Retirement Income Planning Playbook for Financial Advisors

The retirement landscape has changed dramatically over the past several decades.

Affluent retirees are living longer, and traditional pensions have declined in prevalence. Meanwhile, many retirees are ending their careers earlier than expected and before Social Security’s full retirement age.

All of these factors point to the value of retirement spending plans that are custom crafted for each investor.

This playbook outlines what you need to know about retirement income planning. We deliver resources and tools backed by Morningstar research to help clients move toward a comfortable retirement.

Potential dangers could lurk under the surface of even the most well-thought-out retirement plan. Being aware of these dangers can help people implement strategies to avoid them.

Here’s a closer look at the biggest risks to retirement plans.

One of the bigger pitfalls that new retirees face is sequence-of-returns risk, which is the risk that losses early in one’s retirement years will jeopardize their savings’ ability to sustain their spending through the end of their years.

What can financial advisors do?

• Review investment portfolio allocations. Bond exposure usually acts as a shock absorber, tamping down volatility and the risk of losses in earlier years, which in turn helps support a higher spending rate.
• Explore hypothetical investment scenarios with the help of Direct Advisory Suite. The interactive analysis tool illustrates the hypothetical performance of various proposed investments. These client-friendly reports let clients understand how their portfolios might perform in different market environments.

Inflation typically creates a permanent increase in the baseline cost of required spending. The rate of inflation may slow, but price declines are rare.

A spike in inflation early in retirement can be particularly dangerous, given that the cost impact ripples over a longer period. Inflation further in retirement has a more muted impact.

This upward price trend doesn’t present a problem for retirees who rely on Social Security as their sole source of retirement funding, because their paychecks include an annual cost-of-living adjustment to keep pace with inflation.

But for individuals who use portfolio withdrawals to cover additional expenses, it can create a significant challenge.

What can financial advisors do?

• Consider adding products like Treasury Inflation-Protected Securities or I Bonds to clients’ retirement portfolios for insulation.
• Advocate for spending cuts. Because retirees can’t predict how well their portfolio balances will recover over time, the most prudent approach would be to cut back on spending following a spate of high inflation—especially if it occurs early in retirement.
• Use a flexible spending approach, like forgoing inflation adjustments, to lower withdrawal rates in down markets.

Early retirement is an increasingly common scenario. While Social Security’s full retirement age is currently between 66 and 67, the average retirement age is 62, according to a MassMutual survey of 2,000 retirees.

Nearly half of the retirees surveyed by MassMutual said they had retired earlier than planned with commonly cited reasons including layoffs, being able to retire sooner than expected, or illness or injury.

Still, early retirement has significant implications for retirement spending. Longer drawdown periods necessitate lower spending to maintain a high likelihood of not running out later.

What can advisors do?

• Lower the starting withdrawal rate. In our base-case spending simulation, expanding the drawdown period from 30 to 35 years reduces the starting safe withdrawal rate from 3.9% to 3.5%.

Incurring sizable long-term care costs can have catastrophic effects on a financial plan. About 43% of baby boomers will incur long-term care costs, with the average cost of that care being $242,373, according to a recent Morningstar Center for Retirement & Policy Studies report.

The likelihood of needing care correlates with longevity. While just 24% of men and 27% of women who die at age 75 will require long-term care, 52% of men and 60% of women who die at age 95 will require long-term care.

What can advisors do?

• Set aside a separate long-term care “bucket," taking care to segregate it from their spending portfolios, using the average cost and duration of care to determine the right size for that bucket.
• Use home equity, either by selling the home or employing a reverse mortgage, to cover long-term care expenses.
• Build the cost of long-term care into the spending plan, spending less throughout retirement to account for the possibility of a spike in spending later in life.

The 4% withdrawal rule is a popular rule of thumb for how much retirees can pull from their investment accounts each year. Retirees would withdraw 4% of their total investments in the first year of retirement, then adjust that dollar amount for inflation each subsequent year.

However, history shows that the “right” withdrawal rate depends on a few key variables:

• The market environment over a client’s retirement.
• The length of the drawdown period.
• The cadence of retirement spending—for example, if retirees spend the same amount each year or if they spend more earlier in retirement.
• Portfolio asset allocation.

Morningstar’s 2025 retirement income research suggests that 3.9%, a minor downward adjustment from 4%, is the highest safe starting withdrawal rate for retirees seeking a consistent level of inflation-adjusted spending from year to year. Our projects assume a 90% probability of having funds remaining at the end of a 30-year retirement period. We estimate this withdrawal rate also applies to portfolios with equity weightings as high as 50% and as low as 20%.

Retirees with time horizons of less than 30 years can withdraw significantly more than the baseline assumption. However, safe withdrawal rates ratcheted down at a more modest pace for retirees with longer time horizons.

Retirees can withdraw up to 5.7% of their starting portfolio balance by adopting a more flexible approach. However, the right level of flexibility in a retiree’s spending system will depend on the individual's tolerance for spending changes, including the extent to which fixed expenses are covered by nonportfolio income sources.

Flexible strategies are effective because they help to prevent retirees from overspending in periods of market weakness while giving them a raise in stronger market environments. But adjustments create volatility in the retiree’s cash flows, which may also subject retirees to swings in their standards of living.

Advisors can add value for their clients by selecting a withdrawal system that incorporates the client’s preferences around cash-flow volatility (or lack thereof), lifetime spending versus leaving a bequest, and planned cadence of retirement spending (spend more early or spend less as retirement progresses).

A Treasury Inflation-Protected Securities ladder—a series of US Treasury bonds with staggered, fixed maturity dates—takes advantage of inflation-adjusted payouts to give investors a predictable source of retirement income.

This strategy is a self-liquidating portfolio, existing during a specific time horizon. For example, a 30-year TIPS ladder buys TIPS of various maturities, from one year through 30 years, then achieves a consistent real withdrawal rate by combining the yield paid by those TIPS with principal payments as each rung of the ladder matures.

When the 30-year period expires, so does the portfolio.

TIPS ladders deliver a few major benefits:

• A 100% success rate. Payments are guaranteed by the US government.
• Protection from inflation, as their payments are structured in real terms.
• Potentially attractive yields. Their safe withdrawal rates can sometimes exceed those provided by other investment portfolios. A 30-year TIPS ladder would support an inflation-adjusted 4.5% withdrawal rate, based on data as of Sept. 30, 2025.

On the downside, TIPS ladders are inflexible. Retirees who start down that path must either finish it or accept that changes they make along the way will ripple for the rest of the retirement period.

Taxes can further curtail starting safe withdrawal rates. All else equal, retirees with traditional tax-deferred accounts will need to withdraw more from their portfolios to match the same withdrawal from portfolios that have more favorable tax treatment. 

The retirees with all their portfolios in a Roth IRA, for example, will face a limited tax drag. Roth withdrawals are tax-free, provided the investor fulfilled the holding-period requirements. At the other extreme, retirees with 100% of their portfolio in a traditional IRA will see their withdrawals dwindle more significantly, and the tax costs are amplified if they’re in a high tax bracket. That’s because traditional IRAs are taxed as ordinary income. 

Limiting in-retirement taxes is complex. Many of today’s retirees have spent their working careers accumulating assets inside of traditional tax-deferred accounts like 401(k)s that will be taxable in retirement. People with low taxable incomes may be able to skirt taxes on tax-deferred account distributions, but most will owe at least some tax on their withdrawals.

Strategies like Roth conversions in the post-work, pre-required minimum distribution period, when taxes are typically lower for most retirees, and charitable giving can reduce a retiree’s lifetime tax bill. Additionally, careful attention to “asset location” during the accumulation and drawdown period can reduce the drag of taxes from investments with higher ongoing tax costs, such as fixed income assets and REITs.

Almost all retirees receive at least one form of guaranteed income, most commonly Social Security. For many households, it’s the largest cash source in retirement.

Retirees seeking the highest level of lifetime income should consider a combination of delayed Social Security filing and a flexible retirement spending approach.

The US Security Administration penalizes individuals who file before the “full retirement age” of 67 and rewards those who delay. After 67, the benefits increase by 8% a year until reaching a maximum of 124% at age 70. If your client waits until 67 to file for Social Security, by age 79, they’ll have already received more total benefits than those who filed at age 62.

The chart below illustrates the current benefit-payment schedule, highlighting how the timing of a claim can impact the size of monthly Social Security income.

Of course, delaying Social Security isn’t always feasible.

Retirees who stop working at 67 but delay claiming until 70 may need to bridge the gap with portfolio withdrawals.

In our research report, we tested three strategies:

• A three-year bond ladder using TIPs
• Forgoing inflation adjustments during down markets
• Spending less in the first three years of retirement

Our study finds all three bridging strategies delivered higher lifetime spending than claiming Social Security at 67, but at the cost of lower median ending balances.

More importantly, the trade-off of lower spending may feel significant for many new retirees. Early retirement is often the most active and expensive phase, when people want to travel or pursue long-postponed hobbies. For some, the idea of cutting back during those high-energy years to improve long-term outcomes may simply not be worth giving up those early joys.

The defined-benefits system has been slowly shrinking as employers move to offering defined-contribution plans, but the pandemic accelerated that transition. Active participant numbers declined 16% between 2020 and 2022, with many employers closing their pension plans to new employees. 

This is not to say that defined-benefits plans and their relevance will go away immediately. Nearly 30 million people are already receiving or will receive benefits from these plans in the future. Rather, it highlights the large population of individuals for whom retirement funds come from multiple sources.

An allocation to a simple immediate or deferred annuity can also help enlarge in-retirement cash flows. However, doing so early in retirement reduces the money in the portfolio that can compound over the retiree's drawdown period.

Single-premium immediate annuities distribute monthly payouts for the remainder of the retiree’s life, starting when they are purchased. Immediate annuities can simplify financial planning if their payouts, combined with Social Security, cover basic living expenses. In general, allocating part of a portfolio to an immediate annuity increases lifetime spending when paired with Social Security. However, it usually results in a lower ending balance after 30 years.

Deferred annuities begin their payments at a specified later date, often 10 to 20 years after retirement. Here, the long-term health of the insurer is arguably a greater risk than it is with immediate income annuities. That makes it important for retirees to assess the financial strength of the insurance company before purchasing.

One risk is that investors can’t trade in their annuity for cash after income payments have begun. Annuity payouts are also customarily nominal and not adjusted to rising costs of living, making them vulnerable to high inflation because their purchasing power decreases over time. Still, these payouts can protect against longevity and market risk.

Reverse mortgages pay out your home equity as cash. While reverse mortgages don’t require monthly repayments, borrowers can default if they fail to make property tax and insurance payments or keep their homes in good repair.

Foreclosure may be a big risk, but federal regulation of these loans has been tightened in recent years so it’s possible to use a reverse mortgage safely.

Direct Advisory Suite offers tools to build retirement income plans through defining client goals, analyzing diversified portfolios, creating reports, and more.

Our wide scope of data on key investment topics like annuities and target-date funds also gives advisors deeper insights into trends and performance, enabling you to deliver advice for each phase of clients’ retirement.

To truly support clients, financial advisors must identify a client’s personal objectives and preferences.

Different retirees often have diverse definitions of success, ranging from:

• Maximizing lifetime spending during retirement
• Maintaining a stable “paycheck equivalent” in inflation-adjusted terms
• Minimizing the chance of running out of money
• Leaving behind a large portfolio balance for charity or loved ones

Direct Advisory Suite lets advisors personalize recommendations based on a client’s goals. That can not only set clear expectations but also help clients stay focused on outcomes instead of numbers.

Our risk tolerance questionnaire allows advisors to assess and stress-test how much risk a client may handle, comparing their answers against a carefully controlled data set of more than two million other completions and then aligning the client’s risk profile to their portfolio through the Portfolio Risk Score.

Along with understanding investors’ values, advisors must conduct a thorough review of a client’s existing investment portfolio—ensuring that asset allocation and diversification align with their goals.

Direct Advisory Suite can make the process easier with time-saving experiences that help advisors deliver trusted recommendations. The software offers the opportunity for deeper assessments with capabilities like client profiling tools and side-by-side portfolio comparisons.