How to Build a Retirement Paycheck

When you stop working, the paycheck stops too. Retirement income planning is about replacing it, and it comes down to two questions: how much can you spend, and where should each dollar come from?

Step 1: How Much Can You Spend?

There are two ways to approach this, and both lead to the same place:

• What is your spending capacity? Based on Social Security, any pensions, and your investments, how much can you comfortably spend each year? When you claim Social Security plays a big part; see when to claim Social Security.
• How much do you want to spend, and can your savings support it? Start with the retirement you have in mind, then test whether your portfolio can sustain it over a long retirement.

Either way, the result is a spending amount you can feel confident about. From there, we use a guardrails approach. We monitor your portfolio, and if it grows meaningfully, we review whether your spending can increase. If markets fall sharply, there are guardrails on the other side. Portfolios also contain a fixed income allocation that provides stability and peace of mind for when markets are volatile.

Step 2: A Paycheck You Can Count On

Once you know how much you need, the next step is making it predictable. We use a central cash account that sends a set amount to your checking account every month, or on the schedule you prefer, much like a paycheck from an employer. You know what is arriving and when, without deciding what to sell each month. Behind the scenes, we keep that cash account topped up.

If you already receive Social Security or a pension, or will in the future, we factor that in. Those payments come to you directly, and your paycheck from savings covers the difference between them and what you plan to spend, adjusting when they begin.

Bridging the years before Social Security or a pension

If you retire before Social Security or a pension begins, there may be several years with no steady income coming in. Depending on how your savings are set up, we may build a bond ladder, typically using target maturity bond funds. Each fund holds bonds that mature in a particular year, so the ladder provides money for each of those years, feeding the cash account that funds your paycheck. That way, spending in the gap years doesn't depend on selling investments when markets are down.

A paycheck that adjusts with your life

Your paycheck isn't set once and fixed for life. Needs and wants change, and the plan changes with them. Some people find they need less, so the paycheck comes down. Others want to spend more in the early years of retirement, so we plan for that.

Larger expenses work the same way. If you know one is coming, such as a new roof or a family wedding, we can set the money aside ahead of time. And if something comes up on short notice, like a last-minute trip to Antarctica, we can plan around that too, as long as your plan can support it. It's an ongoing conversation, and we work through these decisions together.

Step 3: Where the Money Comes From

Refilling the cash account is where tax planning comes in, because different accounts are taxed differently when you withdraw:

The questions we work through when deciding where to draw from:

• Are required minimum distributions already in place? If so, they go into the cash account first, since they have to come out anyway.
• What could future RMDs look like, and will they exceed what you need? Large traditional IRA balances can mean large required withdrawals later, on top of Social Security.
• If so, should we take more from IRAs now? Drawing extra while there is room in lower tax brackets this year can reduce the balance, and the taxable withdrawals, in future years. See Roth conversions in early retirement for a related strategy.
• Does it make sense to realize some capital gains? Drawing from a taxable brokerage account can be tax-efficient, since only the growth is taxed.
• Are we close to the next tax bracket? Drawing from a Roth account adds no taxable income, which can help avoid a higher bracket, more tax on Social Security, or higher Medicare premiums through IRMAA.

These decisions are revisited throughout the year as your income and the tax rules change, so the paycheck stays steady while the sources behind it adjust.

Paying the taxes. How taxes are paid depends on where the money comes from and the strategy for the year. When funds come from an IRA distribution, federal and state taxes can be withheld directly from it. In other situations, such as realizing capital gains or doing a Roth conversion, estimated tax payments may make more sense.

What You Experience, and What Happens Behind the Scenes

From your side, retirement income should feel simple: your retirement paycheck arrives consistently each month, or on whatever schedule you choose, and you get on with enjoying retirement with relaxed confidence. Behind the scenes, we take care of the work that keeps it that way:

• Refilling the cash account using the tax decisions above.
• Keeping the right mix of investments for your income needs and comfort with risk, and rebalancing as markets move.
• Holding each investment in the right type of account, known as asset location, so more of your returns can grow in tax-advantaged accounts.
• Using tax-efficient ETFs in taxable accounts, which generally distribute fewer taxable capital gains than many mutual funds.
• Monitoring your plan and portfolio, and adjusting as markets, tax rules, and your life change.

Learn more about our retirement income planning and investment management.