How to plan for retirement: Your step-by-step guide

In short: Retirement income planning is the process of estimating your expenses, mapping your income sources and deciding how to draw down savings so your money lasts. The five steps in this guide will help you build a steady income that can last 20 to 30 years — whether you're a decade out or are already drawing down savings.

Retirement income planning starts with three questions: What will you spend, where will your income come from, and how should you withdraw it over time? This guide walks through five practical steps to help you build a sustainable plan.

What does retirement planning actually involve?

Planning for retirement involves more than saving money. It means mapping where your income will come from, how much you'll need, how to draw it down efficiently and how to adapt when things change.

A complete plan addresses five things:

• Your projected living expenses in retirement
• Your income sources, both guaranteed and variable
• The tax treatment of your accounts
• Your investment mix as you approach and enter retirement
• A clear withdrawal strategy

Starting here will give you a strong foundation to build on.

1. How much money will I need each year in retirement?

Quick answer: Start with a first-year retirement budget. Split spending into essential and discretionary costs. Use your current spending as a baseline, then adjust for lifestyle changes, taxes, inflation, and healthcare needs.

Your spending may change over time, but begin with what you expect to spend in year one. It can help to group expenses into two buckets:

Essential expenses (needs)

• Housing: Rent or mortgage, insurance, taxes, maintenance. Factor in whether you plan to downsize, relocate or retire abroad.
• Daily living: Food, utilities, transportation, clothing, and other basics.
• Taxes: Withdrawals from some accounts are taxable. A portion of your Social Security retirement benefits may also be taxed, depending on your income.
• Healthcare: Often a major expense for many retirees. Medicare covers part of costs, but not all. Budget for premiums, out-of-pocket costs and the real possibility of unexpected health expenses as you age.

Discretionary expenses (wants)

• Travel, hobbies, entertainment, and other quality‑of‑life goals
• Gifts to family, such as education support for a grandchild
• Charitable giving

A common benchmark: many retirees need about 70% to 80% of their pre-retirement income each year. That gap is the number that drives the rest of your plan. It tells you how hard your portfolio has to work and how to structure your withdrawals.

A simple example: Say your household earns $100,000 a year before retirement. Using the 70% to 80% guideline, you might plan for $70,000 to $80,000 in annual spending early in retirement.

Now subtract your guaranteed income. If Social Security provides $30,000 a year and a pension adds $10,000, that's $40,000 covered. The remaining $30,000 to $40,000 is the gap your savings and investments need to fill each year.

2. What income will I have in retirement and how is it taxed?

Quick answer: List your income sources, then note how each is taxed. A mix of taxable, tax‑deferred, and tax‑free accounts can give you more flexibility over time.

Once you know what you'll spend, calculate what you'll have coming in. Retirement income typically comes from two types of sources.

• Guaranteed income sources include Social Security, pensions and some annuities. These pay out predictably, regardless of market conditions.
• Non-guaranteed income sources include 401(k) accounts, IRAs, brokerage accounts and other investments. Their value and income potential can rise and fall.

Your non-guaranteed income sources generally fall into three account types, and withdrawing from them strategically can help reduce taxes and support your income needs.

Withdrawals from tax-deferred accounts like a traditional 401(k) are generally taxed as ordinary income. Qualified withdrawals from a Roth account are typically tax-free. And brokerage accounts, which are fully taxable, may trigger capital gains.

Having assets in all three types of accounts gives you flexibility when managing taxes in retirement. The right balance depends on your situation, so it's worth a closer look as part of your broader income plan.

With your income mapped and the tax picture in focus, the next question is how to position your portfolio for the years ahead.

3. How should I invest as I approach retirement?

Quick answer: Your focus shifts from building savings to producing income that can last. Many people gradually add lower‑volatility assets, while keeping some growth potential to help meet long‑term needs.

As retirement nears, the goal moves from accumulation to income. That doesn't mean abandoning growth, but it does mean rebalancing your risk.

A few guiding principles:

• Reduce volatility gradually. Adding high-quality bonds and other lower-risk assets can help protect against a market downturn early in retirement, when your portfolio is most vulnerable.

• Keep some equity exposure. Your money may need to last decades. A portfolio that's too conservative may struggle to keep pace with inflation.

• Revisit your allocation regularly. The right mix at 60 may not be the right mix at 70. A financial professional can help you find the balance that fits your timeline.

There's a specific risk worth naming here. Sequence of returns risk is the risk that a market drop early in retirement does more damage than the same drop later, because you're selling investments while they're down. Structuring your withdrawals to avoid that pressure is one of the most valuable moves you can make.

4. How do I withdraw money so it lasts?

Quick answer: Build a withdrawal plan that turns your savings into a steady retirement paycheck. Start by covering essential expenses with reliable income, then layer in withdrawals from your portfolio and adjust over time.

Once you retire, one of the biggest decisions is how to turn your savings into income. A structured withdrawal plan helps you decide how much to take, which accounts to tap first and how to adjust when markets or expenses change. 

A straightforward approach has three steps:

• Cover essential expenses with reliable income. Start by matching your core expenses with predictable income sources like Social Security, pensions and certain annuities. This creates a baseline of income you can depend on regardless of market conditions.
• Use investments for flexible spending. Next, fund discretionary expenses with withdrawals from your investment accounts. The order you draw from these accounts matters (see section 2), so coordinating withdrawals can help you manage your taxes and extend your savings.
• Adjust as markets and life evolve. Your withdrawal strategy shouldn’t stay static. Reviewing your plan regularly helps you avoid withdrawing too much during market declines and keeps your income aligned with your needs.

A simple example: Dana covers most essential expenses with Social Security and a pension, then uses investment accounts for travel and other flexible spending. Because her basic needs are already met, Dana can reduce withdrawals during market dips.

Go deeper: Compare approaches in this guide to retirement withdrawal strategies.

5. How can I reduce expenses in retirement if I need to?

Quick answer: If spending rises or markets put pressure on your plan, focus on your largest expenses first, then make smaller adjustments to stay on track.

Even a well-built withdrawal strategy may need adjusting over time. The fastest way to rebalance a retirement budget: target your largest expenses first, then fine-tune the smaller ones.

Start with your biggest expenses

The most meaningful changes usually come from the largest categories in your budget.

• Housing: Downsizing, relocating or refinancing can significantly reduce ongoing costs.
• Healthcare: Reviewing coverage annually and planning for out-of-pocket expenses can help you avoid surprises.
• Transportation: Delaying a new vehicle purchase or reducing to one car can lower fixed costs.

Trim flexible spending where needed

Smaller adjustments can help fine-tune your plan without affecting your lifestyle as much. This might include scaling back travel in a given year, reducing subscriptions or being more selective about discretionary purchases.

Adjust alongside your withdrawal strategy

Spending and withdrawals should work together. In years when markets are down, reducing discretionary expenses can help limit withdrawals from your portfolio. In stronger markets, you may have more flexibility to spend.

Reducing expenses is about prioritizing what matters most. Aligning your spending with your goals can help your resources last longer and support the lifestyle you want throughout retirement.

Don’t miss these retirement planning basics

How does Social Security fit into the picture?

Social Security retirement benefits are the foundation of most retirement income plans. You can claim reduced benefits as early as 62, but waiting increases your monthly benefit. Per the Social Security Administration, delaying Social Security past full retirement age can increase benefits by about 8% per year until age 70.¹

The timing decision is personal. It depends on your health, your other income sources and whether you're still working. Because Social Security is guaranteed and inflation-adjusted, it’s often used to cover immediate, essential expenses.

How often should I review my retirement plan?

Review your plan at least once a year, and after any major life change. Expenses, taxes, markets, and healthcare needs evolve over time.

Meeting with a financial professional at least annually can help you confirm your assumptions, update withdrawals, keep your strategy aligned with your goals and help you adjust as you move through different stages of retirement.

Frequently asked questions

What is a retirement income plan?

A retirement income plan outlines how you’ll cover expenses after your regular paycheck ends. It includes your expected spending, income sources (like Social Security and investment accounts), and a withdrawal strategy. The goal is steady, reliable cash flow you can adjust as life changes.

How much money do I need to retire?

There's no single number, but a widely used benchmark is 70% to 80% of your pre-retirement annual income each year. Your figure depends on your lifestyle, where you live, your health and how long you'll be retired. A retirement readiness checklist can help you define your strategy and keep it on track.

What's the difference between guaranteed and non-guaranteed income?

Guaranteed income, such as Social Security, pensions and some annuities, pays out predictably no matter what markets do. Non-guaranteed income, such as 401(k) accounts, IRAs and brokerage accounts, can rise and fall with investment performance. Most plans include both.

How does healthcare affect retirement planning?

Healthcare is typically one of the largest retirement expenses, and it often grows faster than general inflation. Medicare covers a meaningful portion of costs, but premiums, copays, dental care and long-term care can add up quickly. Budget conservatively, consider supplemental coverage and build a cushion for unexpected health events.

How do I account for inflation in retirement planning?

Inflation reduces what each dollar buys over time. Many withdrawal strategies, including the 4% rule, build in annual inflation adjustments. During periods of higher-than-normal inflation, you may need to trim expenses, adjust withdrawals or keep some equity exposure so your returns can outpace rising prices.

Where can I check my retirement readiness?

A retirement calculator gives you a quick read on whether you’re on track. Enter your current savings, target retirement age, expected expenses and Social Security estimate to see a probability-based projection. Use it as a starting point and test different scenarios to spot gaps early.

Take the next step toward your retirement goals

The most important step in how to plan for retirement is simply starting. Build a plan that accounts for where you are today and where you want to be. In all likelihood, your situation will change throughout your career and into retirement, so review and adjust your plan regularly.

Whether you're five years out or already drawing down savings, a clear plan gives you the confidence to move forward. A financial professional can review your full financial picture, identify tax-saving opportunities and help you turn years of saving into income that lasts.

Ready to take the next step? Connect with a U.S. Bank wealth specialist for a no-obligation conversation about your retirement goals.