Innovative solutions for building sustainable retirement income

Why traditional retirement income approaches have limits

The 4% rule for retirement was developed to estimate how much retirees could withdraw from an investment portfolio each year while reducing the risk of running out of money.

The idea is that you withdraw 4% of your portfolio during your first year of retirement and then adjust future withdrawals for inflation. For example, someone with a $2 million portfolio might begin by withdrawing $80,000 during their first year of retirement.

The challenge, however, is that planning for a sustainable retirement often requires more sophisticated income strategies.

• Life expectancy is increasing, according to the Centers for Disease Control and Prevention (CDC).¹
• Today's retirees may spend 25 to 30 years or more in retirement.
• Healthcare expenses continue to rise.
• Market returns can vary quite a bit from one decade to the next.

A 65-year-old retiring today may need approximately $314,000 to cover healthcare expenses throughout retirement if female and $275,000 if male.²

Many retirement income strategies now focus on more than just portfolio withdrawals. Instead, they combine guaranteed income sources, investments, insurance solutions, and ongoing planning to create a retirement income strategy that can adapt as life changes.

Consider building a retirement income floor first

Rather than solely following the 4% rule, a more modern retirement income strategy is to start by answering the question: What expenses absolutely need to be paid every month, regardless of what the market is doing?

These essential expenses often include:

• Housing
• Utilities
• Groceries
• Insurance premiums
• Healthcare costs
• Transportation

Some financial professionals recommend creating an income floor to cover these expenses using reliable income sources.

For most retirees, that floor begins with Social Security. Social Security was never intended to replace your entire paycheck, but it can provide an important foundation of guaranteed income. On average, Social Security replaces approximately 40% of pre-retirement income for the typical worker.²

Some retirees choose to strengthen that foundation further with an income annuity.

An income annuity converts a portion of retirement savings into a stream of guaranteed payments that can continue for a set period or for life, depending on the contract. This creates another source of income that isn’t directly tied to stock market performance.

Once you’ve covered your essential expenses with guaranteed income, the rest of your portfolio can stay invested for growth, discretionary spending, legacy goals, and unexpected expenses.

Bucket strategies can help organize retirement assets

Another popular retirement income strategy is the bucket approach. Instead of viewing retirement savings as one large portfolio, a bucket strategy divides assets based on when you expect to need the money.

For example:

• Short-term bucket (0–3 years): Cash, guaranteed income sources, and short-term reserves designed to cover near-term spending needs.
• Mid-term bucket (3–10 years): Bonds and other relatively stable investments intended to provide income and stability over the next several years.
• Long-term bucket (10+ years): Stocks and other growth-oriented investments designed to support future income needs and help offset inflation.

The short-term bucket helps cover current expenses and reduces the likelihood you'll need to sell investments during a market downturn. The mid-term bucket gives extra stability and income, and the long-term bucket remains invested for growth, so you have more time to recover from market volatility.

One of the biggest benefits of the bucket approach is behavioral. During periods of market volatility, it can be reassuring to know that near-term spending needs are already covered, allowing long-term investments more time to recover and grow.

Insurance solutions have evolved

In addition to investments, insurance can play a broader role in helping you plan for a sustainable retirement. For example, retirees can use certain types of annuities to help address multiple retirement income goals at once.

Income annuities can provide a stream of guaranteed payments designed to supplement other income sources in retirement.

Variable annuities can offer growth potential tied to the performance of underlying investments, but they also come with investment risk. Indexed annuities work differently. Interest is credited in part based on the performance of a market index and, depending on the contract, may also include features to help protect against market losses or provide future income.

Some retirees also use the cash value accumulated in permanent life insurance as part of their broader retirement strategy. Because cash value grows over time and isn't directly tied to market performance, it can give you more stable access to funds when needed.

Permanent life insurance may also continue to provide a death benefit for beneficiaries while offering access to accumulated cash value, subject to policy terms. Policy loans and withdrawals reduce the available cash value and death benefit.

Is a QLAC a good idea?

One challenge many retirees face is planning for longevity risk, which is the possibility of living longer than your retirement savings were originally expected to last. A qualifying longevity annuity contract (QLAC) is designed specifically to address that risk.

A QLAC allows you to use a portion of assets from certain retirement accounts to purchase future guaranteed income that begins later in life, often in your late 70s or 80s.³ Guarantees are backed by the claims-paying ability of the issuing insurance company. Eligibility requirements and IRS limits apply

Instead of receiving income immediately, you’re essentially setting aside money today to create income for your future self. For example, a retiree might use a portion of their retirement savings to purchase a QLAC at age 65. The income payments may not begin until age 80 or 85, depending on the contract.

Sustainable income planning also includes your legacy

A comprehensive retirement plan considers both sides of the equation: how you’ll create income throughout retirement and how your assets will ultimately be distributed.

For some retirees, preserving assets for a spouse, children, grandchildren, or charitable causes is an important goal alongside generating a sustainable retirement income. This is where retirement income planning and estate planning often intersect.

For example, some retirees choose to spend down investment assets during retirement while using life insurance to help provide a death benefit to beneficiaries. Or, they may choose to prioritize preserving certain assets while relying on guaranteed income sources to help support spending needs.

There isn’t a single right approach. By coordinating retirement income, protection strategies, and estate planning goals, retirees can build a plan that reflects what matters most to them and their families.

Frequently asked questions