Retirement Income Strategies for the Long Haul

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Retirement — and the shift to relying on retirement income — marks a crucial change in your financial life. Sure, you can now stop spending so much on new suits and long commutes. However, retirement is when you transition from having a regular paycheck to relying on your investments for income. While this shift may be easy to grasp conceptually, it can be far more challenging to implement as you develop a retirement plan.

"If this isn't done with care, retirees can deplete their savings, particularly if they live longer than expected, which can lead to the risk of running out of money before running out of life," says Anthony Saccaro, president at Providence Financial & Insurance Services.

So, how do you create what amounts to a paycheck in retirement that will last as long as you do? Here are five of the top ways to generate a reliable income in retirement for the long haul.

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1. Retirement income by the bucket strategy

One of the most common strategies experts recommend for a reliable income in retirement is the bucket rule. The idea is to allocate your savings among three buckets: a now bucket, a soon bucket and a later bucket.

"The now bucket holds the money you need for your monthly bills and any 'big ticket' items you intend to purchase over the next two years, like a new car or kitchen remodel," says James Comblo, president and CEO of FSC Wealth Advisors, LLC. "This money is kept safe in a place like a bank where we know it’s reliable and liquid."

You should have enough liquid funds in this bucket to cover three years' worth of expenses after accounting for reliable income sources like Social Security or annuity payments, says Chris Boyd, senior vice president and financial advisor at Wealth Enhancement Group.

For example, if you spend $100,000 per year and get $50,000 from Social Security, you should have three times $50,000, or $150,000, in your "now bucket."

"This should be enough to weather most financial storms before tapping other assets, which are more prone to fluctuation in price," Boyd says.

The "soon bucket" is for money you'll need in the next two to 10 years. This bucket is invested conservatively with the goal of earning more than a bank offers, while minimizing exposure to volatile assets. Think primarily bonds with minimal — or no — stock exposure.

Finally, the "later bucket" is where you invest for the long term. With retirements lasting upwards of 30 years today, it's essential to have some growth components to your savings.

"With these funds, we expect fluctuations in value but in keeping with our ultimate tolerance for risk," Boyd says. "From this bucket, we will expect more capital appreciation than from our other locations."

Over time, you'll replenish your now bucket from your soon bucket, and your soon bucket from your later bucket. But keeping all three in place helps ensure your income needs are covered for today, tomorrow and decades into the future.

2. Dividend stocks and bonds

For reliable income in retirement, you want to lean on income-producing investments, such as dividend stocks and bonds.

"Interest and dividends are renewable resources that can provide a steady income without the risk of depleting the principal," Saccaro says. Living off of dividends and interest lets you avoid needing to sell shares to generate income, "which significantly reduces the risk of running out of money."

You can do this by owning individual dividend stocks and bonds, or through retirement income funds. The latter has the advantage of better diversification, which can be especially important when you rely on dividends because these are not guaranteed.

A company can reduce or cut its dividend at any time. By using a fund with many different dividend stocks, you're less at risk of a single company's dividend cut greatly impacting your retirement income.

If you choose to use individual stocks, Boyd cautions against yield chasing. The highest-yielding companies, whether in dividends or bond interest, tend to be at the highest risk of not getting paid. Instead, look for more moderate and reliable yields.

3. Diversified income streams and taxes

The impact of taxes during retirement, both at the state and local as well as federal levels, is something that isn't addressed enough, Comblo says. Moreover, are you sitting down? "It’s our belief that tax rates may be double their current levels in 10 years," according to Comblo.

This makes it crucial to have methods for managing taxes from retirement income. The best way to do this is to give yourself options.

Not all retirement income sources are taxed the same. Most interest income and withdrawals from pre-tax retirement accounts are taxed at your ordinary income rate.

Capital gains from selling an investment at a profit are taxed at lower capital gains tax rates. Some dividends also qualify for capital gains tax rates. Meanwhile, some interest, such as that from municipal or government bonds, may be exempt from federal and/or state taxes.

Then there is the holy grail of retirement income: Roth accounts, which provide tax-free income.

The more diversified your income streams, the more strings you'll have to pull in managing your taxes in retirement.

4. Use annuities for guaranteed income

You can also think of diversifying your income streams between guaranteed and variable income sources. Interest and dividends are variable income streams because these rates can change. This makes them less than ideal for covering necessary living expenses.

A better strategy is to create enough guaranteed income streams to cover your necessary expenses, then let variable income sources provide for your other costs, like an annual vacation.

Social Security is one source of guaranteed income, but it's often not enough to cover all of a retiree's expenses. This is where annuities come into play.

Annuities often receive a bad rap for their high fees, but they can also provide a guaranteed income for life. "The key advantage of annuities is that they often provide more guaranteed income per dollar invested than most other financial vehicles," Saccaro says. "This makes them an appealing choice for retirees who value security and want predictable, lifelong income."

There are many different types of annuities, each providing a distinct level of control and income. Given their complexity, it's often best to work with a financial adviser who can guide you in choosing the right option for you.

"The drawback of annuities is that they are generally illiquid, so they are better suited for those seeking certainty in income over flexibility in withdrawals," says Justin Haywood, president and co-founder of Haywood Wealth Management.

5. Part-time job

This may not be the answer you were hoping for, but sometimes, the best way to generate reliable income in retirement is to work for it.

Older Americans are increasingly choosing to work in their golden years. Nearly 20% of Americans aged 65 and older worked in 2023, according to the Pew Research Center. This is almost double the number of people who worked 35 years ago.

A part-time job in retirement or a side gig can provide that reliable income stream you're after. It can also help you avoid withdrawing too much from your investment portfolio early in retirement. Your portfolio may not be able to recover from a large withdrawal too early into retirement (a lamentable occurrence known as the sequence of returns risk), making it more likely that you'll run out of money later on.

As an added bonus, a part-time job may provide health insurance, which can be particularly helpful for early retirees who are too young for Medicare.

"For many, if they were not at work, they would likely be out spending more, so the benefits of continued work, to whatever extent appeals to them, helps reduce spending, increase income and delay drawdown of their investments," Boyd says.

Coryanne Hicks is an investing and personal finance journalist specializing in women and millennial investors. Previously, she was a fully licensed financial professional at Fidelity Investments where she helped clients make more informed financial decisions every day. She has ghostwritten financial guidebooks for industry professionals and even a personal memoir. She is passionate about improving financial literacy and believes a little education can go a long way. You can connect with her on Twitter, Instagram or her website, CoryanneHicks.com.