I’m Close to Retirement. Why Hasn’t My Advisor Shown Me How My Paycheck Will Be Replaced?
Perhaps you've been told you have enough money to retire. Your investments have grown, you've accumulated savings, and the projections look encouraging.
But are you still wondering, "How do I replace my paycheck in retirement?"
Typically, the direction of your money reverses in retirement. Instead of receiving a salary and regularly contributing to investment accounts, you'll begin relying on the wealth you've accumulated. Knowing your account balance and seeing a projected probability of retirement success isn't the same as knowing where next month's spending money will come from.
This article from Retirement Wealth Advisors examines what a retirement income plan should show you before you leave the workforce.
How Is Your Paycheck Replaced After You Retire?
A retirement paycheck usually comes from coordinating recurring income, with withdrawals from taxable investments, traditional retirement accounts, Roth accounts, cash reserves, and other available assets.
A written plan should show how much income you need, where it may come from, how taxes could affect it, and how withdrawals might respond to inflation, market declines, or changes in spending.
Depending on your circumstances, income may come from:
Social Security benefits
Pension benefits
Taxable investment accounts
Traditional IRAs and employer retirement plans
Roth IRAs
Cash and short-term reserves
Business or real-estate income
Part-time or consulting work
Retirement income rarely comes from a single source. Often, an investment portfolio itself isn't your paycheck. It's one of several financial resources used to create it.
Why Investment Management Alone Does Not Create an Income Plan
Accumulating money and distributing it require different decisions. During your working years, income generally comes from employment, contributions flow into your accounts, and investments may have years to recover from market declines. The emphasis is usually on accumulating assets for the future.
Retirement changes that equation. Withdrawals may occur during unfavorable markets, taxes affect how much money is available to spend, and the timing and source of distributions can affect future years.
That's why learning how to turn retirement savings into income involves more than choosing investments. A portfolio can be well diversified and professionally managed while still leaving its owner without a clear answer to the question: What gets deposited into my checking account next month?
What Should a Written Retirement Income Plan Show?
A useful income strategy starts with your actual finances and the life you expect to live.
1. The Income Your Household Needs
Start by estimating essential monthly expenses, plus discretionary spending, travel, recreation, gifts, family support, healthcare costs, home and automobile expenses, and major planned purchases. Base your income target on your anticipated lifestyle rather than an arbitrary percentage of your final salary.
2. Income Available Without Portfolio Withdrawals
Next, identify recurring income. This could include Social Security, pensions, rental or business income, part-time employment, or other sources. The Social Security Administration lets you review personalized retirement estimates based on your earnings record and different claiming ages.
3. The Gap Your Investments Must Fill
Once you know your expected spending, subtract the retirement income you expect from sources such as Social Security, pensions, rental income, or other recurring payments. That difference gives you a starting estimate of how much your investment accounts may need to provide.
4. The Accounts Used to Fund the Gap
Once you know the gap, the next question is where the money will come from. An effective retirement withdrawal strategy could draw from cash reserves, taxable investments, traditional retirement accounts, Roth accounts, or a combination of sources. Which accounts you draw from and how those withdrawals affect taxes and the rest of your retirement finances will depend on your situation.
5. How the Strategy Will Be Monitored
Spending, the markets, tax rules, and family circumstances can look very different five or ten years into retirement. Your plan should identify the conditions that would prompt another look at withdrawals, spending, or investment risk.
Which Retirement Account Should You Withdraw From First?
There isn't one withdrawal sequence that's appropriate for everyone. The familiar idea of spending taxable assets first, tax-deferred accounts second, and Roth assets last can be too simplistic.
Before deciding where your retirement income should come from, consider questions such as:
How much taxable income will I have this year?
Would selling investments in a taxable account generate capital gains?
Should I take money from an IRA before required minimum distributions (RMDs) begin?
Could a partial Roth conversion make sense during a lower-income year?
Could additional taxable income increase my Medicare premiums?
Do I want to preserve Roth assets for later in retirement or for my heirs?
Am I eligible to make qualified charitable distributions (QCDs)?
Would drawing from more than one type of account give me greater control over my taxable income?
The answers may lead to a different withdrawal mix from year to year. An experienced retirement income advisor can help you analyze your options and coordinate with your CPA when needed.
What Happens If the Market Falls Right After You Retire?
The early years of retirement introduce a major concern: your investments could decline while you're withdrawing money from them. Selling investments during a downturn can leave fewer assets available to participate in a market recovery. This is known as sequence-of-returns risk.
Consider how much investment risk you can reasonably absorb and whether recurring income covers your essential expenses. Your plan should also consider how much near-term spending to keep in cash or lower-volatility assets, which investments could fund withdrawals, whether discretionary expenses could temporarily be reduced, and how the portfolio might be rebalanced.
The objective isn't to predict the next market decline. It's to decide beforehand how your income could continue if investments temporarily lose value.
Six Questions Your Advisor Should Be Able to Answer
A skilled financial advisor for retirement income should be able to answer the following questions when you ask:
How much can we reasonably spend during retirement?
Which income sources will cover our essential expenses?
How much must come from the portfolio each month?
Which accounts may be used for withdrawals—and why?
How could taxes affect our spendable income?
What happens to our income during a prolonged market decline?
If these questions haven't been addressed, there's more work to do. As part of your retirement planning in Southwest Florida, these are practical questions to answer before your employment income stops.
Retirement Wealth Advisors' Perspective: The Income Plan Is the Backbone
At Retirement Wealth Advisors, comprehensive financial and lifestyle income plans are central to how we manage and monitor clients' finances.
We believe you should understand more than how your portfolio is invested. You should be able to see how income may be created, where withdrawals may come from, and which circumstances could require adjustments.
Our team of financial advisors in Florida examines how portfolio construction, risk, spending, taxes, and other financial considerations interact as you move from earning a paycheck to drawing from your accumulated wealth.
If retirement is approaching and you haven't been shown a clear written income strategy, consider getting a second opinion.
Request a complimentary consultation with us here or call us at (239) 288-1575.
FAQs
When Should Retirement Income Planning Begin?
Ideally, retirement income planning begins several years before you leave the workforce. Starting early gives you time to make decisions about how your paycheck will be replaced before employment income ends rather than figuring it out after retirement begins.
How Much Can You Withdraw in Retirement?
There isn't one percentage that's appropriate for everyone. How much you can withdraw depends on your spending needs, age, assets, recurring income, taxes, investment mix, market conditions, and how long your savings may need to last.
What Happens to Retirement Income When a Spouse Dies?
The surviving spouse may experience changes in Social Security benefits, pension income, taxes, healthcare costs, and household expenses. A retirement income plan should account for how much income could remain and whether investment withdrawals would need to change after the death of either spouse.
What Should a Retirement Income Plan Include?
A retirement income plan should identify your spending needs, recurring income, the amount investments may need to provide, potential withdrawal sources, tax considerations, cash reserves, plans for market declines, and survivor income. It should also establish when the plan needs to be reviewed as your finances and circumstances change.
