Five Steps to Generating a Retirement Paycheck

By Jennifer Napper, CFP®, CDFA®

It is never too early to plan how you will turn your savings and investments into a paycheck in retirement – so you can live comfortably and still achieve your goals. For many, the challenge is easier said than done, and comes alongside fears of spending too much now and not having enough later or the disappointment of denying yourself if you don’t spend enough.

Here are five steps to generating your retirement paycheck.

1) Identify your Needs vs. Wants

The first step in determining your retirement paycheck is to identify how much you really need. I ask every client to document on a spreadsheet all the expected expenses in retirement and then tag each expense as a “need” or a “want”. “Needs” are expenses that you have to pay no matter what – such as housing, utilities, food, medical, transportation and insurance. “Wants” are everything else including entertainment, vacations and home improvements. I don’t make a judgement about what you tag as a “need”. I have had clients list everything from dog breeding to car racing as a “need”. This important exercise is to score your priorities in retirement.

2) Identify guaranteed income sources

The next step is to list all guaranteed and dependable income sources. Guaranteed income sources include Social Security, pensions, and annuities with lifetime withdrawals. These are guaranteed to pay you no matter how the stock market performs. Dependable income sources include rental income, bond coupon payments, and other passive income streams that are not guaranteed but you can count on most of the time regardless of stock market performance.

3) Calculate the impact of taxes and inflation

Since most pension and annuity payments are fixed over time, they will not keep up with inflating expenses. And although Social Security payments do increase with inflation, it is usually not enough to counterbalance the rising cost of utilities, taxes, medical and long-term care expenses. It is critical to calculate your paycheck not just for your first year of retirement, but for every year in your lifetime.

4) Evaluate assets to turn into an income stream

Unless you have a generous pension, you will likely have a shortfall of guaranteed and dependable income sources to cover your total annual “needs”. Evaluate how your current retirement assets may serve you better as an income source by shifting the purpose from a growth strategy to an income strategy. This can be accomplished by leveraging more dividend paying stocks, higher yielding bonds, securing annuities paying lifetime benefits, or utilizing the cash value in permanent life insurance policies. I have observed this as a tough shift for some new retirees who have spent their entire working careers focused on getting the biggest investment return possible to now thinking about how to draw down those assets in the most tax-efficient way possible.

5) Put it on paper

Well, it does not have to be on paper, digital documents are just fine. But retirement income planning is not a once-and-be-done exercise. Retirement income planning is a fluid process that requires constant—at least annual--monitoring for changes in the economy, stock market, interest rates, and your lifestyle and medical needs. I recommend you work with a CERTIFIED FINANCIAL PLANNER® experienced in retirement and investment planning to keep on top of the changing landscape to help keep you on track to achieve your lifetime goals.

Opinions expressed are not necessarily those of Raymond James. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Past performance is not a guarantee of future results. Investing involves risk and investors may incur a profit or a loss. Annuity contracts contain guarantees and protections that are subject to the issuing insurance company’s ability to pay for them.