Calculating Your Retirement Nest Egg: Optimizing Income and Tax Planning

Written by Canty Financial - Published on September 1, 2023

Retirement marks a significant transition in life, offering the promise of relaxation, exploration, and pursuing passions long put on hold. However, achieving the retirement of your dreams requires careful financial planning. One of the critical steps in this journey is estimating the amount of money needed to generate sufficient income during retirement while also optimizing for tax planning.

Estimating Your Retirement Income

As you embark on retirement planning, diversifying your income sources becomes pivotal. Consider the following key income streams:

Investment Accounts

Your investment accounts, including IRAs, 401(k)s, TSPs, deferred compensation, and brokerage accounts, can form the foundation of your retirement income. A popular guideline is the 4% rule, which suggests withdrawing 4% of your total retirement savings annually. For example, if your savings amount to $1 million, this rule indicates an annual withdrawal of $40,000.


For those fortunate enough to have pensions, they provide a reliable income stream. Pensions are typically determined by your years of service and average salary.

Interest and Dividends

Interest from bonds and dividends from stocks contribute to a steady income. Creating a balanced portfolio with growth-oriented and income-generating assets is essential for consistent returns.

Social Security Benefits

Social Security will also play a role in retirement income. Timing is crucial – delaying claiming benefits until full retirement age or beyond can yield higher monthly payments.

Part-Time Opportunities

Many retirees explore part-time work or side gigs to bolster income and keep engaged. These activities can offer both financial benefits and personal fulfillment.

Understand Your Spending: The First Step

Before assessing your retirement income needs, it's crucial to understand your spending habits. Tracking your current expenses forms the foundation of creating a realistic retirement budget. Account for all monthly and yearly expenditures, including housing, utilities, healthcare, transportation, leisure activities, and potential travel.

Creating a Retirement Budget

Your newfound insight into spending lays the groundwork for crafting a comprehensive retirement budget. This budget should align with your envisioned lifestyle. Consider these factors:

Essential vs. Discretionary Expenses

Distinguish between essential expenses (housing, healthcare) and discretionary spending (travel, entertainment) to allocate funds effectively.

Accounting for Inflation

Incorporate an inflation rate into your budget to ensure future income covers rising costs over time.

Contingency Planning

Building a contingency fund within your budget prepares you for unforeseen expenses that may arise during retirement.

A Living, Breathing Plan

Remember, life is fluid, and so should be your budget. Regularly review and adapt your budget as circumstances evolve.

Calculating Your Retirement Nest Egg

To approximate the funds you'll need for retirement while optimizing for tax planning, follow these guidelines:

Estimate Annual Retirement Expenses: Using your budget, calculate the annual funds needed to maintain your desired lifestyle.

Assess Income Sources: Calculate expected income from investments, Social Security, pensions, and potential part-time work.

Determine Shortfall: Deduct expected annual income from projected expenses to identify your financial gap.

Incorporate Tax Planning: Strategically withdraw funds from your retirement accounts to minimize your tax impact. We regularly help our clients optimize for tax-efficient distribution strategies out of tax-deferred, taxable, and tax-free investment accounts.

Try Applying the 4% Rule: Divide your financial gap by 0.04 (4%) to get a rough estimate of the total retirement savings required.

Plan for Longevity: With rising life expectancies, ensure your savings support you through extended retirement years and the potential need for long-term care.

Tax Optimization: A Crucial Component

Optimizing your retirement income includes strategic tax planning. Minimizing your tax liability when tapping your retirement nest egg is a key factor in helping to ensure that you don’t outlive your money in retirement. Planning around withdrawals, required minimum distributions, pension income or income from employment can help determine which accounts to tap in which order. Here are key strategies to consider:

Tax-Efficient Withdrawals/ Distributions

Strategically withdrawing funds from different types of retirement accounts can minimize your tax liability. This is one of the most common areas where we help our clients who are in retirement. By carefully balancing withdrawals from taxable, tax-deferred, and tax-free (Roth) accounts, you can minimize your taxable income in retirement and reduce your overall tax burden.

Consider Tax-Optimized Investments

Invest in assets that have historically generated tax-efficient returns. For example, index funds and ETFs tend to generate fewer capital gains distributions compared to actively managed funds, potentially resulting in lower tax liabilities.

RMD Planning

Understand the rules around Required Minimum Distributions (RMDs) from retirement accounts like IRAs, 401(k)s, TSP, and Deferred Comp. Failing to take RMDs on time can result in substantial tax penalties. Strategically planning your withdrawals can help minimize the impact of RMDs on your taxable income.

Healthcare Savings Strategies

Exploring tax-advantaged healthcare funding options like Health Savings Accounts (HSAs) can help you manage healthcare costs in retirement while providing potential tax benefits. HSAs offer triple tax advantages: contributions are tax-deductible, earnings grow tax-free, and withdrawals for qualified medical expenses are tax-free.

Tax-Loss Harvesting

Implement tax-loss harvesting to offset capital gains with capital losses in your investment portfolio. This strategy can help minimize your tax liability on investment gains.

Tax-Efficient Charitable Giving

Explore ways to optimize your charitable giving to maximize tax benefits. Donating appreciated securities, using donor-advised funds, and considering Qualified Charitable Distributions (QCDs) are strategies to explore.

Timing of Social Security

Deciding when to begin claiming Social Security benefits can have a substantial impact on your taxable income during retirement. Consult with us to determine the most tax-efficient timing for claiming your benefits.

Estate Planning Considerations

As part of your overall tax strategy, consider how your estate will be passed on to heirs. Estate tax laws can impact the transfer of wealth, and careful estate planning can help minimize tax burdens for your beneficiaries.


Preparing for retirement is a journey that requires meticulous planning and careful consideration. By estimating your retirement income needs, crafting a realistic budget, and optimizing for tax planning, you can create a secure financial foundation for your life in retirement. Please feel free to reach out to us to develop a retirement income plan, we regularly help clients develop a retirement plan that is optimized for tax efficiency.

Bill Canty, CFP®, CPAFinancial Planner

Ed Canty, CFP®, Financial Planner

Joe Canty, Financial Planner

Maureen Walsh, EA, Tax Advisor

Tina Alteri, CPA, Tax Advisor

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