What is Your Plan to Replace Your Paycheck in Retirement?
Written on November 09, 2021

What is Your Plan to Replace Your Paycheck in Retirement?

This is the second in our series on managing retirement income.  We regularly receive the following question from prospective and current clients as they save for or transition to retirement:

How do I replace my work paycheck with a new “retirement paycheck”?

Many of us will not be eligible for traditional pension benefits when we retire.  Social Security benefits may cover basic needs, but for most, they will not be enough.  Having a plan for how to build your investment assets and later utilize them to fund your retirement paycheck is critical.

Here are a few tips to create a robust retirement income plan.

Building Your Assets

Tip #1 – Don’t shortchange building investments outside of your tax-deferred 401(k) or IRA.  Yes, take advantage of tax-deferred savings opportunities when you are in your peak earning years (and maybe in a higher tax bracket).  But also work to build assets in your after-tax accounts to provide options for managing your retirement income tax liability down the road.  Long-term capital gains realized in after-tax accounts can be subject to a more favorable tax rate (no higher than 15% for most individuals).  Some or all long-term capital gains may be taxed at 0% if your taxable income is less than $80,000 (married) or $40,000 (single).  Withdrawals from tax-deferred accounts are taxed at ordinary income rates which could be higher.

Tip #2 – Take advantage of Roth contributions if you can.  If your income level qualifies you for Roth IRA contributions and you are currently in a lower tax bracket, take advantage of this opportunity.  Can’t qualify for a Roth IRA?  See if your employer offers a Roth 401(k) as there are no income level restrictions to contribute.


Tip #3 – Assess retirement feasibility 3-4 years before your intended retirement date.  This is a good time to test the status of your nest egg and assess if your savings are sufficient or if adjustments need to be made to your plans.

Converting your Assets to a Paycheck

Tip #4 – Review your investment blend as you transition to retirement.  Depending on your planned portfolio withdrawal rate, adjustments to your stock and bond allocations may be recommended.

Tip #5 – Actively assess income tax planning opportunities before required IRA distributions start at age 72.  The window between your retirement date and age 72 can present opportunities for Roth IRA conversions, withdrawals from tax-deferred accounts, or recognition of capital gains in after-tax accounts to fill up lower tax brackets before required distributions start.

Tip #6 – Be flexible!  Retirement income planning is a complex and dynamic process.  Your needs will adjust over a decades-long retirement.  Tax rules change over time.  Be ready to tweak your strategy when needed.

Don’t miss the first article in our series on managing retirement income: Yes! You Can Manage Inflation Risk.

- Cris


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