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Creating a “Paycheck” in Retirement Thumbnail

Creating a “Paycheck” in Retirement

Did you know retirement is listed as one of the ten most stressful life events, alongside things like marriage, divorce, and pregnancy?!  Even joyous, momentous times in our lives can be stressful because of all the unknowns that change can bring.  While we can’t help you figure out what hobbies will keep you busy or what volunteer work will fulfill you during your retirement years, we can be your partner as you navigate all things related to your finances.

Retirement planning is much more than just answering the question, have I saved enough to retire comfortably?  It can also include tax planning for lower-income years, charitable giving strategies, social security timing, gifting, estate planning, and much more!  We have found a question that clients entering retirement commonly ask is how to create a recurring income stream once the paycheck stops.

Nearly gone are the days of relying solely on pensions and social security to fund your retirement years.  30% of people still in the workforce plan to use a pension to help fund their future retirement, compared with 54% of retirees who say they are currently using pension money1.  Pensions in the United States first became available to a large portion of Americans after the Civil War, when the federal government provided pensions to Union Army widows and veterans disabled in the war2.  The American Express Company developed the first formal pension in 1875, with railroads, among the largest employers in the country, also beginning to provide pensions in the late nineteenth century2.  Social Security began in 1935 when the average life expectancy for white males was 61 and 65 for white females.  Fortunately, or unfortunately, Social Security is the primary source of income for most retirees, with the average life span increasing to 79 for 2023.  

After decades of working and receiving a regular paycheck, how do you turn your savings into a retirement paycheck?  How are regular withdrawals from your investment portfolio affected by the ups and downs of the stock market?  Let's take a look at a sample portfolio:

For a real-life example, let’s go back to the stock market crash of 2008.   The market decline began in October 2007 and bottomed out in March 2009.  It took until March 2013, a little over five years, for the Dow Jones to recover to its October 2007 highs. On the contrary, the Vanguard Total Bond Market Index (VBTLX) had positive returns during this same 2007 to 2009 period. What would happen to that retirement paycheck in a scenario like this?  With 2022 as the exception to the rule, we view bonds (along with cash) as the cushion of your portfolio.  We build your portfolio to have enough cash and bonds to weather substantial market downturns, so we don’t have to sell your stock investments while they are down.  Let’s use this same portfolio example as above to see how long your retirement paycheck could last during a market downturn:

While the evolution from the Defined Benefit Plan (Pension) to the Defined Contribution Plan (401k) has created less “certainty” in retirement, it has also given retirees more control over their retirement income.  This includes more power over how your retirement funds are invested, as well as the ability to increase your annual withdrawals to keep pace with inflation.   And while a pension is finite, retirement assets can live on through legacy planning with family and charities.

  1. https://www.axios.com/2023/07/20/retirement-savings-planning
  2. https://eh.net/encyclopedia/economic-history-of-retirement-in-the-united-states/#:~:text=As%20military%20and%20civil%20service,in%20the%20late%20nineteenth%20century.
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