Retirement Planning: What Does it Mean to Get a Paycheck in Retirement?

Time to read: 5 Minutes

Many approaching retirement, including high-income earners who have saved and planned well, find themselves unexpectedly anxious as the milestone gets closer. They worry they won’t have enough money to support their current lifestyle while also being prepared for unexpected expenses and events.

They likely have ideas about what their ideal lifestyle is in retirement, the goals they have, and the legacy they want to leave. However, although they’ve planned and saved well, they aren’t sure how to crack open their nest egg or how to use it on a day-to-day basis.

This can lead to stress and anxiety in a time that should be about fulfilling dreams and resting. For some, it even means putting off a milestone that they’re more than able to afford.

Still, the impulse makes sense. After spending their entire lives earning a paycheck and using it to pay expenses, increase investments, and fund their savings, they aren’t sure how to make sense of, or spend, the lump sum they’ve saved.

Luckily, there is a simple solution to this challenge: getting a paycheck in retirement.

Why is it Important to Get a Paycheck in Retirement?

Even when you’ve saved well, a regular paycheck feels much more certain and secure than drawing seemingly random amounts from a lump sum of money you’ve spent your entire adult life accumulating. After carefully building your retirement funds, it feels wrong to start withdrawing money instead of contributing.

Not to mention, it helps prevent retirees from withdrawing too much, too soon, or living well below their means (and desired lifestyle) due to the fear of spending too heavily.

When we work with people approaching retirement or recent retirees, our goal is to structure their finances in a way that allows them to receive a regular amount of money each month. The only difference is, instead of that income being given by an employer, it comes from their retirement savings, a pension, social security, or some combination of all three.

Getting a consistent, regular amount of money makes it easier to continue paying living expenses, funding their lifestyles, and even setting money aside for larger goals without wondering if the nest egg is being reduced too quickly.

What Should My Monthly Paycheck Be?

If you’re able to live comfortably and enjoy your lifestyle right now, the goal is simple: to replace the amount of income you currently receive each month from your job.

This generally doesn’t mean dividing your salary by 12, because certain expenses, like state taxes, FICA, and retirement contributions, will no longer be deducted. Instead, we look at what your regular monthly take-home pay is and work to replace that income.

How is this Income Generated?

Where this paycheck comes from is different for each individual or couple.

We start by calculating what monthly income you’re entitled to in retirement, such as a pension or Social Security. We then determine what the gap is between that income and your current salary to determine how much money you’ll need to supplement from your own retirement savings in order to continue receiving the same amount of money each month.

For retirees who have income coming in from multiple sources, it’s not uncommon to find that, because of the required minimum distribution from retirement accounts, they actually end up getting a raise in retirement. 

The Income / Growth Bucket Strategy.

“We don’t know how long we’ll live for. How can we be sure the money won’t run out?”

“What if there is an emergency or we need medical equipment that raises our monthly expenses?”

“What if we need to make a large withdrawal that drastically reduces the amount of money in our accounts?”

These are some of the most common questions we receive, and they all raise good points! What it really comes down to is the way your money is structured.

Our Income / Growth Bucket Strategy separates your income into three buckets: income now, income later, and growth.

The first bucket is where we’ll draw your initial paychecks from. Aside from the consistent amount of money being withdrawn, the lump sum isn’t touched, ensuring that it lasts as long as we expect it to.

The next bucket, the “income later” bucket, stays completely untouched until the “income now” bucket is empty. This reserve is where monthly paychecks will come from after the “income now” bucket is empty, but by keeping it separate, we’re allowing it to continue growing untouched.

The third bucket, the “growth” bucket, has two purposes. The first is to handle unexpected emergencies, expenses, and purchases. Money can be removed from the growth bucket without impacting the amount of money available in either of your income buckets or the rate at which they’re able to grow. This means your day-to-day income stays intact and unaffected, but there is money available to be used in case of an unexpected expense.

How Much is Enough to Retire?

Unfortunately, there is no one right answer about how much money is enough to retire. It depends too heavily on individual lifestyle, circumstances, expenses, and target retirement age.

Somebody who lives in a relatively inexpensive area, has no debt, lives below their means, and isn’t responsible for supporting expenses for any children will need less to maintain their lifestyle and goals than somebody living in a high cost of living city who is paying off a high mortgage, has larger monthly expenses, and is in the process of putting their children through college.

Instead of focusing on a specific number that your accounts need to hit for you to retire, we focus on making sure the income buckets have enough money in them to support your lifestyle so that the growth bucket only needs to be used in the event of the unexpected.

If you want to learn more about our Income / Growth Bucket Strategy, check out chapter four of the new edition of “8 Things I Wish I Knew Before I Retired” or reach out to our team to start building your personalized plan!