What a Retirement Income Plan Looks Like, Step by Step

Clients often arrive with a number. "I have $2.4 million; can I retire?" The answer depends on things the number doesn't contain, and the whole point of a retirement income plan is to drag those things into the open. Below is the plan the way we build it, illustrated with a couple whose figures are typical of our clients. The couple is invented. The process is the one we actually use.

The couple

Mark and Elena, both 63, retiring at the end of this year. $1.8 million in traditional IRAs and 401(k)s, $400,000 in a taxable brokerage account, $200,000 in Roth IRAs, a paid-off home in Coral Gables. Mark's Social Security at 67 would be $3,600 a month; Elena's, $2,200. No pensions. They spend about $11,000 a month now and expect roughly the same in retirement, with travel replacing commuting.

Step 1: Spending, in two parts

First we separate essential spending (housing, food, insurance, health care, transportation, the stuff that doesn't stop) from discretionary spending (travel, gifts, dining, the stuff that can flex). For Mark and Elena, essentials run about $7,500 a month and discretionary about $3,500. Health insurance before Medicare, at 63 and 64, adds $1,800 a month to essentials for two years unless the ACA subsidy applies. Taxes get computed separately, on top.

The split matters because the two parts are funded differently. Essentials should be covered, as far as possible, by income that doesn't depend on markets. Discretionary spending is what the guardrails adjust.

Step 2: Guaranteed income

Social Security is the couple's only guaranteed income, so the claiming decision is the first big call. We model claiming at 63, 67, and 70 for each of them. For Mark, the higher earner, delaying to 70 produces $4,464 a month (in today's dollars) and, more importantly, the survivor benefit Elena would receive for life. For Elena, claiming at 67, or somewhat earlier, is reasonable because her benefit disappears at the first death anyway. The claiming analysis shows the household's lifetime and survivor outcomes under each combination, and the couple lands on Mark at 70, Elena at 67.

From 70 onward, Social Security of about $6,700 a month covers nearly all essential spending. The portfolio's job is discretionary spending, taxes, and the seven-year bridge until then.

Step 3: The bridge years

From 63 to 70 the portfolio supplies everything: $11,000 a month of spending, health insurance, and taxes. That's roughly $150,000 a year before tax, which is a high withdrawal rate against $2.4 million. It's also temporary by design. The plan draws from the taxable account first (low tax, and it keeps AGI down for the ACA subsidy at 63 and 64), then from the IRAs in amounts sized to the bracket.

Those years are also the Roth conversion window. With no Social Security and modest withdrawals, the couple's taxable income is low, so each year the plan converts enough from the IRAs to fill the 12% bracket, or the 22% bracket in years when the projection supports it, staying under the IRMAA tier from age 63 onward. Over seven years, roughly $500,000 to $700,000 moves from traditional to Roth at rates far below what RMDs would have forced at 75.

Step 4: The withdrawal order

For each year, the plan says which account funds spending and in what order: taxable first while the ACA subsidy matters, then a mix of IRA withdrawals up to the bracket target with Roth withdrawals for anything above it, then RMDs from 75 (the couple was born after 1960) with Roth and taxable filling the rest. The withdrawal order isn't a fixed rule. It gets recomputed every year from the tax projection.

Step 5: The bond allocation and the portfolio

The bond portion is sized to the next seven years of withdrawals the portfolio has to make. For Mark and Elena that is the whole bridge to Mark's Social Security at 70, a little over $1 million, so the portfolio starts at about 55% stocks and 45% bonds. The bonds are all U.S. Treasuries, a mix of short-term and intermediate Treasuries and TIPS, with a Treasury ladder for the bridge years if they want dates matched to dollars. The stocks are low-cost, globally diversified funds. The whole thing is managed as one allocation and rebalanced by rule, with each withdrawal taken from whatever is above its target, so a bad year for stocks is paid for out of bonds. A few months of spending sits in a Treasury money market fund so the monthly transfer never waits on a trade. Asset location puts the bonds in the IRAs and the stocks in the taxable and Roth accounts. Once Social Security starts, the draw drops sharply and the bond share comes down with it at the next annual review.

Step 6: The projection

All of that runs through a year-by-year projection to age 95 for the survivor: income, withdrawals by account, taxes by year including Social Security taxation and IRMAA, portfolio balances, and the estate at each spouse's death. The base case uses conservative return assumptions. Then we beat it up: a 30% decline in year one, a decade of returns two points below assumption, one spouse living to 100, a $400,000 long-term care need at 85. The plan gets adjusted until it survives all of that with essential spending intact, even if discretionary spending has to flex.

Step 7: The rules

The plan ends with written rules. The guardrail that cuts discretionary spending if the portfolio falls below a threshold, and the one that raises it above another. The rebalancing bands. The annual tax exercise in December: conversions, gain harvesting, the withdrawal for next year. The Medicare calendar at 65. The survivor plan: what changes at the first death, in income, taxes, and accounts. The rules are what turn a projection into a plan.

What Mark and Elena got

A month-by-month funding schedule for the first year, an account-by-account withdrawal order, a Social Security claiming date for each of them, a Roth conversion target for December, the retirement allocation in place before the last paycheck, and a document that says what happens if the market drops 25% in March. The answer to "can we retire" was yes. But the value was in the hundred decisions behind the yes, most of which they hadn't known were decisions.

How we do it

This is the retirement income planning process for every client, adjusted for pensions, rental income, business sales, or whatever the household actually has. It's updated every year, and the plan that matters is always the one for the next twelve months, built on a projection that runs for thirty.

Frequently asked questions

Joseph G. Valerio, CFP®, EAFounder and Lead Advisor at Valerio Wealth Management, a fee-only, fiduciary virtual family office in Miami, Florida. One advisor, credentialed in both financial planning and federal tax. About Joseph

This article is general education, not individualized advice, and it is not tax, legal, or accounting advice. Figures reflect federal law for the year stated and can change. Valerio Wealth Management does not prepare or file tax returns. Speak with a qualified professional about your own situation before acting.