For decades, your financial life likely followed a routine. You worked; you got paid. Every week or two, money showed up in your account, predictable and dependable. Then retirement arrives, and that steady employer paycheck may disappear.
In its place is something potentially far less familiar: a collection of accounts, benefits, and decisions you must make to figure out how to “pay” yourself—aka retirement income planning. That shift can feel overwhelming, but it doesn’t have to. There are steps you can take and options to explore that may help you recreate a paycheck for yourself in retirement, one that not only covers your needs but also allows you to enjoy what you’ve worked and saved so hard for. Here are a few steps to consider to help you get there.
1. Determine what you’ll need
Start with a simple question: What does your life actually cost? To answer this, consider looking at some of your recent months’ expenses and mapping out your spending habits. Split them into 2 distinct categories:
- Essentials (must-haves): Housing, food, health care, insurance, taxes—anything non-negotiable.
- Non-essentials (nice-to-haves): Travel, dining, gifts, hobbies, entertainment—anything you could live without if you had to.
Many people will need to replace between 55% and 80% of their pre-tax, pre-retirement income after they stop working to maintain their lifestyle in retirement.1 You may be wondering: Why not 100%? Think about the ways your life is changing. You’re not contributing to retirement savings plans anymore; you don’t need to commute or buy work clothes; and maybe you’ve paid off some bigger expenses, like your mortgage.
Regardless of your situation, separating your spending into these 2 categories can help give you a clear picture of what you’ll need to cover when planning that replacement paycheck.
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2. Identify what you already have
Now it’s time to take inventory of your income sources. You can break it down into 2 smaller steps.
First, take your “guaranteed (or predictable) income”—money that will come in no matter what. There are 3 potential sources:
- Social Security: This is a monthly financial benefit available to those 62 and older who have worked and paid Social Security taxes for at least 10 years. However, your exact payout amount depends on your lifetime earnings, the age you begin claiming Social Security, and the specific program you qualify for.
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- Pensions: A pension is a retirement plan set up by an employer or government that provides payouts after you stop working. The amount you receive is typically determined by your salary and years of service. But pensions aren’t as common as they used to be. In fact, only 15% of workers in private industries have access to a defined benefit pension plan in the US.2
- Income annuities: These are contracts issued by an insurance company that, in return for an upfront investment, guarantee3 to pay you (or you and your spouse) a set amount of income either for the rest of your life or for a set period of time. There are different types of income annuities with different payout options and timelines, so consider speaking with a financial professional to help you fully understand your options.
Second, layer in your savings and investment accounts. You’ve been saving potentially for decades, so look thoroughly and make sure you don’t forget about any old employer plans. These types of accounts can include:
- Traditional (aka tax-deferred) 401(k)s and IRAs
- Roth (aka tax-free) accounts
- HSAs
- Brokerage accounts
- Cash savings
Once you tally everything up, you should have a full picture of your assets and can plan your paycheck from this pool. Tip: Always try to cover your essential expenses with predictable income sources first. From there, your savings and investments can help fill in the gaps.
3. Understand what “required minimum distributions” (RMDs) are
Before deciding how much and from which account to withdraw, it’s important to know that some withdrawals aren’t optional.
Starting at age 73, retirees are required to take RMDs—or required minimum distributions—from tax-deferred retirement accounts. If you’re still working past 73, you still have to take RMDs from your IRA but can potentially delay withdrawing from your workplace plan if you meet certain criteria.
These withdrawals are calculated each year based on your age, total account balances, and the life expectancies of you and your beneficiaries. They count as taxable income and can come with steep penalties (of 25% of the amount not withdrawn) if missed. In other words, RMDs create a mandatory income stream, whether you need the money or not, so it may be beneficial to incorporate them into your retirement paycheck strategy ahead of time.
Your next read: Making sense of RMDs
4. Plan ahead for taxes
With paychecks, many of us focus on what we get to keep, or our take-home pay. With retirement income, knowing how taxes can affect the amount you “take home” can help you plan when, how much, and from which account you withdraw. There are 3 main types of accounts:
- Taxable: Think brokerage and other investment accounts that are not tax-advantaged. Investment activity and withdrawals from these accounts may be taxable. Activity that increases income can impact Social Security taxation and Medicare premiums.
- Traditional (tax-deferred): Think traditional 401(k)s, traditional 403(b)s, traditional IRAs, and rollover IRAs. Distributions from these accounts may trigger income taxes, which can get progressively higher the more you withdraw. These types of withdrawals may also increase your overall income and can impact other calculations such as Social Security taxes and Medicare premiums.
- Roth: Think Roth 401(k)s, Roth 403(b)s, and Roth IRAs. Qualified withdrawals are not subject to tax because taxes were paid when you contributed or converted to these accounts.4
5. Build your withdrawal strategy
Fidelity suggests you consider withdrawing 4%–5% from your savings and investments in your first year of retirement. From there, increase that first year’s dollar amount annually by the inflation rate and readjust as needed. You can choose how much and from where that money comes in a way that fits your unique situation.
There are 2 main approaches:
- Traditional approach: This is when you withdraw from taxable accounts first, then move to your traditional tax-deferred accounts, and finally your Roth accounts. The goal: to give your tax-deferred and Roth accounts the opportunity to potentially grow for as long as possible. However, this approach tends to see an inconsistent tax bill each year, potentially paying very little the first few years, then a significant amount in the middle, and then nothing once you start withdrawing from Roth accounts.
- Proportional approach: This is when you withdraw a portion of your desired total amount from each account you own at the same time. The goal of this approach is to help stabilize your tax bill over retirement, so you pay a similar amount in taxes year over year and potentially lower your lifetime taxes overall. This approach also may reduce Social Security taxes and Medicare premiums.
Consider working with a financial professional to help you understand each approach’s implications and what may work best for you. Check out the link below for detailed examples of each withdrawal strategy.
Your next read: Tax-savvy withdrawals in retirement
Step 6: Automate and adjust as needed
A lot of people can agree that payday is a good day: You wake up and there’s more money in your account than when you went to bed the night before. So how can you recreate that ease and accessibility in retirement? Enter: automation.
Depending on your accounts’ capabilities, consider setting up automatic transfers directly to your checking account. You can schedule your automatic transfers to align with bill due dates to avoid missing payments. This strategy can also help you avoid missing any RMD deadlines and potentially facing penalties.
Now set it—but don’t forget it! The only constant in life is change, so your current plan may need tweaks in time, and that’s OK. Your plan should adapt to life’s inevitable curveballs. So whether you’re planning on your own, with a partner, or with a financial professional, check in annually and consider running through steps 1–4 to make sure your plan is still working. Then adjust as needed.