
When we start investing in our retirement accounts – 401(k), IRA, Roth IRA – we keep in mind that the money eventually will be taken out and serve as an income when we stop working.
Those savings are our own and don’t come from the government or an employer. It’s not a guaranteed income as a Social Security or pension. It will only last as long as we plan for. So, when we start withdrawing money from our retirement funds, we should be careful and remember not to outlive our savings.
Most of us don’t have any idea how long we will live. We work hard and save as much as we can, so later we can enjoy our life in retirement. We feel proud and secure when we see how money starts accumulating in our savings account.
But surveys show that many retirees withdraw funds from their savings too quickly, with the potential result of running out of money before they die.
Recently I read that many baby boomers use their 401(k) money for buying vacation houses, new cars, or going on luxury vacations. The problem is that many retirees don’t have a strategy of how to draw down their retirement savings and just “wing it”. If you spend your retirement savings without a good plan or just “wing it”, your nest egg might not last for a few decades.
The decision of how to generate a retirement income and don’t run out of money before you die is the most difficult one. There are plenty of books and articles describing how to save and invest money, but not so many when it comes to how to withdraw them, in what order and how to make it last for the rest of your life.
That’s why I wanted to focus this post on retirement income-generating strategies. I wanted to share what I have learned about how to use your retirement savings for creating an income that hopefully lasts as long as you live.
How many sources of retirement income?

For most of us the retirement income will come from several sources:
- Social Security
- Pension (if you are lucky one)
- Work (full-time or part-time)
- Retirement accounts – 401(k), IRA, Roth IRA
- Other savings
Social Security and pension are considered a guaranteed income because they got paid as long as you live. The full-time or part-time income is paid by your employer if you are still working and stop coming in when you retire.
The money from retirement accounts and savings will become an important part of your retirement income and the one YOU have the most control over.
How to manage your retirement savings?
When you accumulated a good sum of money in your retirement accounts it’s so easy to start spending it without careful planning. If you run through your savings fast and have so many years to live left, you’ll be facing some hard choices. You will be facing the options of going back to work, cutting back your living expenses or maybe moving in with your kids or relatives.
There are a few ways to withdraw money from retirement accounts and make it last for long. While we’re working, most of us live paycheck to paycheck. So, if we stick to the same financial discipline in retirement it will help us to control and manage our savings.
Based on that experience, a good strategy will be to create a monthly paycheck coming from your retirement savings.
But how to determine the size of your monthly paycheck?
First, take a realistic look at your retirement assets and how much money you have saved.
Then, think about what kind of lifestyle you want to have in retirement, how much it will cost to maintain it and for how long.
Establishing your priorities and understanding the trade-offs of each option will help to balance your emotional and financial decisions.
How much money to withdraw from your retirement savings?

To determine how much to withdraw from your retirement savings is a critical decision. A simple withdrawal plan will help you to live comfortably and not to spend sleepless nights worrying about outliving your savings. But first, you need to figure out how much you will spend in retirement.
Do you know how much you will spend when you stop working?
Did you calculate how much you will spend on housing, transportation, utilities, groceries, medical and traveling?
Calculating your future expenses is an important part of retirement planning. The retirement expenses or I call it “your future spending plan” will help to determine how much to withdraw from retirement savings in addition to Social Security or pension.
A piece of good advice to remember that the more guaranteed income you have coming in, the less money you need to withdraw from your retirement savings.
Related Post: What Is the Source of Your Income in Retirement?
Once you set up your future spending plan, you need to figure out how to withdraw money from 401(k), IRA, Roth IRA, and other savings. There are several ways to take money out of retirement savings.
3 best ways to generate retirement income:
1. The 4% withdrawal rule
The 4% rule of thumb is the most popular method to withdraw money from a retirement account each year.
How does it work?
The idea behind this method is to calculate 4% of your retirement savings that are remaining on your retirement accounts at the beginning of each year and then divide it by 12. That calculated number will determine your monthly paycheck for the year. The next year you should do the same calculation.
For example, if you have saved $300,000, this means you could safely withdraw 4% or $12,000 per year or $1,000 monthly. When you start your calculations, don’t forget to adjust those numbers for inflation, because the inflation erodes our savings. Whatever our cost of living today it will double in 20 years.
Simple withdrawal calculations for nest egg of $300,000:
Year 1 = $300,000 x 4% = $12,000 (or $1,000 per month)
Year 2 = $300,000 – $12,000 = $288,000; $288,000 x 4% = $11,520 (or $960 per month); $11,520 x 3% (inflation rate) = $11,865 (or $988 per month with increase for inflation rate)
Year 3 = $288,000 – $11,865 = $276,135; $276,135 x 4% = $11,045 (or $920 per month); $11,045 x 3% (inflation rate) = $11,376 (or $948 per month with increase for inflation rate)
And so on…
Why so much calculations?
When you use the 4% withdrawal rule, you will tap into your portfolio income and principal. Your retirement portfolio might go up and down during the year. Yearly calculations will help to protect your assets from being drawn down fast.
This method will give you the flexibility to occasionally tap into your principal and access to your savings for emergencies, but the money may not last through your lifetime.
While a yearly 4% withdrawal rule might not be ideal and may require more active management of your savings, but it should give you a general ballpark of where to start.
2. Withdrawals from investment income – interests and dividends
If your retirement income from Social Security and/or pension is big enough to cover your living expenses, then you can just withdraw interest and dividends from your retirement portfolio.
This strategy will allow you to withdraw only investment income (interests and dividends) and don’t touch the principal. With this method, you will keep most of your principal invested and it should last for your lifetime.
You’ll still have access to your savings and generate a retirement income, but it will be much lower, than with a 4% withdrawal rule. However, if you want to use this method to generate a retirement income, you’ll need to accumulate a big enough portfolio.
How much capital do you need to have to generate $50,000 in annual income? The answer will be it all depends on your dividend’s yield, but generally speaking close to $1.3 million. And if you need to have only $40,000 in your annual income, the number of your capital will be smaller close to $1 million.
So, if you want to live off your interests and dividends generated by your investment portfolio without touching a principal you will need to save much more than 20%, and then invest aggressively. Unfortunately, most people don’t get into this group.
3. Annuity as a guaranteed retirement income

You can create a guaranteed retirement income by using a portion of your savings to buy an annuity. You can call it a DIY pension with a regular “retirement paycheck”.
How does it work?
You give a lump sum of your retirement savings to an insurance company and they promise to pay you a monthly income for life. Once you have your basic expenses covered by an annuity, you will gain peace of mind. Knowing that you have some financial security, you may want to invest your remaining money for growth, rather than worrying about how to stretch your savings for the rest of your life.
Annuities come in different size and shape:
- Fixed income rate and variable income rate annuities
- Lifetime annuity or Term annuity
- Deferred Annuity or Immediate Annuity
Gary from Super Saving Tips blog gave a very good and detailed overview of annuities and their features:
Are Annuities Good or Bad for Your Retirement?
I must admit that I am not a big fan of annuities because it comes with high fees and commissions. However, I like the idea of buying an immediate annuity with the portion of retirement savings.
The immediate annuity will pay you a fixed income for the rest of your life. Unfortunately, there is no inflation protection for an immediate annuity with a fixed monthly income.
If you want to find out how much lifetime retirement income your savings could buy, use The New Retirement Annuity Calculator:
What I am planning to do:
My plan is to buy an immediate annuity to cover our basic living expenses using one-third of our savings. I will keep one-third of our portfolio invested in stocks, so we will see our assets growing and get some inflation protection. The remaining part of our savings I will keep in cash, CD’s and bonds. When we retire, I can start using a 4% withdrawal rule to generate an additional income for our travels and hobbies.
Final thoughts
There is no right and wrong way to generate income from your retirement savings. It’s all depended on many factors like the size of your retirement portfolio, your living expenses, and the lifestyle you are dreaming about.
The problem is that we don’t want to deprive ourselves of certain luxuries when we stop working for a paycheck. We worked hard and waited for many years to live a nice life in our golden years.
So, if you are still 10 or more years away from retirement, I encourage you to stick to your budget, control your spending habits, and increase your savings. Those savings will help you to generate more income and provide you with safety and comfort in retirement.
Readers – What do you think? Have you thought about how to use retirement savings for creating a retirement income? Any thoughts on the annuities as a guaranteed retirement income?
The intent of this post is to be only educational and provide a simple guideline for a very complicated matter. I would recommend discussing your retirement income strategies with an accountant, financial planner or tax professional.
I like this list. But I would add real estate investments and part-time job. I think it works for early retirees who wants to keep busy and earn some extra income on the side. Also, real estate is a strong income producer, I don’t like to deal with tenants. An addition to that it requires big chunk of upfront money, but payoff can be a nice way to earn some income. However, I wouldn’t call it a passive income.
Glad you found this post helpful. Yes, real estate and part-time jobs are great addition to the list. Thank you for sharing your thoughts and ideas!