Hi Debbie - The simple answer is you can simply take dividends as cash or you can sell holdings to get the money you need; but, simple answers are seldom helpful.
Without knowing more about your IRA, it's almost impossible to provide a meaningful answer. Most investors think in terms of principal and interest, while their IRAs ususally an assortment of mutual funds, which have no guaranteed principal or interest. Under these circumstances, it's best to think in terms of portfolio 'total return' - a combination of price changes and dividends.
How your portfolio is diversified will impact how much it fluctuates and how much you draw as income will impact how long your money lasts. It then becomes a question of arranging your assets in an order to allow for the growth you'll need (if you two are in good health, you'll have three decades ahead of you, and that can be a lot of inflation) while providing for current income requirements.
Your question leads me to believe you're not working with a professional as yet; I think it's something you may want to consider.
You may withdraw money from a traditional IRA anytime. You may have to pay a 10% tax penalty if the withdrawals are before you are 59 ½ unless you qualify for an exception.
One exception that might work for you is the Annuity exception.
“You can receive distributions from your traditional IRA that are part of a series of substantially equal payments over your life (or your life expectancy), or over the lives (or the joint life expectancies) of you and your beneficiary, without having to pay the 10% additional tax, even if you receive such distributions before you are age 59½. You must use an IRS-approved distribution method and you must take at least one distribution annually for this exception to apply. The “required minimum distribution method,” when used for this purpose, results in the exact amount required to be distributed, not the minimum amount.”
This is from IRS publication 590. Here is a link to it http://www.irs.gov/publications/p590/ch01.html#en_US_2011_publink1000230899
You should work with a financial professional to determine if it is in your best interest to utilize this exception.
Any funds withdrawn from a traditional IRA will be taxed at the owner’s income tax rate and may be subject to state taxes.
I hope this helps, Dave
If you can wait until 59 1/2 by depending on other sources, then you certainly should. There is no reason to pay an early withdrawal penalty if you can avoid it.
David's explanation above of using the annuity exception is correct, but you should have a lengthy chat with your financial advisor first. A decision to annuitize your IRA could affect other considerations, such as leaving an inheritance, and should be part of a broader financial plan.