Saving for retirement is one step, generating income is another

Saving for retirement is one step, generating income is another

For many individuals, the path toward saving for retirement is often more straightforward than planning for sustainable income in retirement.

While an “autopilot” approach may be relatively effective for saving for retirement, managing income after retirement often requires deeper analysis and more ongoing maintenance. During the process of building retirement savings, following these general steps can generally lead to a positive outcome.

  • Save regularly, through payroll deductions preferably
  • Diversify retirement savings by establishing a well-diversified portfolio using asset allocation funds or investing in target-date funds
  • Maximize the tax benefits of contributing to retirement accounts
  • Stay on track through market cycles

Time: An opportunity and a challenge

The biggest challenge for most savers is accounting for longevity. The time horizon to save for retirement is generally known. The time horizon in retirement is not. In addition, it may not be easy for retirees to keep up with what they will need for retirement income. The decline in traditional guaranteed income sources like corporate defined benefit plans and an uncertain long-term outlook for Social Security may present challenges to generating sustainable income in retirement.

In general, people are living longer. Still, it’s hard to predict how long retirement will be. According to the Centers for Disease Control, a 65-year-old adult has a greater than 50% chance that they will live past age 85. (2018 data, most recent available). Retirees have less room for error since investing more aggressively to make up for shortfalls is not recommended. And going back to work may not be a viable option later in life.

When people choose to retire can also impact their chances of having enough income in retirement.

Consider this hypothetical example:

  • Individual retires with a portfolio balance of $1 million and withdraws 5% each year for income
  • The portfolio is invested in 60% stocks, 30% bonds, and 10% cash
  • Withdrawals are increased by 3% each year to account for inflation
  • After ten years of withdrawals, what is the remaining balance in the portfolio?

Portfolio balance remaining after 10 years of withdrawals

When you retire can impact savings

Source: Putnam research. Hypothetical portfolio assumes S&P 500 for stocks, Bloomberg U.S. Aggregate Bond Index for bonds, and U.S. 3-Month Treasury Bill Index for cash (no rebalancing). Assumes 3% annual inflation rate for withdrawals.

As illustrated in the example, retirees taking portfolio withdrawals in the beginning of 1980, 1990, and 2010 fared well. They received income from withdrawals over the first ten years, and the original portfolio balance of $1 million grew considerably. These retirees are well positioned for the rest of retirement. However, a retiree taking distributions in the beginning of 2000 faced a very different result. In this case, after accounting for withdrawals and market performance, the original $1 million portfolio declined by almost 50% over the first 10 years. Generating sustainable income over the remaining retirement years may be challenging in this case.

Planning for income

Establishing a plan for generating a sustainable income stream in retirement can be complex. Withdrawing too much too soon will clearly limit how long savings will last. Choosing an appropriate withdrawal rate is key, and monitoring ongoing distributions is critical. A financial advisor can help navigate this planning.

Withdrawal rates and sustainability

impact of withdrawal rates on savings

Source: Putnam research. This example assumes a 95% probability rate. These hypothetical illustrations are based on rolling historical time period analysis and do not account for the effect of taxes, nor do they represent the performance of any Putnam fund or product, which will fluctuate. These illustrations use the historical rolling periods from 1926 to 2020 of stocks (as represented by an S&P 500 composite), bonds (as represented by a 20-year long-term government bond (50%) and a 20-year corporate bond (50%)), and cash (as represented by U.S. 30-day T-bills) to determine how long a portfolio would have lasted given various withdrawal rates. A one-year rolling average is used to calculate performance of the 20-year bonds. Past performance is not a guarantee of future results. The S&P 500 Index is an unmanaged index of common stock performance. You cannot invest directly in an index.

Rising costs weigh on income

There are multiple factors that influence planning for retirement income distribution. They include varied sources of retirement income, the tax landscape, rising health care costs, and inflation.

Health care premiums, for example, have risen 136% over the past 20 years (Kaiser Foundation 2021). Tax rates are unpredictable but may very likely be higher than today.

Inflation — which recently reached levels not seen in decades — is top of mind for most savers as they consider the impact on the dollar’s purchasing power. Individuals may base their retirement projections on historical CPI data. But perhaps they may consider revisiting their calculations based on the current environment.

Seek expert advice

In addition to a review of retirement savings strategies, an advisor can help investors choose ways to optimize tax efficiency in retirement and generate sufficient income. To learn more about tax-smart investing and withdrawals in retirement, read our investor education piece, “Developing a tax smart retirement income strategy.” When and how to claim Social Security benefits is another important topic for investors. Understand how to get the most out of these benefits in “Five things you need to know about optimizing Social Security.”


Past performance is not a guarantee of future results.

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