Generating a Retirement Paycheck
Great news, you made it to retirement. Congratulations! You have built your nest egg, but you are probably asking, how do I make my retirement savings work for me? More specifically, how can I pay myself in retirement? I need some beer money after-all.
In this post, I will share my strategy, as a guide. But, developing a ‘Retirement Paycheck’ is a serious and complex matter that varies by individual. I recommend that everyone do their research, and consult with a financial professional to develop a plan specifically for their needs.
I have to admit, I will miss the 15th and 30th of every month when my employer deposits my pay into my bank account. Now, I’m responsible for that. That’s a big responsibility! Here is my game plan. I plan to use a common method called the 'Bucket Approach’ for generating my retirement paycheck.
Bucket #1: Cash
Your ‘cash bucket’ contains your most liquid assets and is risk-free, meaning the value is not exposed to the market. Think, checking/saving accounts, money market accounts, etc. You will use this bucket to generate your retirement paycheck. I plan to pay myself once a month given the timing of my expenses. You may prefer weekly or twice-monthly payments. Choose a payment timeframe that makes the most sense for you, based on your cash flow needs.
In general, this bucket should contain 2 - 3 years of your annual income needs minus any other income you are receiving from social security, pensions, rental income, etc. I hope you read my previous post on 'How to Make the 80% Rule Work You?'. If not, check it out.
Note: The 2 - 3 years is a guideline to protect you from market fluctuations. You want to avoid selling your medium or long-term investments in a down market. The ‘cash bucket’ gives you quick access to your money but also provides a hedge when the markets are negative. I plan to ‘refill’ this bucket each year, as long as the market is healthy. Currently, I have this money invested in a high yield money market account which is returning ~1.8% per year.
Bucket #2: Fixed / Stable Income
The second bucket is the primary source to refill your cash bucket. In this bucket, I have fixed income investments that generate steady income for the intermediate term (think 4 - 8 years). There are many strategies to create this bucket by using individual bonds, bond mutual funds, stable dividend-paying stocks, or high yield CDs. My bucket contains fixed income investments that mature in 2 to 5-year intervals.
One popular method of using fixed income is to create a ‘bond ladder’ of investments that mature at different timeframes. A bond will generate income (generally monthly) that you can use to refill your cash bucket. Then, at maturity, you can reinvest the principal into another bond or use the cash for other purposes. Below is a bond ladder example from Fidelity Investments.
Bucket #3: Long Term Growth
The last bucket is focused on long-term growth. Think of this bucket as your most risky but highest reward (return) bucket. These investments have a 10+ year time horizon, and the proceeds from this bucket will primarily fill bucket #2 above - when needed. Some typical investments in this bucket are growth and dividend stocks or mutual funds. The goal of this bucket is to produce long-term growth and income that will outpace inflation. It should closely track to the stock market and generate reasonable returns over time. For this bucket, I plan to use a combination of growth and income mutual funds.
As mentioned above (hopefully you were paying attention), generating a ‘Retirement Paycheck’ is complex and should be tailored to your needs and goals. Also, your buckets will need to evolve over time - this is not a set-it and forget-it strategy. I strongly recommend working with a financial professional to develop a plan and to check-in on an annual basis to ensure you are on track. To Retire Happy, you need to get this right!
Have you developed a ‘Retirement Paycheck’ plan? If so, are you using the bucket approach or another method? How’s it going? Please share your strategy with the WorkFlowRetirement Community.
I would love to hear from you, help you, and answer your questions. Please join our community here.
Good luck and let's #RetireHappy.