How Much Retirement Income Do I Need? Build a Retirement Income Plan

One of the most important questions in retirement planning is also one of the hardest to answer: How much retirement income do I need?

The answer is not simply a percentage of your current salary.

Your retirement income needs depend on what you plan to spend, when you retire, how long you live, how much reliable income you receive, how much you have invested, how taxes affect your cash flow and how much flexibility you have when circumstances change.

Retirement income may come from several sources, including investment withdrawals, pensions, Social Security, CPP, OAS, other government benefits, rental income and continued employment.

The challenge is putting all of those pieces together into one coherent plan.

This article explains how to estimate your retirement income needs and how to build a retirement income plan that connects your spending, assets and sources of income.

Retirement Income Is Not the Same as Retirement Spending

Start by separating two concepts:

Retirement spending is how much money you need to support your lifestyle.

Retirement income is where the money comes from.

Suppose you want to spend $70,000 per year in retirement.

That does not necessarily mean you need $70,000 of withdrawals from your investment portfolio.

You might receive:

• $25,000 from a pension
• $20,000 from government benefits
• $5,000 from rental income
• $20,000 from investment withdrawals

In that simplified example, your total retirement cash flow could support $70,000 of spending while only $20,000 needs to come from your investment portfolio.

This distinction is fundamental.

How Much Should You Spend in Retirement?

Before calculating how much retirement income you need, you need a reasonable estimate of your retirement spending.

There is no universal retirement spending number.

Someone who plans to travel extensively may need substantially more income than someone who prefers a simple lifestyle.

Your housing situation can also make a major difference. A mortgage-free homeowner may have very different expenses from someone who expects to rent throughout retirement.

Healthcare, insurance, taxes, transportation, hobbies, travel, family support and other discretionary expenses can also vary widely.

Our guide How Much Should I Spend in Retirement? explores retirement spending in greater detail.

Start With Your Desired Retirement Lifestyle

Rather than starting with a percentage of your employment income, consider the lifestyle you actually want.

Ask yourself:

• Where will I live?
• Will I have a mortgage or rent?
• How much will I spend on travel?
• What hobbies will I pursue?
• Will I continue working part-time?
• Will I help children or grandchildren financially?
• What healthcare or insurance costs should I anticipate?
• How much flexibility do I want for unexpected expenses?

These questions help turn the vague idea of "retirement income" into an actual spending target.

Build Your Retirement Income From Multiple Sources

A retirement income plan often consists of several different sources.

Investment Withdrawals

Investment accounts may provide a substantial portion of retirement income.

Depending on your country and account types, these may include taxable investment accounts, cash savings, 401(k) plans, traditional IRAs, Roth accounts, RRSPs, TFSAs and other investments.

Each type of account can have different tax treatment and withdrawal rules.

The amount you withdraw each year also affects how long your investments may last.

Pension Income

A defined benefit or other pension can provide predictable income throughout retirement.

Pension timing matters.

Starting a pension at one age can produce a different income stream from starting it later.

Your retirement income plan should therefore model not only how much pension income you expect, but also when it begins.

Social Security

For Americans, Social Security can form an important part of retirement income.

The amount and timing of Social Security benefits can affect how much income needs to come from investments.

CPP and OAS

For Canadians, the Canada Pension Plan and Old Age Security can form important components of retirement income.

CPP and OAS should be considered alongside investment withdrawals, pensions, taxes and spending rather than treated as completely separate from the rest of the retirement plan.

Our guide CPP, OAS and Social Security explains how these government benefits can affect retirement planning.

Other Income

Retirement income can also come from other sources.

• Rental property
• Part-time employment
• Business income
• Annuity income
• Other recurring income sources

These sources may reduce the amount that needs to be withdrawn from investments.

Calculate the Retirement Income Gap

One useful way to think about retirement income is to calculate the gap between what you want to spend and the income you expect from reliable sources.

For example:

Desired retirement spending: $80,000

Pension income: $25,000

Government benefits: $20,000

Other income: $5,000

That leaves:

$80,000 - $25,000 - $20,000 - $5,000 = $30,000

The portfolio would therefore need to provide approximately $30,000 of annual income before considering the effects of taxes and other planning details.

This is much more informative than simply asking whether you have "enough savings."

Why Taxes Matter

Your retirement income target is ultimately about money you can actually use.

That means taxes need to be part of the calculation.

Two retirees could each receive $80,000 of gross income but have different amounts available for spending depending on where the income comes from, their tax situation and the rules that apply to their jurisdiction.

Investment withdrawals can also have different tax consequences depending on the account.

This is why a retirement income plan should consider taxes rather than simply adding up every source of gross income.

Learn more in How Taxes Affect Your Retirement Plan and Financial Freedom .

Gross Retirement Income vs. Spendable Retirement Income

One of the easiest mistakes to make is confusing gross income with spendable income.

Suppose your retirement plan produces $100,000 of gross annual income.

That does not necessarily mean you have $100,000 available to spend.

Taxes and other deductions may reduce the amount available for lifestyle expenses.

When building your retirement plan, focus on whether your income supports the spending you actually want after considering applicable taxes.

How Much Should Come From Your Investments?

Once you know your spending target and other income sources, you can determine how much your investments need to contribute.

This is where withdrawal planning becomes important.

The commonly discussed 4% rule can provide a useful starting point, but it is not a personalized retirement income plan.

Your actual situation may involve:

• Different retirement lengths
• Different spending patterns
• Taxes
• Pensions
• Government benefits
• Different investment allocations
• Changing withdrawal needs
• Changing market conditions

Read The NEW 4% Rule for a deeper discussion of why a fixed withdrawal percentage should not replace personalized retirement planning.

Withdrawal Strategy Matters

Knowing how much income you need is only part of the problem.

You also need to determine where that income comes from each year.

Someone with several different account types may have choices about which account to draw from first.

Those choices can affect:

• Taxes
• Future account balances
• Government benefits
• Future required withdrawals
• Estate value
• After-tax retirement income

This is why creating a tax-efficient retirement income plan is an important part of the larger retirement planning process.

Do You Need the Same Income Every Year?

Not necessarily.

Retirement spending can change over time.

You may spend more during the first years of retirement while you travel and pursue active hobbies.

Later, discretionary spending may decline.

Healthcare, support and other costs could then become more important later in life.

This means a retirement income plan does not necessarily need to assume one identical spending number for every year of retirement.

Testing different spending patterns can provide a more realistic picture of your financial future.

Retirement Income and the 4% Rule

The 4% rule is often used as a shortcut for estimating how much retirement income a portfolio might provide.

For example, a $1 million portfolio multiplied by 4% suggests an initial withdrawal of $40,000.

But that calculation does not account for your entire financial situation.

If you also receive $30,000 from pensions and government benefits, your total retirement income could be substantially higher than $40,000.

Conversely, if you need $100,000 of spending and your portfolio is your primary source of income, the required withdrawal could be much larger.

The important question is therefore not simply: "What percentage can I withdraw?"

It is: "How do all of my income sources work together to support the spending I want?"

Retirement Income and Your Financial Freedom Number

Retirement income is closely connected to your financial freedom number.

Your financial freedom number depends in part on how much income you need and how much of that income must be generated by assets.

If pensions and government benefits cover a large portion of your essential spending, your investment portfolio may need to provide less income.

If your portfolio must cover nearly all of your spending, your asset requirement may be considerably larger.

You can learn more about this relationship in How Much Money Do I Need to Retire? .

Retirement Income for Couples

Couples often have a more complicated retirement income picture than individuals.

Two people may have different:

• Investment accounts
• Pensions
• Government benefits
• Retirement dates
• Tax situations
• Life expectancies

A household retirement income plan should consider both people together.

One spouse may retire earlier while the other continues working.

One may begin a pension earlier while the other delays benefits.

These decisions can change the household's overall cash flow and portfolio withdrawals.

Retirement Income Before and After Government Benefits Begin

Retirement income can change significantly over time.

Imagine someone retires at 60 but delays certain government benefits until a later age.

The household may need more portfolio income during the first years of retirement.

Once those benefits begin, portfolio withdrawals may decrease.

This creates an important concept in retirement planning: the income gap may change over time.

Your plan therefore needs to look at income year by year rather than simply calculating one annual retirement income number.

Sequence-of-Returns Risk and Retirement Income

The timing of investment returns can become particularly important once you begin withdrawing money.

Consider two retirees who experience the same long-term average investment return.

If one experiences a major market decline early in retirement while taking withdrawals, the outcome can be very different from someone who experiences the decline later.

This is known as sequence-of-returns risk.

Your retirement income plan should therefore be tested against unfavorable market sequences rather than relying only on an average return assumption.

See Why You Should Test Your Retirement Plan Before You Retire and How to Stress-Test Your Retirement Plan for more on testing these risks.

How to Build a Retirement Income Plan

A practical retirement income plan can be built in several steps.

Step 1: Estimate Your Retirement Spending

Build a realistic estimate of what you expect to spend. Separate essential expenses from discretionary spending where possible.

Step 2: List All Income Sources

Include pensions, Social Security, CPP, OAS, other government benefits, rental income, employment income and other recurring sources.

Step 3: List Your Investment Accounts

Identify your taxable, tax-deferred and tax-free accounts and their current balances.

Step 4: Identify the Income Gap

Compare your desired spending with your expected reliable income. Determine how much must come from investments.

Step 5: Consider Taxes

Determine how taxes could affect the amount of income available for spending.

Step 6: Decide When Income Sources Begin

Model the timing of pensions and government benefits rather than assuming that every income source starts at retirement.

Step 7: Test Withdrawal Strategies

Compare different ways of drawing from your accounts and examine how those choices affect taxes, portfolio longevity and future income.

Step 8: Test the Plan Under Different Conditions

Test lower returns, higher inflation, higher spending, earlier retirement, longer life and market declines.

Step 9: Review the Plan Over Time

Your retirement income plan should evolve as your savings, spending, investments and circumstances change.

How Retirementize Can Help Build a Retirement Income Plan

Retirementize is designed to bring the different pieces of a retirement income plan together.

Instead of looking at investments, pensions, government benefits, taxes and spending separately, you can build a plan that considers how those elements interact.

You can enter your income, investment accounts, pensions, housing, spending and other financial information and then see how the plan develops over time.

Retirementize supports retirement planning for both the United States and Canada, including major retirement income sources such as Social Security, CPP and OAS.

You can also explore different retirement ages, investment assumptions, spending levels and other What-If scenarios.

This makes the question more useful than simply asking: "How much retirement income do I need?"

You can ask: "How can I build the retirement income I need from all of my available resources?"

Check Whether Your Retirement Income Plan Is on Track

Building the plan is only the beginning.

Your actual savings, spending, investment returns, income and retirement timing will eventually differ from your original assumptions.

That is why you should periodically ask whether your retirement plan is still on track.

Our guide How Do I Know If My Retirement Plan Is on Track? explains how to compare your actual financial progress with the original plan.

If something has changed, update the assumptions and test the plan again.

PLAN. IMPROVE. TEST. CONFIRM. REPEAT.

A retirement income plan should not be a static calculation.

It should be part of an ongoing process:

1. PLAN. Estimate your spending, income, assets and retirement timing.
2. IMPROVE. Look for ways to increase income, reduce unnecessary spending, improve tax efficiency or strengthen your assets.
3. TEST. Change retirement ages, spending, investment returns, inflation and other assumptions.
4. CONFIRM. Determine whether the plan can support the lifestyle you want.
5. REPEAT. Revisit the plan as your financial situation changes.

This approach recognizes an important reality: you are not planning one retirement income number. You are planning a financial system that needs to work throughout retirement.

Frequently Asked Questions

How much retirement income do I need?

The amount depends on your desired retirement spending, taxes, housing costs, lifestyle, retirement age, longevity and other circumstances. A useful starting point is to estimate your desired spending and then determine how much of that spending will be covered by pensions, government benefits and other income.

Does retirement income include Social Security, CPP and OAS?

Yes. Government benefits can be important sources of retirement income. Their amounts, eligibility rules and timing depend on the applicable country and individual circumstances.

How much retirement income should come from investments?

It depends on how much income comes from other sources. The amount your investments need to provide is generally the gap between your desired spending and the income available from pensions, government benefits and other sources, after considering applicable taxes and planning assumptions.

Is the 4% rule enough to create a retirement income plan?

The 4% rule can be a useful starting point, but it does not account for every part of an individual's retirement plan. Taxes, pensions, government benefits, spending changes, longevity and investment conditions can all affect the appropriate withdrawal strategy.

Should retirement income stay the same throughout retirement?

Not necessarily. Spending and income can change throughout retirement. Some people spend more during their early retirement years and less later, while healthcare or other expenses may increase later in life.

Why should I stress-test my retirement income plan?

Stress testing can show how your income plan responds to lower investment returns, higher inflation, increased spending, early retirement, longer life or market declines.

Fun Facts About Retirement Income

Build a Retirement Income Plan That Works Together

The question "How much retirement income do I need?" does not have one universal answer.

The better approach is to start with the life you want to live, estimate the spending required to support it and then build an income strategy around your available resources.

That means connecting your investments with pensions, Social Security, CPP, OAS, other government benefits, rental income and any other sources of retirement cash flow.

It also means considering taxes, withdrawal timing, longevity, inflation and investment risk.

Most importantly, it means testing the plan instead of assuming the first projection is the final answer.

Build your retirement income plan, play out different futures and see what your financial freedom could look like.

Retirementize lets you build a free retirement plan that brings your savings, investments, pensions, government benefits, taxes, spending and retirement timing together in one place.

Build Your Free Retirement Plan

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