Newly Retired? 6 Tips for Setting Up Your Retirement Paycheck

As someone transitioning out of the working world, you have spent years building your wealth for the moment you can start cash flowing from your investments. However, when setting up your new retirement paycheck, the process of working with multiple sources of income can be confusing and may even trigger some anxiety. It may take a while to get into a rhythm, especially for the first couple of years. Here are six tips that might help:

1. Know how much of your income will be covered by non-investment sources.

A part of your income may be covered by reliable monthly sources outside your retirement savings, such as a pension, Social Security or even part-time work. Some of these sources will be paid to you immediately, and others may be delayed a few months or longer. You may have additional compensation, such as a bonus, that may be paid out later, depending on your company policy and the timing of your retirement.

If you are delaying Social Security or waiting to start a pension to lock in a higher monthly amount for yourself or your spouse, you'll want to ensure you are making up for that interim cash flow gap.

Having these income figures on hand will be a helpful starting point when deciding how to manage your portfolio withdrawals. 

2. Understand the relative tax costs to generate each dollar of portfolio income.

Not all investment withdrawals are the same from a tax perspective. Distributions from a Traditional IRA or 401(k) will be subject to ordinary income taxes, and you may owe capital gains taxes on sales needed to generate cash from a taxable investment account.

In other words, for every dollar of living expenses, you will often need to take out more than a dollar from your investments. If most of your income comes from a Traditional IRA withdrawal, you'll want to plan accordingly for taxes as you calculate the net amount that you need.

Deciding how to efficiently source cash from your portfolio can be a nuanced process. Still, with some thoughtful planning and guidance from your wealth advisor or tax professional, it can pay off over the long term. Every tax dollar saved translates into more money in your pocket. 

3. Pay yourself regularly—annually, monthly or quarterly.

During your working years, you may have been getting paid every two weeks. Changing the frequency of your income can be a big adjustment. Mimicking the timing of your paychecks in retirement could help smooth this transition. For others, having a savings account with cash on hand for the year or quarter may offer greater peace of mind. 

How do you plan for lumpy expenses such as annual property taxes, insurance premiums, vacations or other surprise costs? Knowing the timing and expected amounts of those irregular or extra expenses can help ensure your cash buffer is sufficient over the coming year. You may need more cash going into the summer months for vacations or toward the end of the year for gifts. Give yourself time to track whether you are under- or overestimating, rather than cutting it so close that you need to adjust each month.

4. Don't limit your view of portfolio withdrawals to portfolio yield only.

If you invest with a total return approach, your cash flow will come from a combination of sources such as dividends, interest payments and selling positions with capital gains. This approach differs from other methods, such as an income-focused strategy, which bases your cash flow on yield only, such as dividends or bond payments.

Understanding the underlying sources of portfolio withdrawals can be hard to grasp early in retirement, as you may naturally feel concerned about keeping your principal and wanting to only withdraw the income that you’re earning. However, this can be higher or lower than your actual needs, and we believe it is better to tailor your withdrawal strategy to your true income requirements.

5. Plan for higher expenses early in retirement.

Many people cut back on expenses as they near retirement, then increase their spending in the first couple of years of retirement. Sometimes, the new freedom of retirement leads us to spend on long-awaited goals. Or higher expenses may simply result from increased everyday costs, such as dining at restaurants more often, traveling more frequently or dedicating more money to health goals. An increased portfolio withdrawal rate could also be due to unforeseen circumstances such as a health event or the desire to provide family support.

While it’s always important to monitor your expenses and withdrawal rate, we think it’s wise to enter your first couple of years of retirement prepared to spend more than you might have initially planned in order to minimize potential surprises.  

6. Spending from your portfolio instead of a paycheck will feel different.

Many new retirees get concerned that they are spending too much. It may feel like your outlook on the financial future has changed radically in just a few months. You might even wonder if you should return to work, just to regain a greater sense of certainty and security—especially if budgeting conversations with your spouse are triggering stress.

It's perfectly natural for spending a dollar from your portfolio to feel different than spending a dollar from your paycheck, and it may take some time to get comfortable with this new reality. In our experience, knowing how you will turn your portfolio assets into cash flow, and approaching the process with some flexibility as you adjust, can help smooth the financial and emotional transition out of the working world and into the next phase of life.

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