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How to Create a Retirement “Paycheck” Thumbnail

How to Create a Retirement “Paycheck”

One of the biggest adjustments when retiring is giving up the steady paycheck that comes from your employer. In retirement, you become responsible for replicating that biweekly, or monthly, paycheck yourself. It can be overwhelming thinking about how to coordinate your various income sources and investment accounts to create that paycheck. In this post, we break down the process into five key steps.

Step 1 – Get Organized:

The first step is to understand your unique situation and what resources you have available. You’ll want to list your income sources and investment assets:

  1. Income sources – These include Social Security, pensions, annuities, and any part-time work you expect to do in retirement.
  2. Investments assets – These include your retirement accounts (401k, 403b, 457b, IRAs) and any taxable investment accounts.

Step 2 – Know Your Expenses:

How much will you spend in retirement? Expenses come in several forms:

  1. Annual fixed expenses – Things like property taxes, food, health insurance, etc.
  2. Annual variable expenses – Traveling, eating out, entertainment, etc.
  3. One-off expenses – Weddings, new cars, big family trips, etc. 

Step 3 – Understand How Much You’ll Need to Withdraw From Your Investment Accounts:

In step one, you listed your investment assets and income sources. Now, the goal is to understand how much you’ll need to withdraw from your investment assets.

Annual Expenses – Annual Income Sources = Amount Needed From Investment Accounts Each Year

For example, if you expect to spend $100,000 and will receive $66,000 from Social Security, you’ll need to withdraw $34,000 from your investment accounts each year to pay for your lifestyle:

$100,000 (expenses) – $66,000 (income sources) = $34,000 (amount needed from investment accounts)

Step 4 – Confirm That Your Investment Withdrawal Rate Is “Safe”:

There’s a rule of thumb, called the “4% Rule,” which says that over a longer period of time (the typical retirement period), investors can withdraw approximately 4% of their investment portfolio’s value each year without running out of money. This assumes a diversified portfolio of stocks and bonds.

When looking at your own situation, compare the required annual withdrawals from your investment accounts (from step three) to the value of your portfolio to ensure that you’re within the 4% range. For example, if you had $1,500,000 of investment assets and needed to take $34,000 from your investments each year, the math would be as follows:   

$34,000 (amount needed from investment accounts) / $1,500,000 (investment assets) = 2.3% (your withdrawal rate)

If your expected withdrawal rate is above 4%, consider whether you need to adjust things, such as annual spending, income sources, or retirement age, in order to retire safely and confidently.

Also consider whether there are any temporary factors, such as a large one-off expense or delayed collection of Social Security, that are impacting your expected initial withdrawal rate but will cause your withdrawal rate to fall below 4% in the future.

Step 5 – Withdraw From Your Accounts in a Way That Minimizes Taxes:

Different investment accounts are treated much differently when it comes to taxes:

  1. Roth accounts = no taxes when money is taken out.
  2. Traditional (or tax-deferred) accounts = each dollar taken out is taxable at your ordinary income tax rate.
  3. Taxable accounts (individual or joint) = preferential tax rates when investments are sold.  
    • Investment gains (if held longer than a year) are taxed at capital gains tax rates, rather than at ordinary income tax rates.

You can be strategic about the way you withdraw from your investment accounts if you know that money is taxed differently depending on which account it’s taken from. So, for example, if you need $34,000 from your investments, rather than just taking the entire amount from your taxable accounts, you may decide that you would be better off taking the $34,000 from some combination of your tax-deferred, taxable, and Roth accounts.

While the specifics are beyond the scope of this blog post, it’s important to develop an intentional tax planning and account withdrawal strategy if you hope to minimize your retirement tax bill. You can read more on tax planning in retirement here.


The transition to retirement brings significant change and there are many decisions that must be made in order ensure your money lasts. By following this five-step process before retiring, you’ll have a much better understanding of how your various investments and income sources will fund your lifestyle (and whether it’s sustainable). From there, hopefully you can have the peace of mind to enjoy your ideal version of retirement while knowing that you’ll still have a steady “paycheck” coming your way each month.  


About MD Wealth Management: We are an Ann Arbor financial planner that specializes in providing financial planning for physicians and retirees. We are CERTIFIED FINANCIAL PLANNER™ professionals and fiduciary financial advisors who operate on a fee-only basis, which means we do not sell financial products or collect commissions. As an Ann Arbor financial advisor, we enjoy working with clients both locally and remotely.