After a lifetime of trying to save enough money for a financially secure retirement, your main financial strategy once you enter retirement will shift drastically: from wealth accumulation to wealth preservation and, to some extent, decumulation to meet your retirement spending needs. At this point in your life, your primary objective is to ensure your retirement assets last for as long as you live — or in other words, to make sure that you don’t outlive your money.

The concept of retirement planning can be difficult to understand, especially when it’s still decades away. Your version of retirement planning today may simply be setting aside a certain percentage of your paycheck each month into your employer-sponsored retirement account.

It’s important to understand that the sum of money in your retirement account(s) will eventually become your source of income during retirement. Below, we’ll share some tips to help you maximize that income.

Read more: How you should be thinking about retirement income

The retirement challenge

Most people will need a large sum of money to retire comfortably, meaning they must start saving consistently from an early age. Beyond the challenge of saving enough, there are several other considerations for future retirees.

Economic factors

First, there are several economic factors that can create challenges as someone prepares for retirement. The first challenge future retirees face is rising healthcare costs.

In 2021, the average healthcare spending per person was about $12,914, and the number is significantly higher for seniors.¹ If you plan your retirement income based on what you spend on healthcare in your 20s, 30s, or 40s, you might face financial struggles when your spending during retirement is actually much higher.

Another economic factor that can present a challenge for your retirement plan is inflation, which is the reduction in the spending power of a dollar. Inflation is to be expected, but it still has a negative impact on your retirement.

To give you an idea of how much inflation can affect your retirement plans, consider how much inflation has changed spending power in just the last couple of decades. To buy something that would have cost $100 in 2000, you would need roughly $182.34 in 2023.² If you’re planning your retirement spending based on today’s dollars, you may not end up with enough to meet your basic needs.

Longer lifespans

Another challenge facing retirees is long life expectancies. The average life expectancy in the U.S. has risen from 68 years in 1950 to 79 years in 2023, meaning the average person is living 11 years longer.³

Today’s longer lifespans mean people may enjoy more years of retirement than previous generations. However, it also means there are more years of retirement to save for.

The solution: Long-term financial planning

The best way — and perhaps the only way — to achieve a comfortable retirement today is long-term financial planning. By starting the planning process in your 20s or 30s rather than in the years leading up to your retirement, you can ensure you save the money necessary to achieve your desired retirement income.

Long-term financial planning for retirement includes several important components, including employer-sponsored retirement plans, Social Security, annuities, and more, each of which we’ll talk about in the next section.

Read more: Seven essential steps for retirement planning

Strategies to maximize retirement income

Your retirement income refers to the money you’ll receive each year from various sources, including Social Security, your 401(k) plan, pensions, annuities, and any other retirement funds you have set aside. It’s important to understand how to maximize your retirement savings and turn it into an income during retirement.

Understanding the Social Security system

Social Security may be the source of retirement income many people are most familiar with, so it may be the best place to start. Social Security is a program that was created in the 1930s to help create a social safety net and a source of income for seniors.

Each person can collect Social Security benefits during retirement if they (or their spouse) have collected 40 work credits, which is roughly 10 years of work. Someone’s earnings are based on their highest 35 years of earnings.⁴

Retirees can start collecting Social Security benefits starting at age 62 but at a reduced amount. The age at which you can collect your full benefits depends on when you were born. For individuals born in 1960 and later, the full retirement age is 67. Finally, if you delay your Social Security benefits until you reach age 70, you can collect an increased amount.

Workers may expect Social Security will support them during retirement, but that’s rarely the case: According to the Social Security Administration, the average monthly retirement benefit is $1,759.67.5 Depending on your situation, that may not be enough to maintain your current lifestyle.

And don’t forget, your Social Security benefits will be subject to income taxes just as any other income would be, which will further reduce your spendable income. The percentage of your Social Security income that will be subject to income taxes depends on your household income and marital status.

The 401(k) account

The 401(k) plan is the most common employer-sponsored retirement plan in the U.S. It allows workers to defer a portion of their income pre-tax, meaning the funds aren’t subject to income taxes. The money grows tax-deferred in the account until the worker withdraws it during retirement.

Many 401(k) plans also have a Roth option, which accepts after-tax contributions. However, any income and withdrawals will then be tax-free.

In 2024, workers can contribute up to $23,000 to their 401(k). If you’re 50 or older, you can contribute an additional $7,500 as a catch-up contribution. In addition to your own contributions, your employer can also contribute to your 401(k) account on your behalf. This is usually done as a matching contribution.

As you change jobs, you have the option of rolling your 401(k) over, either into your new workplace retirement plan or into an individual retirement account (IRA). While you can choose to cash out your account instead, it’s not advised to do so. Not only will you pay income taxes and early withdrawal penalties, but you’ll also be robbing your future self of retirement income.

Read more: How to understand your 401(k) plan

Other retirement accounts

The 401(k) is a common retirement account, but it’s not your only option. If your workplace doesn’t offer a 401(k) plan, you can achieve similar benefits using whatever plan is available. Examples may include a 403(b) plan or a 457(b) plan.

Additionally, you can save for retirement without the help of an employer using an IRA. Unlike other retirement accounts, an IRA is an account you open directly rather than through your employer. It’s a self-directed plan, meaning you choose all of your own investments.

In 2024, you can contribute up to $7,000 to an IRA, with an additional $1,000 catch-up contribution allowed if you’re 50 or older.

Understanding retirement withdrawal strategies

Saving for retirement is just one piece of the puzzle. In order to create a reliable retirement income, you must also consider your withdrawal strategy.

One of the most common withdrawal strategies is the 4% rule, which states that you can safely withdraw 4% of your portfolio in the first year, and then adjust that number each year for inflation. By following that rule, you should have sufficient retirement income for 30 years or more.

Other retirement withdrawal strategies include:

• Fixed-dollar withdrawal: Withdraw a fixed dollar amount each year for a specific number of years. After that period, re-evaluate and adjust for inflation.
• Fixed-percentage withdrawal: Withdraw a fixed percentage of your portfolio each year. The amount you can withdraw will fluctuate up and down with the market.
• Systematic withdrawal: Withdraw only the income — including dividends and interest — that your portfolio earns, leaving the principal intact.

When it comes to choosing the right withdrawal strategy for you, there’s not necessarily one right answer. A financial planner can advise you on which strategy is best suited for your situation. When choosing a strategy, you should consider the balance of your retirement assets, your expected years of retirement, and your desired annual retirement income.

And remember — during certain years, your retirement accounts will be higher than others. It’s normal for the market to fluctuate, and you may see your account balances decrease in some years and increase in others.

Investment considerations

Your retirement contributions aren’t simply placed into a savings account to sit until you retire. Instead, they’re typically invested in the market to potentially grow and offset the impacts of inflation. The type of retirement account you have and your account provider will determine what investment options are available to you. Generally speaking, retirement accounts may be invested in stocks, bonds, mutual funds, exchange-traded funds (ETFs), and more.

Each person’s investment strategy is personal to them. You can choose your own investments, use a robo-advisor to build a portfolio on your behalf, or hire a financial professional to build a fully personalized portfolio.

No matter what method you choose, a key principle of investing is building a diversified portfolio. The right asset allocation, though different for everyone, should include a wide variety of different investments and match your risk tolerance.

Generally speaking, your asset allocation will shift more conservatively as you get closer to retirement. Doing so will help you manage your risk to ensure the money is available when you need it during retirement.

Annuities as a retirement income solution

One option to help manage your retirement income is an annuity. An annuity is a contract between you and an insurance company. You make a lump sum payment or a series of payments to the insurance company in exchange for a guaranteed income stream.

An annuity is a popular retirement tool because it eliminates the risk of running out of money. Rather than pulling an annual income directly from your retirement accounts, you would purchase an annuity that would provide you with income payments, either for a set period of time or for the rest of your life, no matter how long or short that is.

Types of annuities

An annuity is an insurance contract that provides a guaranteed stream of income for a specified period or for life. There are several types of annuities to choose from and decisions to be made when purchasing one.

• Single vs. flexible premium annuity: A single premium annuity is one that’s funded by a single lump sum. For example, you might use your entire 401(k) balance to purchase an annuity when you retire. On the other hand, a flexible premium annuity is one that’s funded over a longer period in a series of payments.
• Fixed vs. variable annuity: A fixed annuity is one that pays your principal and a minimum interest rate to ensure your account doesn’t lose value. A variable annuity is invested and subject to market fluctuations.
• Immediate vs. deferred annuity: An immediate annuity starts payments immediately after it is funded. This type of annuity may be useful if you wait until retirement to purchase it. A deferred annuity, on the other hand, will begin payments at a later time.
• Lifetime vs. fixed period annuity: A lifetime annuity is designed to provide payments for the remainder of your life, whether that’s one year or 30 years. Once you pass away, the payments will end immediately. A fixed-period annuity has payments that last for a set number of years. If you pass away within that time, the payments will instead go to your beneficiary.

Pros and cons of annuities

Annuities have some advantages that make them a popular retirement income tool. However, there are also some disadvantages.

Advantages of annuities in retirement planning

• Steady stream of income: An annuity will provide a steady stream of income, similar to what you may be used to with a full-time job.
• Guaranteed income: An annuity guarantees your income, ensuring you won’t run out of money as you might if you manage your own 401(k) withdrawals.
• Customization: There are several ways to customize your annuity, including choosing between fixed versus variable rates, fixed-period versus lifetime payments, and more.
• Protection against market events: Some annuities can shield you from market fluctuations, a drop in the stock market won’t necessarily affect your retirement.

Drawbacks of annuities

• High costs: Some annuities have high upfront costs, which reduce your earnings later on during retirement.
• Complexity: Annuities can be difficult to understand, which can lead to someone signing up without really knowing what they’re committing to.
• No liquidity: Unlike other retirement plans, annuities are relatively illiquid, meaning you can’t simply pull more money out if you need it without penalties.
• Potentially small returns: Certain annuities may not match the market, meaning you may not see your returns match what you would have gotten in a 401(k).

How to choose the right annuity

Choosing the right annuity requires the same steps as choosing any other investment: research and due diligence. Because annuities come in so many forms, it’s important to explore your options and find one that works best for your situation.

It may be worth enlisting the help of a financial professional to choose an annuity, but proceed with caution when choosing the right one. Annuities typically pay high commissions to the advisors who sell them. It may be best to choose a fiduciary advisor, such as a Certified Financial Planner, who will recommend the product that’s in your best interest rather than just one that’s suitable and can help an advisor earn a high commission.

Common mistakes to avoid

As you’re making a plan to maximize your retirement income, there are some critical — and, unfortunately, common — mistakes to avoid.

Pitfalls of rigid adherence to the 4% rule

Many people use the 4% rule as absolute truth, but it shouldn’t be taken without a grain of salt. First, there’s not a single retirement strategy that works for everyone. No matter your situation, it’s important to explore your options to decide what’s best for you.

It’s important to consider the timing of your retirement when deciding how the 4% rule will apply. For example, many people retire at market peaks when their portfolios are elevated. But using the 4% rule when the market is at its peak could lead you to withdraw too much in future years when the market has declined.

Whether the 4% rule is appropriate for you also depends on other factors, such as your account balance, your age, your expected retirement years, and more. Some people may be better off withdrawing less than 3%, while others could safely withdraw more.

Overlooking the impact of inflation

As we’ve discussed, inflation will have a major impact on your spending power during retirement. If you save $1 million for retirement with a plan to retire in 25 years, that $1 million won’t go as far then. Instead, you might need more than you expect to maintain your current spending power and lifestyle.

Neglecting changes in life circumstances

Your life situation when you start saving for retirement is likely to look very different from your situation during your mid-life and retirement. It’s important to re-evaluate your retirement plan on a regular basis to ensure your retirement income is suitable for your lifestyle, family, health status, and more.

The danger of ignoring market volatility

Market volatility is inevitable, and you should expect your portfolio to experience it both leading up to and during your retirement. The last thing you want to do is have an emotional reach to a market downturn and sell your investments or drastically change your retirement plan.

On the other hand, not having any sort of plan for market volatility — especially once you’re already retired — could also be dangerous. A financial professional can help you make a plan for market volatility to help you weather any financial storms without acting impulsively.

Part-time employment and side hustles

It can feel daunting to save enough to last you for your entire retirement and then to properly manage it. After all, you don’t want to run out of money during retirement, but you also don’t want to spend so frugally that you can’t enjoy those years.

One solution many people turn to is part-time work during retirement. Working part-time during retirement has plenty of benefits. First, there’s the obvious benefit of additional income to help make your retirement a bit more comfortable. In addition to income, part-time work during retirement can also provide fulfillment. You can pursue work you’re passionate about while being an active member of your community.

You may be able to pursue a field you’ve always had an interest in but that didn’t make sense as your full-time career, or simply continue working in your current field. For example, one retired accountant may decide to pick up part-time work at the local garden center, while another may decide to take on a few clients during tax time.

Another potential benefit of working part-time during retirement is you may be able to delay your retirement Social Security benefits, allowing you to withdraw a greater monthly amount later on.

Reducing retirement expenses

Your income isn’t the only factor to consider when it comes to your retirement needs — you should also consider your expenses.

There are ways to intentionally reduce your spending during retirement. Some retirees choose to downsize their housing, moving from the large house they may have been living in into a smaller home, condo, or apartment.

Another way to manage your spending during retirement is to find ways to reduce your healthcare expenses. This could include having the appropriate health insurance coverage, as well as considering long-term care coverage to pay for higher potential costs.

Finally, budgeting is just as important during retirement as it is during any other phase of life. Creating a budget — and sticking to it — can help to ensure your retirement savings lasts as long as you need it to.

The bottom line

Many people give little thought to what form their income will come in during retirement. Sure, you set aside money in your retirement account each month. But how will that translate to income during retirement?

There are plenty of valuable tools that can help you save the funds needed for retirement, including a 401(k) plan, individual retirement account, and other types of retirement accounts. These funds can be used in combination with any Social Security earnings you expect to get.

Finally, it’s important to consider how you’ll access your funds during retirement. Will you purchase an annuity, use the 4% withdrawal rule, or something else altogether?

If you’re ready to start planning for retirement, consider using the Empower Retirement Planner. It allows you to run different scenarios, create a spending plan and anticipate large expenses to help give you the most accurate picture of your retirement. It can also give you an idea of how much you should save to reach your retirement income goals.