How to Build a Retirement Paycheck
Replace the paycheck's job, not just its dollar amount
During working years, a paycheck gives your finances a rhythm. In retirement, income may arrive from several places on different schedules. Building retirement income means organizing those sources around spending needs, taxes and the flexibility your plan requires. It does not mean that investment withdrawals become guaranteed income.
Start with the gap your savings may need to fill
Estimate spending, including irregular expenses and taxes, then compare it with expected income that does not depend on portfolio withdrawals. Check the timing and conditions of each source. Pensions may have benefit elections, Social Security requires a claiming decision and part-time earnings may vary.
Here is a simplified illustration: if a household expects $5,000 in monthly spending and has $3,500 of expected monthly income, the initial gap is $1,500. That calculation is only a starting point. It does not establish a sustainable withdrawal amount and must be adjusted for taxes, changing costs and uncertainty.
Give near-term withdrawals a deliberate process
Discuss where upcoming spending will come from, how often money will move and what would prompt a review. Consider the purpose of reserves alongside the rest of the portfolio. Holding more cash can reduce exposure to short-term market movements for that money, but it also has inflation and opportunity-cost tradeoffs. No single reserve amount fits every retiree.
Coordinate accounts with the tax picture
A dollar withdrawn is not always a dollar available to spend. Traditional IRA distributions are generally taxable, with exceptions such as the treatment of nondeductible contributions. Qualified Roth IRA distributions are generally tax-free. Sales in a taxable investment account may realize gains or losses. Other income can also affect how much Social Security is taxable.
Work with your tax professional on the consequences of withdrawal choices. A fixed rule such as always spending one account first may overlook your income, future required distributions and other circumstances.
Read about Social Security, withdrawals and taxes.
Plan for the review before markets change
Discuss how you would respond if investments declined, expenses rose or a larger purchase became necessary. Which expenses could change? What information would you review before selling investments or changing withdrawals? A written decision process can make the conversation more focused, but it cannot eliminate investment risk or ensure the plan will succeed.
Revisit the income as life changes
Retirement spending may change as work, travel, housing, health or family responsibilities change. Review the plan at agreed intervals and when a meaningful event occurs. Compare actual spending with assumptions and discuss whether income sources, account choices or goals need another look.
Questions to discuss with your advisor
- Which expenses need dependable funding, and which are flexible?
- How will taxes and irregular costs be included?
- What happens when benefits start or required withdrawals begin?
- What would trigger a change to the withdrawal plan?
Further reading: IRS Publication 590-B: IRA distributions and IRS: Social Security income.
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This material is for general educational purposes and is not individualized investment, tax or legal advice. Investing involves risk, including possible loss of principal. No strategy guarantees a profit or protects against loss. Consult your tax and legal professionals about your individual circumstances.