The Retirement Income Process: Framing the Gap and Choosing a Strategy
From accumulation to distribution
Retirement income planning inverts the accumulation mindset. The question is no longer "how much can I accumulate?" but "how much can I safely spend, from which account, beginning when?" A workable process runs: (1) quantify the desired lifestyle; (2) translate it into a spending need using a replacement ratio, commonly 70–85% of pre-retirement income (lower for high earners, who save more and pay less payroll tax); (3) inventory guaranteed income - Social Security, defined benefit pensions, annuitized assets; (4) compute the income gap the portfolio must fund; (5) select a withdrawal strategy and stress-test it.
Floor-and-upside thinking
Separate essential (nondiscretionary) spending from discretionary spending. Essential spending is best matched to a guaranteed floor - Social Security, a DB pension, or a life annuity - because those sources are immune to market and longevity risk. Discretionary spending can be drawn from a diversified portfolio using a systematic withdrawal, bucket/segmentation, or guardrail approach. Longevity insurance (delaying Social Security, a deferred income annuity) is most efficient for the tail risk.
Traps
Candidates confuse an arithmetic average return with the compound return actually earned; treat a Monte Carlo "probability of success" as a guarantee; and forget sequence-of-returns risk, which is far more destructive in distribution than in accumulation. Another trap: assuming spending is flat in real terms. The "retirement spending smile" suggests real spending often declines through the 70s and rises later with health care.
Rule of thumb
A client earning $100,000 targets $80,000. Social Security provides $32,000 and a pension $12,000, leaving a $36,000 gap. At a 4% initial withdrawal rate, the portfolio must be roughly $900,000 ($36,000 ÷ 0.04).