The best way to turn retirement savings into income is usually a plan, not a single product: coordinate flexible withdrawals from investments with Social Security, any pension, taxes, required minimum distributions, and—if it fits your needs—contractual income from an annuity. Portfolio withdrawals keep more control and access to assets but expose you to market and longevity risk. An annuity can provide scheduled payments, sometimes for life, but may limit access to principal and relies on the insurer’s ability to pay.
Start with the income gap, not a withdrawal-rate rule
Retirement income planning begins with the amount your recurring income does not cover. List Social Security, pension payments, and other dependable income, then compare that total with your expected spending. The remainder is the amount your savings plan must help fund. Separate essential spending—such as housing, food, and healthcare—from discretionary expenses, because you may want more flexibility in the latter if markets or household circumstances change.
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There is no single withdrawal rate established here as safe for every retiree. A sustainable amount depends on spending, investment results, inflation, time horizon, taxes, other income, and how much flexibility you have. A plan that works for a household with a pension and modest spending may not work for someone who depends heavily on investments or expects a longer retirement. Treat a withdrawal percentage as a planning input to test, not a guarantee.
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Two broad approaches can generate income from savings: sell or withdraw from an invested portfolio over time, or exchange some savings for an annuity contract that pays periodically. They are not mutually exclusive. A retiree may keep most assets invested and use a smaller portion to secure a stream of contractual income, or may rely entirely on planned portfolio withdrawals. The appropriate mix depends on cash needs, comfort with investment fluctuations, desired access to assets, and household goals.
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Compare portfolio withdrawals and annuity income
| Planning question | Portfolio withdrawals | Annuity income |
|---|---|---|
| How payments are determined | You decide when and how much to withdraw; the amount your savings can support varies with spending, markets, inflation, taxes, and time horizon. | The contract specifies payment terms. Depending on the contract, payments may begin immediately or later and may last for a set term or for life. Investor.gov’s annuity overview. |
| Access to savings | Assets generally remain in accounts you can access, although selling investments may have tax and diversification effects. | Access may be restricted after annuitization or subject to surrender charges or market-value adjustments for early withdrawals, depending on the contract. |
| Exposure to risk | You retain market and longevity risk: poor investment outcomes or a long retirement can make it harder to sustain withdrawals. | A lifetime payout can address longevity risk, but the buyer gives up some flexibility and depends on the insurer’s claims-paying ability. Contract terms determine other risks, including inflation exposure. |
| Costs and protections | Costs depend on the investments, account, and transactions used; selling assets can affect portfolio diversification and taxes. | Contract charges, rider fees, surrender terms, payout guarantees, optional benefits, and insurer strength vary. Variable annuity values can fall with investment performance. |
| Survivors and inheritance | Assets still in the account may remain available to a beneficiary, subject to account and tax rules. | Joint-life and beneficiary options may be available, but selected payment features affect the contract and can change the income offered. |
This comparison is a framework rather than a personalized recommendation. Annuities are insurance-company contracts funded by a lump sum or series of payments in exchange for periodic payments. A contract’s benefits and limitations depend on its actual terms; do not infer inflation protection, survivor income, liquidity, or a particular guarantee from the word “annuity” alone.
Use portfolio withdrawals when flexibility matters
With planned withdrawals, you raise spending money from investment accounts over time. You can choose the timing and amount, change the plan as circumstances change, and retain access to assets that have not been spent. The trade-off is that the portfolio must support both spending and whatever investment risk you are willing to bear. Withdrawals during a market decline can leave fewer assets invested for a recovery, while inflation can erode the future purchasing power of a fixed dollar withdrawal.
Choose a cash-raising method deliberately
Before selling holdings, consider how a sale affects diversification and taxes. Investor.gov advises older investors to plan how and when to take money out, account for the effects of asset sales on diversification and taxes, and review the plan annually after preparing taxes. Its guidance is available in Older Investors. The point is not to sell a particular asset class first; the appropriate source depends on account type, holdings, current taxes, and your broader portfolio.
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Keep the spending plan connected to both essential and flexible expenses. If discretionary spending can be adjusted, that flexibility may help you respond to lower-than-expected returns or higher costs without treating the original withdrawal amount as fixed forever. Conversely, if most expenses cannot be delayed or reduced, the plan needs to account for that constraint when assessing how much income savings must supply.
Review rather than set and forget
A withdrawal plan is not a one-time calculation. Revisit it after preparing taxes and when household spending, health, markets, income, or goals change. Investor.gov offers an RMD calculator and Social Security benefit estimator among its free planning tools. These can support the work, but they do not replace checking your actual account details, tax circumstances, or plan terms.
Understand what an annuity does—and what it does not
An annuity can convert some savings into a stated payment stream. Immediate annuities typically start payments within a year; deferred annuities accumulate value before the payout phase. Depending on the contract, payments can last for a chosen period or for the annuitant’s lifetime. A lifetime payout can help address the risk of outliving assets, a risk that defined contribution account owners generally must manage themselves. A pension that pays for life serves a similar longevity-protection role. See Investor.gov’s guidance on managing lifetime income.
A lifetime promise is not the same as a government-backed guarantee. Contractual payments depend on the insurer’s ability to pay claims, so insurer financial strength matters. The amount and duration of income, access to funds, inflation adjustments, beneficiary treatment, and fees all depend on contract terms. Compare these features with your existing income and the flexibility you would give up before deciding whether a contract addresses a real gap.
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Deferred annuities may be fixed, fixed indexed, or variable. Their guarantees, participation terms, fees, investment exposure, and optional benefits differ. In particular, a variable annuity’s value can fall when its investment options perform poorly. Optional riders may add features and charges, while surrender provisions can make early access costly. Read the contract and, where applicable, the prospectus rather than relying on a sales summary. Investor.gov explains general annuity features at Annuities and variable-annuity risks at Variable Annuities.
Check the trade-offs before committing
- Liquidity: Find out how much can be withdrawn, when, and under what surrender charges or market-value adjustments. Understand what happens after payments begin.
- Inflation: Check whether payments are level or adjust, and how any adjustment is calculated. A fixed nominal payment may not preserve purchasing power as prices rise.
- Survivor income: Compare single-life, joint-life, term-certain, and beneficiary provisions actually offered in the contract. A feature that continues payments to another person can affect the payment amount.
- Costs: Identify contract charges, fees for optional benefits, and any surrender charges. Compare the full cost and terms with the value of the protection you are buying.
- Insurer claims-paying ability: Assess the insurer behind the promise; the contractual income depends on that insurer’s ability to pay.
- Taxes and account source: Ask how the annuity is funded and how distributions will be taxed. Tax treatment can vary by account and state.
Before buying or exchanging an annuity, compare the proposed contract with your current arrangement, read the contract and prospectus, and understand any surrender or tax consequences. Product features and fees vary; a replacement is not automatically an improvement just because it offers a new benefit.
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Build a mix around household needs
Portfolio withdrawals and annuities address different needs. Portfolio assets provide flexibility and potential access to principal, while a lifetime annuity may turn part of a savings balance into income that continues for life. Social Security and a pension may already cover some recurring expenses. The planning question is therefore not “Which one is best?” but “Which risks and cash needs remain after dependable income is counted?”
Match the approach to the job
- If preserving access to savings and adjusting withdrawals are priorities, a portfolio-based plan may fit better, provided you can tolerate investment and longevity risk.
- If the central concern is income lasting for life and you can accept reduced liquidity for the amount committed, consider whether a lifetime annuity contract addresses that concern on acceptable terms.
- If you need both predictable income and flexibility, evaluate whether a partial allocation to contractual income alongside invested assets meets both goals. Do not assume a particular allocation is universally appropriate.
- If legacy goals are important, compare the assets that may remain in a portfolio with the actual beneficiary or joint-life options in an annuity, including how those options change income.
These are decision prompts, not product recommendations. For each option, test what happens if spending rises, investment performance is weak, a spouse outlives the other, or health and care needs change. Consider whether the household could adapt, and which commitments would be difficult to reverse.
Account for taxes and required minimum distributions
Retirement income is not just a gross-dollar calculation. Traditional-account withdrawals are generally taxable except to the extent of previously taxed basis or another applicable tax-free distribution. Qualified Roth distributions can be tax-free. The account type and timing matter, so do not assume that a withdrawal sequence is tax-free or optimal for every household. The IRS summarizes required minimum distribution rules in its RMD FAQs.
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Know the age-73 starting rule and its exceptions
Under the IRS rules described in its current RMD materials, traditional IRA owners generally must begin required minimum distributions by April 1 of the year after turning 73, even if still employed. Many employer defined contribution plan participants have a similar rule, but a plan may permit a participant who is not a 5% owner to wait until retirement. Plan terms matter. The IRS provides an IRA versus defined contribution plan comparison chart; check the rule against your own account and current IRS guidance.
Plan the first RMD deadline carefully
You can generally postpone the first RMD until April 1 of the year after the year you reach the applicable starting age. If you do, the next year’s RMD is still due by December 31 of that same calendar year, so two distributions may be taxable in one year. RMD amounts generally use the account balance from the prior December 31 and a life-expectancy factor from IRS tables. A required distribution is an account-specific obligation; do not assume a distribution from one account satisfies another account’s RMD without verifying the applicable rules.
Owners of Roth IRAs and designated Roth workplace accounts generally do not have lifetime RMDs, although beneficiary rules apply. RMDs are generally taxable except for previously taxed basis or amounts eligible for tax-free treatment. Confirm deadlines, calculations, and tax treatment for each account rather than relying on a generic estimate.
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- Inventory income and expenses. List Social Security, pension income, other recurring income, essential and discretionary spending, and liquid reserves. Identify the gap that savings must cover.
- Map accounts and assets. Record each account type—taxable, traditional retirement, or Roth—and the investments held in it. Note any pension or annuity income already in place.
- Choose possible withdrawal sources. Identify which assets could fund spending, while considering how each sale or withdrawal may affect diversification and taxes. Do not assume one universal account order is right for everyone.
- Compare any annuity offer with a portfolio plan. Assess payment duration, liquidity, inflation terms, survivor benefits, charges, insurer strength, and tax consequences. Read the actual contract and prospectus, including surrender provisions and optional-benefit costs.
- Check RMD obligations account by account. Verify the amount and deadline for each applicable account, including whether a workplace plan permits a delayed start.
- Revisit the plan annually. Review it after tax preparation and when spending, health, markets, household income, or goals change. Use planning tools as aids, then verify results against account documents and current rules.
When to get individualized help
General guidance cannot determine a household’s best withdrawal amount, investment allocation, annuity, or taxable-versus-traditional-versus-Roth sequence. Those choices require details such as account balances, tax basis, spending, health and household circumstances, current contract terms, and applicable tax rules. Consider qualified financial, tax, legal, or insurance advice when comparing a complex annuity, evaluating an exchange, coordinating multiple RMDs, or deciding how a large withdrawal could affect taxes. Ask the professional to explain costs, conflicts, alternatives, and what assumptions drive the recommendation.
The useful outcome is a withdrawal plan that identifies where income comes from, which obligations must be met, what flexibility remains, and how often the plan will be reviewed. Keep the written plan with account statements and tax records so you can update it when the facts change.
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