After a lifetime of diligently working and saving for retirement, it may not occur to everyone that they will need another money management strategy after they stop working. Retirement income is very different than receiving a regular paycheck that arrives weekly or fortnightly. You will likely have multiple sources of income available at different intervals, sometimes subject to tax, sometimes not. Sensible utilization and reinvestment of these streams can make your retirement significantly more comfortable.

There are two types of retirement income: regular and potential.

Fixed amounts of money that you receive at uniform intervals for the rest of your life, regular retirement income includes government social security payments (which are adjusted annually for inflation) and defined-benefit pensions (which are increasingly rare). Annuitized defined-contribution pensions, which mimic defined-benefit pensions by annuitizing defined-contribution plans like 401(k)s, and payment for employment, where you continue to work full time or part time, are additional examples of regular retirement income.

Potential retirement income, by contrast, is money that can be drawn as needed or taken as regular withdrawals. Tax-advantaged accounts like 401(k)s and IRAs, as well as investments and savings, qualify as such income, as do reverse mortgage loans (which, as loans rather than income, are not taxable).

Note that from the age of 72, you must take your required minimum distributions (RMDs) from your retirement accounts. However, if you are still working, you can delay this for the 401(k) at the company where you are employed (unless you own more than 5 percent of the company). And some 401(k)s from previous employers may allow you to transfer your account to your current employer’s plan.

RMDs are taxable as ordinary income (except for Roth IRAs); if your retirement plan administrator doesn’t deduct any required state and federal taxes, you will need to account for them. (Retirement tax differs between states.) And, you must withdraw your total RMD by December 31 of each year. Not taking the correct RMD can result in a penalty of 50 percent of the shortfall amount.

It’s not just income flows that change at retirement; your expenses will look different, too. For example, as office-related expenditures for things like business attire and gas for commuting decrease, you may find yourself spending more on health care or to visit nonlocal family members. Plus, many sources of retirement income don’t withhold tax as your employer does, so you will need to settle your estimated taxes quarterly.

Sitting on surplus cash to cover irregular or unexpected expenses means you’re losing out on investment opportunities. Balancing cash with liquid investments (i.e., investments that are easily converted to cash without penalties) will address this, but it’s vital to anticipate your cash requirements upfront. Toward this end, experts recommend adopting a “bucket” approach, where:

- cash or cash equivalents like money market funds is reserved for living expenses (e.g., clothing, food, health care, housing, transportation, and utilities),

- low-risk investments like treasury bonds and FDIC-insured CDs are used to satisfy short-term savings goals for things like vacations and automobile replacement (where the maturity date of the investment[s] corresponds with the anticipated need[s]), and

- a blend of liquid accounts (e.g., money market funds) and less liquid options (e.g., CDs) for an emergency fund capable of covering expenses for three to six months.

However, if your regular retirement income doesn’t fund your living expenses and emergency fund, you will need to decide the order in which to access your potential retirement income. This is because tax and penalties make the order that you draw on different retirement income sources important.

It is best to structure your retirement withdrawals in the following order:

1. taxable investment accounts (which will allow you to benefit from lower dividend and capital gains tax rates; investments will be taxed depending on whether they are subject to short-term or long-term capital gains tax rates),

2. tax-free investment accounts,

3. tax-deferred accounts (e.g., 401(k)s, 403(b)s, and traditional IRAs, which are taxed as ordinary income), and

4. tax-free retirement accounts (including Roth IRAs that allow your money to grow tax-free for as long as possible).

Wherever possible, it usually works best to roll over lump-sum distributions to a tax-deferred account. This way, you avoid a considerable tax expense occurring all in one year. And try to avoid early withdrawals that involve penalties.

With lifespans increasing, it is more important than ever to manage your retirement income well, as it might need to last longer than planned. Take time to think about the things that are important to you; for most people, this is relationships and health. They are the things to which you should allocate any surplus discretionary funds. Spending money on meaningless, non-value-accruing items and experiences might be something you live to regret one day.