdrew money solely from tax-deferred accounts, your taxable income could increase significantly.

Qualified charitable distribution (QCD). If you are age 70½ or older, you can donate up to $108,000 (for 2025) directly from your IRA to a qualified charity.

A QCD counts toward your RMD but is excluded from your taxable income, which can lower your adjusted gross income.

Organized and purposeful income planning for retirement gives you peace of mind, allowing you to meet expenses and maintain your desired lifestyle while protecting your assets and mitigating taxes.

It's how you can make your money work efficiently and fruitfully for you after decades of working so hard to retire and enjoy it.

Dan Dunkin contributed to this article.

The appearances in Kiplinger were obtained through a PR program. The columnist received assistance from a public relations firm in preparing this piece for submission to Kiplinger.com. Kiplinger was not compensated in any way.

This article is meant to be general and is not investment or financial advice or a recommendation of any kind. Please consult your financial advisor before making financial decisions.

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