When people start thinking about retirement planning, one of the first questions they ask is, “What do I need?” But planning around needs is a flawed approach. If we based our lives solely on needs, we wouldn’t take vacations, we wouldn’t drive the cars we enjoy, we wouldn’t buy lake homes or beach houses, and we wouldn’t splurge on experiences with family. Needs are about survival. Retirement, however, should be about living.
Throughout our working years, we strive to build more than the minimum. We save, invest, and work hard not to get by, but to enjoy life. That mindset shouldn’t disappear the day we retire. If anything, retirement requires even more planning, because we have to factor in inflation, taxes, and unexpected expenses while ensuring our income lasts for decades.
The Key Factors That Shape Retirement Income
When planning for income in retirement, there are several moving parts:
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Taxes: What you keep after taxes matters more than what you withdraw.
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Inflation: Costs of living will rise, so income needs to grow.
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Unexpected expenses: Healthcare, family needs, or large home repairs can come at any time.
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Lifestyle: What you want your retirement to look like should guide your income target.
But before we dive into those complexities, let’s look at a realistic comparison of income while working versus income in retirement.
Case Study: A Couple Making $250,000 While Working*:
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Gross salary: $250,000
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401(k) contribution (pre-tax): $30,000
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HSA contribution (pre-tax): $5,000
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Taxable income after pre-tax savings: $215,000
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Effective tax rate (including FICA): 22%
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Net after-tax income: $172,000
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Brokerage savings (after-tax): $5,000
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Actual lifestyle spending: $167,000
In Retirement
In retirement, they no longer:
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Save into a 401(k)
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Save into an HSA
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Save into a brokerage account
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Pay FICA or Medicare taxes
They only need enough gross income to cover $167,000 of lifestyle spending.
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Effective retirement tax rate (federal + state, no FICA): 16%
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Gross withdrawals needed: $199,000 per year
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Which nets out to the same $167,000 they were used to living on
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On a monthly basis: $16,583 gross → $13,917 net
But Not All Income Is Taxed the Same
This is where planning gets more interesting. The source of your retirement income changes how much you actually need to withdraw:
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401(k) / IRA: Fully taxable when you withdraw. Every dollar counts as ordinary income.
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Brokerage accounts: Only a portion may be taxable. Withdrawals might include principal (not taxed) plus gains (taxed, often at lower capital gains rates).
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Roth IRAs: Qualified withdrawals are completely tax free.
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Cash value life insurance (via policy loans or withdrawals to basis): Can provide a death benefit and tax-free income over time if structured properly. **
This means two retirees with the same $167,000 spending target might need to withdraw very different amounts depending on the mix of their accounts. Someone pulling from a traditional 401(k) might need ~$199,000, while someone drawing partly from Roth or life insurance cash values may need significantly less because those dollars are tax free.
The Real Answer to “What Do I Need?”
This case study highlights the key point: just because you earned $250,000 in your working years doesn’t mean you need that same gross number in retirement. Once you strip out savings and FICA, the required gross drops to about $199,000 if you’re using fully taxable accounts. But with a well-diversified retirement income strategy that blends pre-tax, after-tax, and tax-free sources, the amount you need to withdraw could be much lower while still meeting the same lifestyle.
Final Thought
Retirement planning isn’t about asking, “What do I need?” It’s about asking, “What do I want, and how do I structure my income so I can enjoy that lifestyle for the rest of my life?” By understanding how different income sources are taxed, you can maximize your net income, reduce the strain on your portfolio, and plan for abundance rather than scarcity.
*Hypothetical example for illustrative purposes only
**Guardian, its subsidiaries, agents, and employees do not provide tax, legal, or accounting advice. Consult your tax, legal, or accounting professional regarding your individual situation. Some whole life polices do not have cash values in the first two years of the policy and don’t pay a dividend until the policy’s third year. Talk to your financial representative and refer to your individual whole life policy illustration for more information. Policy benefits are reduced by any outstanding loan or loan interest and/or withdrawals. Dividends, if any, are affected by policy loans and loan interest. Withdrawals above the cost basis may result in taxable ordinary income. If the policy lapses, or is surrendered, any outstanding loans considered gain in the policy may be subject to ordinary income taxes. If the policy is a Modified Endowment Contract (MEC), loans are treated like withdrawals, but as gain first, subject to ordinary income taxes. If the policy owner is under 59 ½, any taxable withdrawal may also be subject to a 10% federal tax penalty.
This material is intended for general use. By providing this content Park Avenue Securities LLC and your financial representative are not undertaking to provide investment advice or make a recommendation for any specific individual or situation, or to otherwise act in a fiduciary capacity. Please contact a financial representative for guidance and information that is specific to your individual situation.
The Guyton Group offers fee-based planning, wealth advisory services, and securities through Park Avenue Securities LLC (PAS) and insurance through The Bulfinch Group Insurance Agency, LLC. Fee-based plans may include tax and wealth planning suggestions, but we do not give tax or legal advice. You should consult your tax or legal advisor regarding your individual situation. Andrew Guyton is an Investment Advisor and Registered Representative of PAS and Financial Representative of The Guardian Life Insurance Company of America (Guardian), supervised from: 160 Gould Street, Suite 310, Needham, MA 02494, 781-449-4402. PAS is a member of FINRA & SIPC and a wholly-owned subsidiary of Guardian. The Guyton Group and The Bulfinch Group are affiliated, but neither firm is an affiliate or subsidiary of PAS or Guardian. The Guyton Group and The Bulfinch Group are not registered in any state or with the U.S. Securities and Exchange Commission as a Registered Investment Advisor. Financial Balance® is a service mark of The Guardian Life Insurance Company of America® (Guardian), New York, NY 10004, © 2020 Guardian. Andrew Guyton, CA Insurance License #0I61971; FL Insurance License #W252632.
8581253.1 (Exp. 11/27)
