How to Create $120,000 of Retirement Income

Are you wondering how to create $120,000 of retirement income without running out of money? In this article, we’ll walk through a detailed retirement case study featuring a hypothetical couple and show you the exact strategy we use with our clients every day. Whether you’re nearing retirement or already retired, this example can help you build a solid plan to generate reliable income and reduce financial uncertainty.

Creating $120,000 of Retirement Income: Hypothetical Couple’s Setup

Let’s lay out the situation first. We’re going to assume this is a married couple named Steve and Kelly. They are both 60 years old and have $2 million in investable assets. Their goal is to figure out how to create $120,000 of retirement income annually using their $2 million portfolio

In reality, you may be a little bit older or younger. You may have more or less than $2 million of investable assets. This is just for illustrative purposes, but I think you’ll find the methodology and strategy pretty helpful.

If you’re retiring a little bit early like Steve and Kelly, It’s before you’re eligible for Social Security benefits and well before you’re eligible to get your full unreduced benefits, which is called your full retirement age. For most people, that’s probably going to be age 67.

Breaking Retirement into Two Parts

We look at retirement in two parts:

1. What does it look like, and what do you need, to fund the early part of retirement?
2. What does it look like once income normalizes after full retirement age?

We’re going to assume that at full retirement age, this couple has $60,000 of combined Social Security benefits. So, from age 60 to age 67, if they want to take out $120,000 per year, they have to pull 100% of that from their portfolio assets. We’ll also assume they don’t have a pension. If you have one, you would subtract that amount from your income need.

That means $120,000 per year will need to come out of the portfolio for the first seven years. Multiply that out and it’s $840,000.

Once full retirement age hits at 67 and they begin receiving $60,000 of Social Security income, the net withdrawal need is just $60,000 per year. This is a very common planning scenario. Probably 90% to 95% of the financial plans we do have something that looks fairly similar to this: larger cash flow needs in early retirement, and reduced needs once pensions or Social Security kick in.

Early Retirement Considerations When Creating $120,000 of Income

You may have higher expenses early in retirement. For example:

• Buying health care through the ACA can be more expensive than Medicare.
• You might still be paying off a mortgage.
• You could still be helping kids with college expenses.

These bigger gaps in early retirement need to be accounted for separately from the years after full retirement age.

Funding Early Retirement with 4% Interest

Let’s say you could earn 4% interest—a realistic rate in 2025—on the portion of your money used to fund those first seven years. That could come from CDs, money markets, or short-term bonds.

Instead of needing the full $840,000, if you earn 4% and take $120,000 per year, you’d only need about $720,000. That amount would fund the first seven years of retirement.

Three Bucket Strategy for Generating $120,000 of Retirement Income

• Bucket #1: Two years of cash flow needs = $240,000
• Bucket #2: Five years of cash flow needs = $480,000
• Bucket #3: Remaining $1,280,000 goes to the growth bucket

The idea is to keep buckets one and two filled and pull income from those buckets during the early years, allowing the growth bucket to grow over time.

Managing the Buckets to Sustain $120,000 Retirement Income

This isn’t a set-it-and-forget-it strategy. We continue to anticipate cash flow needs and refill buckets one and two as long as the growth bucket performs positively. That seven-year buffer gives you time for market recovery.

If we fast forward, the long-term need after age 67 is $60,000 per year. That comes from the $120,000 income need minus the $60,000 from Social Security.

Each year, if markets are up, move $60,000 from the growth bucket to refill bucket number two. Bucket two then replenishes bucket one.

• Bucket #1: Short-term money (CDs, money markets)
• Bucket #2: Medium-term (CD ladders, 3-5 year bonds)

Continue this annual refill process to maintain a steady cash flow.

Risk Factors and Market History

There are uncertainties:

• We don’t know future returns for any of the buckets.
• Rates are relatively high now (2025), but that can change.

What really matters is how the growth bucket performs. A sideways market for 10-15 years has happened before—from 2000 to 2009, for example. We must be prepared for those scenarios.

If the $1,280,000 in the growth bucket only needs to grow to $1,500,000 by age 67, that only requires about a 2.6% annual return. That’s not a huge hurdle, but it’s not guaranteed either.

If you experience flat growth, you may end up with a 4.6% withdrawal rate. That’s above the 4% rule and lowers the probability your money will last. A 6% withdrawal rate has only about a 15% chance of lasting 20 years.

Real-World Lessons from Market History

From 2000 to 2009, the S&P 500 was actually down about 9% over that 10-year period. If you know anyone who retired during that time, you know how tough it was to maintain a retirement lifestyle.

Knowing your expenses, and separating out discretionary expenses, gives you flexibility during down markets. You might be able to reduce or pause spending like travel if needed.

Adding Predictable Income to Your Plan

One way to reduce pressure on your portfolio is to add predictable income:

Dividend Stocks

Dividend-paying stocks may offer 2% to 4% yield but usually won’t cover the full $60,000 gap.

Rental Income

Income-producing real estate can help, but not everyone wants to be a landlord in retirement.

Annuities

As of April 2025, annuity payout rates are very good. A 60-year-old couple could get a 6% guaranteed withdrawal for life. Wait seven years, and that income could rise to 9.5%.

If you took $631,000 from the $1,280,000 growth bucket and put it into an annuity, that could cover 100% of the $60,000 gap starting at age 67.

Now instead of having to rely completely on portfolio performance, you’ve secured predictable income from:

• $60,000 Social Security
• $60,000 annuity income

Why the Bucket Strategy Works

During your working years, you bought investments regularly and benefited from market dips. Retirement is the opposite—you’re withdrawing.

Adding guaranteed income with annuities or dividends gives you confidence and helps you stay invested for long-term growth.

If you’re within seven years of retirement, now is the time to begin filling those buckets. Don’t wait until the day you retire.

If the market drops 10% or 20% right as you retire, it may force you to delay retirement. But if your buckets are filled, you have a buffer.

If you’re wondering how to create $120,000 retirement income consistently and with less stress, this bucket approach can offer you a more stable path. Start filling your buckets today.