When I talk to people working toward retirement, I've found one of the major concerns to be how to plan for their retirement income.

Of course, the answer for everyone is different. Why? Everyone's personal circumstances are different. The answer varies based on your situation.

Yet I see one blog article after another, media personalities and financial advisors try to give a one-size-fits-all answer to this complex question.

Remember, financial and retirement planning are not one time exercises. They are dynamic and must be flexible. There are several things to consider when you make the retirement income decision for yourself. I'll walk you through a process to help you figure it out. If you already know, going through the process will confirm you're on the right track.

In the meantime, turn off the financial news, if you're Googling for articles on the topic (you'll find hundreds of them), stay away from anyone who tells you definitively there is a right way. You probably already know that. But I'm often surprised to find out that some of the things that are obvious to me are not to others. I find it's better to raise the questions than not.

With that, let's get started.

Retirement income planning

The most basic first question is obvious.

How much retirement income do you want/need?

I know that seems patently obvious (I have to ask it anyway). You'd be surprised how many people start planning without that basic first step. If you don't know, no amount of numbers crunching will work. There are several schools of thought on how to determine retirement income. Here are the top two.

A percentage of pre-retirement income – Typically financial advisors and personal finance bloggers will tell you to calculate 70% – 80% of your pre-retirement income as a start. And that may make sense. The problem with it – there are too many other variables. Will you be working part-time to generate additional income? When should you claim Social Security? How much will you receive? What other sources of income will you have (more on that below)? Pensions? Annuity income? Inheritance? You have to look at all of these things and work from those numbers. Based on your estimated retirement expenses – Here again. How do you actually know? Are you staying in the same house in the same location? Is all of your debt paid off (or will be soon)? Are there any large purchases coming up to account for? Car purchases? Will you be helping with grandchildren's college? What about travel? If you have those expenses nailed down, then this is a pretty good place to start the calculation.

Sources of retirement income

One of the most important parts of retirement income planning is adding up the income from all sources outside of your investments. Doing so helps nail down what you need to pull from investment accounts. From there, you'll need to decide the most effective and efficient way to get the money out of those accounts.

Let's start with the most common sources of income.

Pensions

Do you have a pension? For most, the answer is no.

Where I live outside of Washington, DC, the answer for a lot of people is yes. The biggest employer in our area is, of course, the Federal government. They, along with state and local governments, are the last bastion of organizations that still offer pensions. Less than 10% of private companies still do. However, if you are in a group that has a pension, there are a couple of things to think about.

Does it have a survivor benefit? If so, take a look at how it works. In my area, it's not uncommon for both spouses to work for the government. In most places, if there is a pension, it's usually just for one of the working spouses. A survivor benefit can be a valuable way to maintain guaranteed income for your spouse. What if I don't take the survivor benefit? If you choose not to take the survivor benefit, you will get a higher income. How will that impact your surviving spouse? What other sources of income will he/she have available? Make sure you look at the options before deciding.

Social Security

Unlike pension plans, Social Security is something for which anyone who was in the workforce long enough will likely be eligible.

That said, Social Security is one of the most complicated things to figure out. Did you know there are over 2,700 rules in the Social Security playbook? That's right 2,700 rules!

Many people worry whether it will even be there for them. There is a common perception that Social Security is going broke. Like most things, it isn't that simple. I believe that Congress will act to shore up benefits. It may be in the eleventh hour but they will act. Their careers likely depend on it.

If you or, if married, you and your spouse are eligible for Social Security, do you know when and how to apply to gain the maximum benefits? If not, that needs to be a part of your planning.

For close to 50% of Americans, Social Security represents the primary (in many cases the only) source of retirement income. Make sure you know how to maximize your benefits, both retirement and survivor benefits before applying.

Social Security is one of the few benefits to which we workers have access that is inflation-protected. The benefit increases yearly with inflation as measured by CPI. Don't ignore this great benefit. You've paid for it. Get what you deserve.

Social Security Calculators

Competent, independent financial advisors should be able to provide this analysis for you as part of their services. There are also resources available to you outside of the advice industry.

Lawrence Kotlikoff, Professor of economics at Boston University, developed software used by financial advisors and available to the general public for a small fee. Find it here at Maximize My Social Security. I've used his software and find it a very good tool. It will cover any scenario you're eligible for and show you the best option. You can see side by side comparisons of each. It's a very helpful and well-designed tool.

Another option is Social Security Solutions. I've used this one as well. Both provide a comprehensive analysis of your claiming options. Each allows you to compare various options. They are both good tools and have individual and financial advisor versions.

The Social Security Administration also offers numerous calculators to help on their Benefits Planner: Calculators page.

Whichever calculator you choose, get the right strategy before deciding on the other factors that make up your retirement income picture.

Part-time work

There are at least two reasons to consider working part-time (even if you don't need the income). One is financial. The other is not. Both are important.

Supplemental income

The primary reason people work in retirement, especially early in retirement, is for the income (right now you're probably saying, “well duh!”).

If you lack a pension, have calculated your Social Security income, and still fall short, you may need to think about working part-time. Many people find a way to become consultants in the fields they left. Often, they consult with the company they left.

Are you a doctor? How about working part-time in a clinic? A lawyer? How about teaching part-time at your alma mater? One of my lawyer clients teaches at his alma mater. Another has an adjunct professor gig worked out whenever he decides to retire.

Or maybe you want to move away from the career from which you retired. Consider working at a nonprofit. How about starting an online business? Find something you're passionate about and look for ways to do that while generating some additional income.

Which brings us to the non-financial piece.

Filling your time

It's about what you do with your time.

Whether you've worked as a laborer, in construction, a professional, executive or business owner, you've worked 8 hours or more every day for a good part of your adult life. That schedule is about to get turned upside down.

How will you spend the hours you were working after you retire? Don't blow off this question. It's a big one.

My stepfather, Bob, learned this the hard way. I shared his story in my article, Retirement Planning is About More than Just Money. I'll repeat it here because it's important.

Bob was a professor of pulmonary medicine at the Indiana University School of Medicine. He taught interns during their rotations through his field. He operated at a very high level of activity, both physical and mental. When he retired, he hadn't planned for what he wanted to do with his time. œMy mom and he traveled a fair amount, especially early in his retirement. However, that didn't fill the time for him during his day to day life. Because of that, he became depressed. He fought this depression for a couple of years until he finally found something to fill his days – art.

He started painting. I mean he really jumped in with both feet. It took up so much time and he enjoyed it so much, they built a studio for him as an addition to the house. He spent the rest of his days doing something that he didn't know he loved until he tried it. Over time, his depression eased, they continued to travel, and his life was full. Had he thought about that before he retired, his early retirement years might have been very different.

Don't make that same mistake. Think about how you will spend your time long before you retire.

Managing investment accounts

Once you've determined your other sources of income, it's time to examine how your investment accounts are structured.

How much do you have in taxable investments? Traditional IRAs? Roth IRAs? Do you still have money in an employer retirement plan (401(k), 403(b), etc.)? What about annuities? Permanent life insurance policies with cash value? Do you own tax-free funds (municipal bonds or funds/ETFs that invest in municipal bonds)?

Make a list (better yet, a spreadsheet) of these assets to analyze how much is in taxable vs tax-deferred vs. tax-free accounts. You need to do this to determine where to withdraw the money you need to provide the additional income you want.

Of course, this assumes you've followed the advice in the steps above and added up your pension, income from your part-time work, and calculated your best Social Security claiming strategy. You may also want to utilize financial planning software or retirement calculators.

This article from The Balance, The Best Online Retirement Income Calculators, offers a list of their ratings on each. I'm a big believer in doing an overall financial plan (full disclosure, that's my other business). It's the best way to get the full picture. And these calculators won't tell you the best way to get the income out of the various types of accounts. What they will do, though, is give you the basic numbers and a snapshot of the big picture to get you started.

Which brings us to the final point.

Tax-efficient withdrawals

Conventional wisdom says to draw money out of taxable accounts first, especially those that hold stocks or stock funds with long-term capital gains in them. The logic says that you should sell those stocks first since they will likely generate the lower long-term capital gains tax rate of either 15 % or 20%. On the surface, that sounds right.

Money coming out of IRAs and other retirement accounts gets taxed at ordinary income rates. These rates will likely be higher than the capital gains tax rates. That, of course, depends on how much total income you take. So, if your income is such that your tax rate is, say 24%, the lower capital gains tax rate makes sense. Again, at first glance.

Let's take a closer look.

Many people, either from being in a high-income field or from working at the same place for most of their careers, have accumulated large employer retirement account or IRAs. Unlike taxable investment accounts, IRAs have a mandatory income requirement. It's called required minimum distributions (RMDs for short). The RMD rules say that when you reach age 70 1/2, you must begin to take income from your retirement accounts (traditional IRAs, and employer plans).

If you've accumulated a very large IRA, your RMDs could be significant. And remember, you have no choice in the matter. Failure to take the minimum amount will cost you 50% of the total amount you were supposed to withdraw.

That can cause unwanted problems you didn't anticipate. First, a higher tax bill on that income. Second, higher taxes on Social Security (up to 85% could potentially get taxed). Not to mention the fact that with proper planning, you may have been able to reduce the RMD and its resulting tax bill.

Reducing RMDs

The short answer is yes. Here are a couple of ways.

Don't be too quick to follow the “rule of thumb” for investment withdrawals. Look at whether it makes sense to take money out of all of your accounts on a pro-rata basis. So some money comes out of taxable accounts and tax-deferred accounts. Consider converting your traditional IRAs to Roth IRAs – If you're not yet retired and still earning a good income, you should strongly consider this strategy. There is a misconception that you have to do this conversion all at once. NOT TRUE. You can utilize the “fill-up-the-bracket” conversion strategy.

Here's an example: Let's say your 2018 tax bracket is the new 24% bracket. If filing as an individual, the band is $82,500 to $157,500. If married filing a joint return, the band is between $165,000 and $315,000. In the fill-up-the-bracket strategy, you would convert just enough money each year to prevent your adjustable gross income from going above the top income level for that bracket (either $157,500 or $315,000).

This allows you to pay the additional taxes while you are working at your highest income years, which usually are in the years leading up to retirement. It also reduces the amounts subject to RMDs. Remember, Roth IRAs don't have RMD requirements. If held for five years, all distributions of contributions and earnings come out tax-free! The exception is if your holding period is less than five years or you are under age 59 1/2. In either of those cases, you would be subject to a 10% penalty.

At the end of the day, wouldn't you rather decide for yourself when to take out the income you need? And what tax rate you want to pay on that income? I offer 3 reasons to consider a Roth IRA conversion in this article,

Final thoughts

First and foremost, understand retirement planning is a dynamic process. You can't just enter some financial numbers into a piece of software and call it a day. You need to take the time to think through several things.

Retirement income planning isn't just about getting the most income. Don't get me wrong. That's very important. However, you want to be sure that money is getting to you in the most efficient, and effective way possible.

And remember, retirement income planning is not a one and done deal. Retirement income planning is a dynamic process. Review your plans at least once a year to make sure you're on the right track. If circumstances change dramatically during the course of the year, you may want to look sooner. Things like a huge market crash shortly before or shortly after retiring can have a major impact on your plans (see the 2008 financial crisis).

An untimely death, a change in the tax laws, investment rules, IRA withdrawal rules or any of a number of other factors outside your control would also be a reason to reexamine your plans.

It's never too late to start. It's never too soon either. Following the guidelines outlined here can help get you on the right path.

Now it's your turn. What are your biggest challenges planning for retirement? What keeps you up at night? Are you on the right track? I welcome your comments and feedback.