A retirement paycheck usually comes from mixing guaranteed and market-based income, then drawing from them in a tax-smart order. Here’s a practical framework to build pensions, Social Security, investments, and cash reserves in 2025.
1. Start with your guaranteed base
Add up pensions and Social Security, these are your needs money for housing, food, insurance. If you delay Social Security beyond your full retirement age, your benefit rises by up to 8% per year until age 70 via delayed retirement credits, permanently boosting your monthly check.
If your pension offers choices, compare options against your household needs and other assets. For taxes, pension/annuity payments are generally taxable to the extent you don’t have an after-tax basis in the contract.
2. Layer investment accounts by tax type
After guaranteed income, fill the gap from tax-deferred (traditional IRA/401(k)), Roth (Roth IRA/401(k)), and taxable brokerage accounts.
● Tax-deferred accounts: Withdrawals are ordinary income and subject to Required Minimum Distributions (RMDs); the first RMD can be delayed to April 1 of the following year.
● Roth IRAs: Qualified withdrawals are tax-free and Roth IRAs have no lifetime RMDs for the original owner.
● Taxable accounts: Dividends/interest are taxed annually; long-term capital gains may be taxed at preferential rates. Using taxable assets early can help manage future RMD-driven tax spikes.
3. Choose a withdrawal method that can flex
The classic 4% rule has evolved. Recent research suggests a 3.7% starting withdrawal rate for a typical 30-year horizon, with better outcomes when you stay flexible. Consider guardrails or floor-and-upside approaches rather than a rigid dollar target.
Practical order many retirees use:
1. Interest/dividends/capital gains in taxable accounts
2. Tax-deferred withdrawals up to the top of your current tax bracket
3. Roth assets last, to preserve tax-free growth and an estate-friendly pool of assets
4. Mind the key milestones
● RMDs: Begin the year you turn 73. Missing one can trigger penalties; plan ahead.
● Social Security timing: Compare claiming at 62, FRA, or delaying toward 70. The permanent increase from delaying can act like buying more inflation-adjusted income you can’t outlive.
5. Build a buffer for sequence risk and surprises
Keep 6–24 months of essential expenses in cash or very short-term instruments so you’re not forced to sell investments after a market drop, especially critical in the first 5–10 years of retirement. Use this cash bucket to smooth withdrawals and refill it during good markets. Research on safe withdrawals underscores how volatility early in retirement can change outcomes markedly.
6. Coordinate taxes annually
Each fall, model next year’s income to decide: Do Roth conversions before RMDs start? Harvest gains in taxable accounts? How much to draw from IRA vs. Roth to stay in your target bracket? Aligning withdrawals with tax thresholds can extend portfolio life.
Conclusion
Build a reliable floor from pensions and Social Security, then layer flexible withdrawals from taxable, tax-deferred, and Roth accounts, mindful of RMDs, tax brackets, and market conditions. A small amount of annual planning can materially increase your after-tax income and the odds your money lasts as long as you do.
