How to Turn Your Retirement Savings into a Reliable Monthly Paycheck
For thirty or forty years, your financial focus has likely been singular: accumulation. You saved, you invested, and you watched the pile grow.
But the day you retire, the game changes completely. The goal shifts from accumulation to decumulation. This transition is often the most stressful part of retirement planning. The nagging question shifts from "Did I save enough?" to "How do I spend this without running out?"
Turning a lump sum of savings into a reliable, consistent monthly paycheck requires a different set of tools and a shift in mindset. In this post, based on our latest episode of Retire & Thrive, we break down an approach for creating sustainable income designed to support income throughout retirement.
Way #1: Establishing Your Guaranteed Income Floor
Before we touch your investment portfolio, we need to establish your foundation. Guaranteed income sources are the bedrock of a secure retirement because they are unaffected by stock market volatility.
For most people, this means Social Security. (Social Security benefits are guaranteed by the U.S. government, subject to program rules.)
The Social Security Math: 62 vs. 70 One of the most important decisions you will make regarding your guaranteed income is when to claim Social Security. It is not just a matter of waiting a few years; it is a mathematical decision with permanent consequences.
- Claiming at 62: You receive a reduced benefit for life. You are essentially accepting a permanent pay cut in exchange for getting the money sooner.
- Claiming at Full Retirement Age (e.g., 67): You receive 100% of your earned benefit.
- Deferring to 70: For every year you wait past your full retirement age up to age 70, you receive roughly an 8% guaranteed increase in your benefit amount.
Waiting until age 70 can result in a monthly payment that is significantly higher than claiming at 62. While not everyone can afford to wait, understanding the math is crucial before locking in a permanent decision.
Way #2: Calculating Your "Income Gap"
Once you know your guaranteed income numbers, you need to figure out what is missing. This is what we call the "Income Gap."
Calculating it is simple but vital:
Total Monthly Retirement Expenses (What you need to live) MINUS Total Guaranteed Income (Social Security, Pensions, etc.) = The Income Gap
If you need $8,000 a month to live comfortably, and Social Security provides $4,000, your Income Gap is $4,000.
This number is your target. It is the amount of money your investment portfolio must reliably generate every single month.
Way #3: Portfolio-Based Income and Withdrawal Rates
How do you fill a $4,000 a month gap using your savings without the risk of draining the account in your 80s?
This brings us to the withdrawal rate formula. You may have heard of the "4% Rule," which suggests you can withdraw 4% of your portfolio in year one and adjust for inflation thereafter.
While the 4% rule is a helpful starting guideline, it is not a guarantee. Market conditions in the early years of your retirement can drastically affect the sustainability of that rate. A truly robust income plan tests different withdrawal rates against historical market downturns to evaluate if you have a high probability of success across a range of market conditions. Any withdrawal strategy depends on assumptions about market returns, inflation, and individual circumstances, which can vary significantly.
Optimization: Tax Buckets and the Cost of Cash
Creating the paycheck is step one. Optimizing it is step two.
Flexible Income Layers (Tax Buckets) When you pull money from your portfolio to fill the Income Gap, where you pull it from matters tremendously for your tax bill. You generally have three buckets:
- Tax-Free: Roth IRAs or Health Savings Accounts (HSAs).
- Tax-Deferred: Traditional IRAs or 401ks (you pay ordinary income tax upon withdrawal).
- Taxable: Brokerage accounts (subject to capital gains taxes).
A strategic income plan pulls from the right buckets in the right years to keep you in the lowest possible tax bracket throughout retirement.
The Opportunity Cost of Cash Finally, many retirees fall into the trap of holding too much cash out of fear of market volatility. While you need an emergency fund, holding excessive cash in a high-inflation environment means your purchasing power is eroding every year. Your portfolio needs to be working hard enough to outpace inflation so your future purchasing power is protected.
Moving from Anxiety to Confidence
Moving from saving to spending does not have to be terrifying. By accurately calculating your Income Gap, maximizing your Social Security benefits, and applying a disciplined withdrawal strategy to your portfolio, you can build a personal pension that provides reliable income for life.
Fortress Financial Group LLC (“FFG") is a registered investment advisor. Advisory services are only offered to clients or prospective clients where FFG and its representatives are properly licensed or exempt from licensure. For current FFG information, please visit the Investment Adviser Public Disclosure website at www.adviserinfo.sec.gov by searching with FFG’s CRD# 315329
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. The information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor. All strategies involve risk, including the potential loss of principal, and no strategy can guarantee income or investment results.
