Planning for retirement isn’t just about saving. Remember to plan for retirement spending too.

Planning for retirement isn’t just about saving. Remember to plan for retirement spending too.

When we talk about retirement, usually the conversation centers around how to save and how to invest that savings. Let’s add a third dimension to that discussion: Once you retire, how do you turn that savings into income and make the transition from retirement savings to retirement spending?

It’s a question that many Americans, and even those nearing retirement, may be unprepared to answer. According to a recent survey published by Charles Schwab, one-third of baby boomers who say they are just five years away from retirement have not even calculated how much income they will need when the time comes. Part of the problem, Schwab says, is that individuals haven’t figured out what their essential living expenses will be. More than 76 million baby boomers, or nearly a quarter of all Americans, are approaching retirement age in the next two decades.

The survey of more than 1,000 Americans age 55-70 also found that 64 percent have less than one year of cash savings at any one time for retirement living expenses. Maintaining at least a year of cash to use, along with regular sources of income, to cover expenses is one of the fundamental steps for retirement income planning, Schwab says. Regular, “predictable,” sources of income may include Social Security, pension payments (if you were part of a pension/defined benefit program with an employer), dividend and interest income.

So is anticipating the impact taxes will have on retirement income. Almost half of survey respondents haven’t considered this important expense, and a quarter haven’t thought about tax expenses at all, Schwab says.

Generating income in retirement is an issue that investors are struggling with, and often don’t address until it’s too late, Schwab says. If retirement is on your horizon, the firm suggests some of the following considerations to get you started in the planning process:

1. Consolidate your regular sources of income into a single account, perhaps even into the one with the year of cash, to make it easy to track your daily expenditures.

2. Take a look at your spending, and divide expenses into two categories: essentials and discretionary. Cover the essentials with predictable income sources.

3. Consider measured withdrawals from principal to supplement interest and dividend income. Measured is the key word. Setting up a plan helps to avoid spending savings too quickly.

4. Develop a “drawdown” strategy for your portfolio. Schwab says that this might include taking the required minimum IRA distribution if you are 70 ½ or older; selling from tax-advantaged accounts, first with Traditional IRAs and then Roth IRAs; and drawing principal from maturing bonds and CDs.

Planning for retirement isn’t just about saving. Remember to plan for retirement spending too.