Retirement Planning
June 14, 2023

The Three Phases of Retirement Income

It’s important to know the three phases of retirement income and when you should be in each one.
Stewart Willis

Many believe retirement planning consists of shoving money into a retirement fund for four decades or so before they quit their jobs and live on their savings. While that’s broadly true, it’s the little details that make the difference between a successful retirement plan and one that ends in failure.

For retirement planning purposes, it’s helpful to think of the process in terms of three distinct phases: growth, asset preservation and distribution.


The growth phase is the one most people think of when saving for retirement. This first phase is often the longest, and it can be viewed as a race to accumulate as much money as possible, as quickly as possible. 

Especially during the early years of the growth phase, it’s important to have a healthy risk tolerance. Stuffing all of your retirement funds into low-risk accounts feels quite safe but is in fact risky in its own way. 

Consider inflation. If you’d put $100 in a retirement account at the beginning of 1980, it would need to have grown to $386.12 for you to have the same purchasing power as you did back then. That’s because, since 1980, inflation has increased at an average rate of 3.06% per year

The average savings account has an interest rate of less than half a percent per year. In other words, by diligently saving all your money in a “safe” savings account, you are risking your retirement because the money you save will fail to keep up with inflation and likely be worth much less when you’re of retirement age than it is now. 

The takeaway is that a successful retirement plan must have a growth phase in which your money grows at a high enough rate to fund your retirement even after inflation inevitably devalues your savings. This means adopting a certain comfort level with risk. While that risk tolerance will be different for each individual, in general, the early phase of your retirement savings journey is the time when you should be taking on more risk.

That does not, however, mean you should gamble. There’s taking risks, and then there’s taking foolish risks. Investing in Ponzi schemes, pyramid scams and other vehicles with exceedingly high risk and almost no chance of reward is not a good way to take on risk for higher retirement rewards.

However, investing in the market, which does involve risk, especially in the short term, is often a good way to grow your wealth faster than inflation detracts from it. It’s usually best to avoid the temptation to “play” the market by trying to buy stocks at their lowest values and sell them at their highest. It’s nearly impossible to time the market, and missing just a few of the best days over decades can cost you tens of thousands of dollars. 

Asset Preservation

Once you have enough money to retire at the level you desire, you enter the asset preservation phase. This often happens five or six years before you actually retire. Knowing when to take risk off the table to preserve what you’ve saved is key to securing your successful retirement. Ask yourself, “If I never make another cent on the money I have saved, will I be able to retire?” If the answer is yes, then it’s a good idea to examine why you’re continuing to gamble your nest egg in the market. 

The stock market crashes of the past wiped out peoples’ retirement savings. If those people were in their 30s, they had time to recover those savings before retirement. If they were in their mid-sixties, they often didn’t. As your retirement date gets closer, dialing back risk can prevent market losses from striking your retirement savings at the worst possible time.

By reducing higher-risk positions in your portfolio, you’re acknowledging the accumulation phase is over, but don’t allow your money to stagnate! You still want to grow your money during the asset preservation phase; you just want to grow it with a lower level of risk. You can think of it as narrowing your investment bandwidth: You’re giving up the highest peaks in order to protect yourself from the lowest valleys. As I used to tell my son when he raced go-karts, once you’ve won the race, don’t crash on the victory lap!


Many consider the distribution phase to be around age 67 because that’s the commonly-accepted full retirement age. However, it’s important not to ascribe a particular age to it! Some retire “right on time,” while others may retire decades early or work well into their 70s or 80s. Knowing when to enter the distribution phase is less about a specific age than knowing how far you are from your retirement goal. 

This is where a lot of people make the most mistakes. A classic mistake is jumping at the first “guaranteed income” product that comes along. Annuities are an example of a product that can be good, or can be harmful depending on how they’re set up.

Some annuity shoppers are so focused on the idea of a guaranteed income in retirement that they are willing to accept a low, or no, rate of return. That could be a mistake. As I write this, we’re in a high-interest rate environment. Forfeiting a decent rate of return just to have income could do more harm than good. Many guaranteed income retirement products are specifically set up to generate a 0% rate of return via parasitic fees, riders and other add-ons. 

A 0-return annuity boils down to you giving an insurance company money, and the company makes a profit from investing in it while slowly giving your money back; you don’t get any benefit from the interest your money is generating for the company.

Rates of return aside, the most important consideration for the distribution phase is that you are now in a largely-closed system. The money you have in your retirement accounts is the money you have for your retirement. Once you stop earning a paycheck, you often won’t have extra money coming in to replace money spent unwisely.

Many retirees make the mistake of assuming they can continue spending at the levels they maintained during their careers. If your income was $200,000 with expenditures of $100,000 per year and you have $1 million saved for retirement, your retirement money will only last 10 years if you keep spending at the same level! 

At Asset Preservation Wealth & Tax, we’re happiest when we see clients conducting “dress rehearsals” of their retirement. Well before you actually retire, determine what you’ll be able to safely spend on a monthly basis in retirement, then drop your current spending to that level. If that’s not enough, perhaps you need to grow your retirement funds to enable higher spending when you retire.

Knowing which retirement-planning phase you’re in, and what to do in each phase, can make the difference between a difficult retirement full of stress over money matters and a confident, comfortable retirement that really feels like a restful permanent vacation. 

Stewart Willis is the founder and president of Asset Preservation Wealth & Tax, a financial planning firm in Phoenix, Arizona. Investment advisory services offered through Foundations Investment Advisors, LLC, an SEC registered investment adviser.

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