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An Investing Road Map for Retirees

Tips on asset allocation, Social Security, annuities, withdrawal rates, and more.

Colorful city scene with retirees crossing the street, one gazing at the sky, another in a wheelchair, while a woman shops at a store in the background.

Editor’s Note: A version of this article previously appeared on June 29, 2023.

Even retirees who are seasoned investors will tell you that transitioning from accumulating to spending from their portfolios is a challenge. The “right” withdrawal strategy seems to be a moving target.

Devising an asset-allocation plan that balances safety and liquidity with long-term growth is no mean feat, either. There are also psychological hurdles to jump over: After years of saving, transitioning into drawdown mode can feel a little bit scary.

Because mapping out a durable in-retirement investment plan can be so complicated, it’s crucial to do your homework. Read everything about retirement planning you can get your mitts on and sample a range of opinions from various online retirement calculators (the T. Rowe Price Retirement Income Calculator and AARP’s Retirement Nest Egg Calculator are two favorites). Also consider getting some guidance from an advisor on the viability of your plan and its positioning.

Above all, keep in mind that your in-retirement portfolio is a work in progress: The most successful retirement plans, while not overly complicated, need to change with the times and be responsive to changes in your own situation.

As you plot out your in-retirement financial and retirement plan, here are the key tasks to tackle.

  1. Protect and adjust your expenses.
  2. Take stock of and maximize your guaranteed sources of lifetime income.
  3. Decide whether—and how much—to annuitize.
  4. Don’t rule out doing some type of work.
  5. Lay a safety net.
  6. Stay flexible on the withdrawal rate front.
  7. Pay attention to tax matters.
  8. Rightsize your portfolio’s risk profile.
  9. Give due attention to your estate and portfolio succession plan.

Project and Adjust Your Expenses

As you enter retirement, it's valuable to compare your in-retirement budget with your ledger when you were working. If you were a heavy saver while in accumulation mode, taking savings off the table means that you're apt to need a much smaller sum than you did while you were working. For this reason, David Blanchett, formerly of Morningstar and now with PGIM, has found that higher-income workers' income-replacement rates in retirement are much lower than their lower-income counterparts'. Of course, your spending may rise in other categories, such as travel and healthcare, but it may be offset through lower expenditures on categories such as work transport and eating lunches out.

A budget is as valuable in retirement as it is while you’re working and saving, but it requires some discipline and a bit of artfulness: Aim to strike the right balance between minding expenses and counting every penny. In addition to employing a budget on an ongoing basis, look forward and anticipate major lumpy outlays in retirement, such as when you expect to need a new car and years in which you expect that your travel budget will run high. Such forecasting will help you determine if your portfolio’s withdrawal rate, discussed below, is realistic.

Take Stock of and Maximize Your Guaranteed Sources of Lifetime Income

The next step when plotting your in-retirement financial plan is to assess your guaranteed sources of lifetime income. For most retirees, Social Security will be their key source of guaranteed lifetime income; a small (and shrinking) share of the population will be able to rely on pensions that will provide them with an income stream during retirement.

Obviously, the greater the certain sources of lifetime income that you’ll bring into retirement, the less you’ll need to tap your investment portfolio (and the better its odds of lasting). Ideally, those certain sources of income will cover your baseline living expenses—housing, food, utilities, and healthcare/insurance costs. That underscores the virtue of maximizing those income sources.

Delaying Social Security, while not the right answer in every situation and perhaps a bit less of a no-brainer than it was before cash and bond yields began to rise a few years ago, is well worth considering. That’s especially true if your family and personal health history points to longevity. Delaying will mean forgoing benefits in the early years of retirement, but it will enlarge your eventual benefit—an advantage that will be with you for the rest of your life. And if you have a pension, give due consideration to taking benefits as an annuity rather than a lump sum. Pension benefits taken as an annuity often provide lifetime income at a cost that would be difficult to replicate on your own.

Decide Whether—and How Much—to Annuitize

Basic income annuities are another way to add a baseline of guaranteed lifetime income to your in-retirement plan; retirement researchers love them for this reason. With a very basic annuity, you hand over a portion of your assets to an insurance company; in return, the insurer pays you a stream of income throughout your lifetime. (These products are quite different from variable annuities, which are much more costly and much less transparent than income annuities.) There’s the side benefit that an annuity can take the guesswork out of at least that portion of a retiree’s income needs; that’s particularly valuable when you consider that cognitive decline and financial fraud are growing threats in the elderly population.

Yet as straightforward and transparent as basic income annuities are, the decision about whether to steer a portion of your investment assets into such a product is complex. There’s also the question about product type: whether to purchase an immediate annuity, from which payouts would commence right after purchase; a deferred annuity that starts paying out at some later date; a fixed index annuity; or some other product type.

Retirees with pensions supplying a healthy share of their income needs have much less reason to consider annuitizing a portion of their portfolios than investors without pensions. Ditto for retirees who expect that their life spans will be average or below average; they’ll tend to benefit less from the longevity-risk pooling that comes along with annuities. For investors with longer-than-average life expectancies whose Social Security payments won’t cover all of their fixed expenses, however, a plain-vanilla income annuity is worth considering. That’s especially true now that payouts have jumped up with higher interest rates.

Don’t Rule Out Doing Some Type of Work

The complexion of “retirement” is changing before our very eyes. Thanks to improvements in healthcare, many retirees are healthier and more active than their forebears. Moreover, many “retirees” aren’t fully retired at all but instead continue to work in some fashion into retirement. In fact, some of the biggest employment gains in the US in recent years have been among people aged 55 and over. According to a US Bureau of Labor forecast, people over age 55 will compose 25% of the workforce in 2024, up from 22% in 2014.

Working longer can be a win-win-win from a financial standpoint, reducing portfolio withdrawals and improving portfolio longevity, allowing for other financially beneficial decisions like delayed Social Security, and even enabling additional retirement-plan contributions later in life. Yet even as working longer is a worthwhile aspiration, the data show a disconnect between the percentage of preretirees who say they plan to continue working in some fashion through retirement and the percentage who actually do so. While eight in 10 workers in the 2019 Employee Benefits Research Institute Survey said they planned to work for pay in retirement, just 28% actually do. And while workers expect to retire at age 65, the median retirement age among retirees is 62 years old. More than four in 10 retirees retired earlier than they expected. Health issues—for the older worker, spouse, or parents—and/or untenable physical demands of a job can derail a goal to work longer, for example. Thus, it’s crucial to ensure that “working longer” isn’t central to the viability of your financial plan.

Lay a Safety Net

Protecting your financial plan through insurance and emergency funding is every bit as crucial—if not more so—during retirement than it is when you’re working. True, you can’t purchase disability insurance if you’re not employed; life insurance isn’t typically a must-have for retirees, either. But you’ll still need the basic property and casualty policies during retirement, of course, and you’ll also want to give due care to your healthcare elections. Most retirees will want to insure against heavy out-of-pocket healthcare outlays with a supplemental insurance policy alongside Medicare; Medicare Part D prescription drug coverage is also important.

If you haven’t purchased a long-term-care insurance policy at this life stage, you’re apt to have trouble qualifying for one, or the insurance could be prohibitively expensive. In that case, it’s crucial to consider how you would cover long-term-care needs should they arise. Lower-income retirees will be able to rely on Medicaid for their long-term-care needs if they’ve exhausted their assets, and very affluent retirees (with, say, more than $2 million in assets) may be able to self-fund long-term care without disrupting their financial plans. If you fall between those two extremes, however, consider setting aside a long-term-care fund, separate from the money you expect to spend during retirement, to cover long-term-care expenses that arise later in life. Retirees can multitask with such a “come what may” fund, using it to cover long-term-care expenses, cover them in case they should live a much-longer-than-expected life, or pass it to their heirs, whichever comes first.

And while you don’t hear much about it, holding an emergency fund is also important during retirement. While you’ll no longer need to worry about setting cash aside to tide you through unexpected job loss (and therefore your emergency fund can shrink), you’ll still want to set aside a cash cushion to cover unanticipated outlays like big dental or veterinary bills, or home and auto repairs.

Stay Flexible on the Withdrawal Rate Front

Your withdrawal rate—the amount you spend from your portfolio each year—is a crucial determinant of your retirement plan’s success or failure. But how to determine how much to take out without prematurely running out of money, while simultaneously ensuring a decent standard of living in retirement?

For years, many financial planners agreed that the 4% guideline is a reasonable starting point for portfolio withdrawals. The 4% guideline assumes that you withdraw 4% of your balance in year 1 of retirement, then inflation-adjust that dollar amount as the years go by. For example, a $1 million portfolio would support a $40,000 initial withdrawal; assuming 3% inflation, the retiree could take a $41,200 withdrawal in year 2, and so on. That’s the “base case” scenario we use in our annual “State of Retirement Income” research. And lo and behold, 4% was the safe starting withdrawal rate in this latest round of research.

But most retirees don’t spend the same amount, adjusted for inflation, year after year in retirement. Analyses of actual retiree spending shows that they tend to spend less throughout retirement. And in any case, being somewhat flexible with retirement spending generally allows for a higher starting withdrawal percentage and a higher lifetime withdrawal than a 4%-style guideline. We discussed several such dynamic withdrawal strategies in our latest retirement income research. These strategies generally call for reining in your spending if you encounter a market shock that depresses your portfolio’s value (especially if you encounter that market shock early on in retirement), while potentially taking out more in years when your portfolio is riding high.

Pay Attention to Tax Matters

Retirement planning would be so simple if we each came into retirement with a single investment account like a Roth IRA. Roth withdrawals are tax-free, and there are no required minimum distributions, either.

Yet thanks to the tax code, the reality will be far messier for most of us: We might have assets in Roth IRAs, but other assets in traditional tax-deferred and taxable accounts as well. In fact, the typical retiree today will come into retirement with most of her assets in traditional tax-deferred accounts like IRAs and 401(k)s. Distributions from these accounts are taxable upon withdrawal and are also subject to required minimum distributions; those withdrawals have the potential to bump you into a higher tax bracket.

One key concept when you begin drawing down from your portfolio is to first tap the accounts that are the least beneficial from a tax standpoint, while saving the accounts with the biggest tax benefits until later in your distribution queue. The standard withdrawal sequencing calls for RMDs, to the extent that you’re subject to them, to go first in the distribution queue, followed by taxable accounts, and traditional tax-deferred accounts. Roth assets, because they carry the biggest tax benefits, should go last. Of course, that’s just a basic framework; there may be plenty of situations when it makes sense to flout those rules.

Rightsize Your Portfolio's Risk Profile

For many retirees, the decision about how to position their investment assets across stocks, bonds, and cash seems hopelessly black-boxy, but it doesn’t have to be. Rather, use your anticipated spending needs from your portfolio to determine how much to invest in each asset class. This is the basic premise behind the Bucket approach to retirement portfolio allocation.

Under the Bucket strategy, portfolio spending for years 1 and 2 of retirement (above and beyond what you’re getting from Social Security, pensions, and the like) should go into cash; it won’t earn much, but nor will it run the risk of declining in value. Money for the intermediate years of retirement, say, years 3 through 10, can go primarily into high-quality bonds, which have higher return potential than cash without the possibility of dramatic downward swings that accompany stocks. Cash needs for the later years of retirement can go into stocks and other higher-risk/higher-return asset classes like low-quality bonds. My model Bucket portfolios include sample investment mixes for retirees with varying time horizons and risk tolerances.

Give Due Attention to Your Estate and Portfolio Succession Plan

Most retirees are well aware of the virtues of having at least a basic estate plan: powers of attorney for healthcare and financial issues, a will, and a living will. A qualified estate-planning attorney can help you draft these documents and think through your options. Also give due attention to your beneficiary designations on your various financial accounts, as these will supersede any bequests you’ve laid out in your will.

In addition to estate planning, it’s also crucial to give thought to succession planning for your portfolio. How would things run if you were unable to run them? Simplifying the moving parts in your portfolio—switching away from individual stocks and employing more broad-market index mutual funds, for example—is a worthwhile step, especially for older retirees. So is maintaining a master directory, a basic document that outlines your various financial accounts. Finally, consider bringing some financial help on board, whether it’s a paid advisor or a trusted adult child, to provide the basic outlines of your plan and to use as a sounding board for any major changes you’re considering. If for some reason you’re unable to manage your own assets at a later date, that person will know the outlines of your plan and could step in and manage for you.

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.

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About the Author

Christine Benz

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Christine Benz is director of personal finance and retirement planning for Morningstar, Inc. She is also the author of a new book, How to Retire: 20 Lessons for a Happy, Successful, and Wealthy Retirement (Sept. 2024, Harriman House). She co-hosts a podcast for Morningstar, The Long View, which features in-depth interviews with thought leaders in investing and personal finance.

Benz joined Morningstar in 1993. Before assuming her current role she served as a mutual fund analyst and headed up Morningstar’s team of fund researchers in the U.S. She also served as editor of Morningstar Mutual Funds and Morningstar FundInvestor.

She is a frequent public speaker and is widely quoted in the media, including The New York Times, The Wall Street Journal, Barron’s, CNBC, and PBS. In 2020, Barron’s named her to its inaugural list of the 100 most influential women in finance; she appeared on the 2021 list as well. In 2021, Barron’s named her as one of the 10 most influential women in wealth management.

She holds a bachelor’s degree in political science and Russian language from the University of Illinois at Urbana-Champaign.

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