4 Steps to Consider When Building a Retirement Paycheck

From your daily routine to your living arrangements, plenty of things big and small may change as you move into retirement. While you might find yourself balancing a lot at once, one of the most important considerations is how to manage your money without the structure of a steady paycheck.

Retirement looks different for everyone, and your financial needs may change as you navigate its various stages. For that reason, it’s important to ensure your available funds will cover your day-to-day needs and wants while also potentially sustaining you for multiple decades. Thoughtful planning can help you manage not only the essentials but also any larger dreams you might have for this next chapter.

Building a “retirement paycheck” for yourself can be a big help in this regard. Not sure where to start? Breaking it down into manageable steps can streamline the process. Here are some points to keep in mind as you go: 

1. Identify Your Sources of Income

A good first step in building your retirement paycheck is determining what sources of income you’ll have at your disposal. These could include:

• Savings from your current salary, as well as any working income from your spouse or a new job in retirement

 

• Social Security

 

• A pension

 

• Income from any rental properties you might own

 

• An inheritance

 

• Retirement plan distributions

 

• Investment income, including interest, dividends, appreciation, and the principal itself

 

When it comes to Social Security, you can use the government’s retirement benefit estimator, which uses your salary from the previous year to project what your benefit amount might be. On average, retirees receive $1,905 per month from Social Security.¹

Also think about how much you’ll be withdrawing from your retirement accounts each year. Required Minimum Distributions, or RMDs, are the amount you must withdraw, but there may be times when you’ll want, or need, to take out more—and that amount could fluctuate as you go through different phases of your retirement. 

2. Understand the Timing

In addition to knowing where your income will come from, it’s important to know when you’ll take or receive it from these various sources.

You can choose when you’d like to begin receiving your Social Security benefit, usually between the ages of 62 and 70. If you start before what’s called your “full retirement age,” you’ll receive a percentage of what you’re entitled to, but if you wait until your full retirement age, you can receive 100% of your benefit amount. And if you wait even longer, you can receive even more over the lifetime of the benefit.

When it comes to your retirement accounts, you can typically start withdrawing funds without incurring a tax penalty once you turn 59½. If you have a traditional 401(k) or IRA, you will be required to take RMDs once you reach age 72 (or 70½ if you turned 70½ in 2019 or earlier). The amount of your RMD is based on a calculation set forth by the IRS, involving both the account balance and what’s called a life expectancy factor. This information is outlined at IRS.gov.

Knowing these milestones can help give you a picture of when money will be in motion and help you be more thoughtful about your tax strategy. And if you’ve been diligent about building up your personal savings, you may be able to delay the start of Social Security to maximize your benefit and keep the money in your retirement accounts invested for as long as possible to maximize potential earnings.

3. Work With Your Budget

A retirement paycheck and a retirement budget go hand in hand. After determining your potential income, map out your anticipated expenses and divide them into must-haves and nice-to-haves, before building in any loftier, higher-cost goals.

In a perfect world, your available income would cover your needs, wants and the inevitable surprises. But it’s possible that your paycheck and budget won’t immediately line up. If there’s a gap, it might be time to reevaluate one or the other, or both, for a more practical look at your retirement picture. Just like while you’re in the workforce, it’s important for your budget and paycheck to work in tandem.

Leading up to retirement, it can be helpful to practice living on your proposed retirement budget to ensure it’s realistic.

4. Expect the Unexpected

Of course, no matter how well you prepare, you’re bound to face some unexpected challenges in retirement—including risks posed by the market or inflation, or long-term care needs. Plus, it’s impossible to know how long of a retirement you’ll be planning for in the first place.

One thing you may want to consider is maintaining an emergency fund, aiming to keep the equivalent of at least three to six months of living expenses available in easily accessible accounts, on top of the other savings you’ve already accumulated to cover everyday costs and predictable bills.

Putting It All Together

In the absence of a steady paycheck from work, creating a retirement paycheck for yourself may help ease your financial transition into the next phase of life and ensure that your money stretches as far as it needs to. 

With a clear understanding of your income sources, a sense of when you’ll tap into them, a budget outlining your inflows and desired outflows, and an emergency fund in place, you have some fundamentals to get you started. To put it all together, you may want to consider:

• Putting a real number on your projected spending needs for each phase of retirement;

 

• Figuring out how long you can rely on savings and other more liquid funds before you need to start tapping into Social Security and your retirement accounts;

 

• Factoring taxes into your overall strategy;

 

• And then determining how much you’ll “pay yourself” from each income source on a monthly basis.

 

If you have questions or need a helping hand to build out your strategy, it can be a good idea to consult a financial professional and/or your legal and tax advisor, who can help you determine specific steps to take based on your needs and goals.