Retirement Income Strategies

Retirement income planning transforms accumulated wealth into sustainable income streams that must last potentially 30+ years. CFP professionals must understand multiple withdrawal strategies, asset allocation approaches, and the role of guaranteed income products in creating durable retirement income plans.

Systematic Withdrawal Strategies

Systematic withdrawal strategies provide regular income from investment portfolios. Each approach balances simplicity, inflation protection, and portfolio sustainability differently.

Flat Dollar Withdrawals

Flat dollar withdrawals provide a fixed nominal dollar amount each year:

Inflation-Adjusted Withdrawals

Inflation-adjusted withdrawals increase the dollar amount annually by inflation (CPI or fixed rate):

This approach maintains purchasing power but may stress the portfolio during extended low-return periods.

Percentage-Based (Performance-Based) Withdrawals

Percentage-based withdrawals take a fixed percentage of the current portfolio value each year:

• Advantage: Portfolio can never be fully depleted
• Disadvantage: Income varies significantly year-to-year
• Example: 4% of a $1,000,000 portfolio = $40,000; after a 20% decline, 4% of $800,000 = $32,000

This approach is self-adjusting but creates income uncertainty that may be psychologically difficult for retirees.

The 4% Rule and Modern Research

Traditional 4% Rule (Bengen, 1994)

William Bengen's original research suggested withdrawing 4% of the initial portfolio in year one, then adjusting that dollar amount for inflation annually. This provided a 30-year success rate through historical worst-case scenarios.

Updated Research for 2025-2026

Key Insight: Morningstar's forward-looking analysis uses current market valuations and return expectations, often yielding more conservative rates than historical backtesting. Both approaches have merit for different planning scenarios.

Factors Affecting Sustainable Withdrawal Rates

• Time horizon: Longer retirements require lower rates
• Asset allocation: Moderate equity exposure (30-50%) often optimal
• Spending flexibility: Ability to reduce spending increases sustainable rates
• Guaranteed income: Social Security and pensions reduce portfolio withdrawal needs
• Fees and taxes: Net returns after costs matter

The Bucket Strategy

The bucket strategy (or time-segmentation approach) divides retirement assets into three distinct "buckets" based on when the money will be needed.

Three-Bucket Framework

How Bucket Strategy Works

1. Draw from short-term bucket for annual living expenses
2. Replenish short-term bucket from intermediate bucket periodically
3. Refill intermediate bucket from long-term bucket when markets are favorable
4. Avoid selling equities during market downturns by using safer buckets

Psychological and Practical Benefits

The bucket strategy helps retirees:

• Weather volatility: Knowing 2-3 years of expenses are safe reduces panic selling
• Stay invested: Long-term bucket can remain in equities during downturns
• Manage sequence risk: Cash reserves prevent forced sales at low prices
• Budget effectively: Clear separation of near-term vs. long-term money

Rebalancing Considerations

Rebalance when:

• Short-term bucket falls below target (refill from intermediate)
• Long-term bucket significantly outperforms (harvest gains to replenish other buckets)
• Market recovery after downturn (opportunity to lock in gains)

Floor-and-Upside Approach

The floor-and-upside (or safety-first) approach separates retirement income into guaranteed and variable components.

The Floor: Essential Expenses Covered by Guaranteed Income

Goal: Cover non-discretionary expenses (housing, food, healthcare, utilities) with guaranteed income sources.

The Upside: Discretionary Spending from Portfolio

The investment portfolio covers discretionary expenses:

• Travel and entertainment
• Gifts and charitable giving
• Lifestyle upgrades
• Legacy goals

Benefit: If markets decline, discretionary spending can be reduced without affecting essential needs.

Annuitization Options

Single Premium Immediate Annuity (SPIA)

SPIAs convert a lump sum into immediate lifetime income:

Deferred Income Annuity (DIA)

DIAs purchase future income at a discount:

Qualified Longevity Annuity Contract (QLAC)

QLACs are a special type of DIA purchased with qualified retirement account funds:

Key QLAC Benefits:

• Reduces required minimum distributions before annuity payments begin
• Provides longevity insurance for advanced ages
• Couples can each purchase $210,000 QLAC
• SECURE 2.0 eliminated the 25% of account balance limit

Example: A 70-year-old purchases a $200,000 QLAC with payments beginning at age 85. That $200,000 is excluded from RMD calculations until age 85, reducing current taxable income while guaranteeing substantial income if the retiree lives to advanced age.

Sequence of Returns Risk Mitigation

Sequence of returns risk poses the greatest threat in the first 5-10 years of retirement. Mitigation strategies include:

Strategy Comparison

The "Retirement Red Zone"

The five years before and five years after retirement represent the highest-risk period for sequence of returns. Strategies to protect this critical decade:

1. Reduce equity allocation as retirement approaches (glide path)
2. Build cash reserves covering 1-3 years of expenses
3. Delay Social Security to maximize guaranteed income
4. Consider partial annuitization to create income floor
5. Maintain spending flexibility to reduce withdrawals if needed

On the CFP Exam

Expect questions testing your ability to:

• Compare systematic withdrawal approaches and identify appropriate strategies for different client situations
• Apply current safe withdrawal rate research (know both 3.9% Morningstar and 4.7% Bengen figures)
• Explain bucket strategy construction and rebalancing
• Distinguish floor-and-upside components and recommend income sources for each
• Evaluate annuity options (SPIA, DIA, QLAC) and their role in retirement income
• Identify sequence of returns risk mitigation strategies