Creating a Retirement Paycheck: Key Concepts and Strategies

When you retire, you’ll no longer receive a traditional paycheck. But income in retirement is just as important as a paycheck is during your working years. In fact, retirement income is a key component to your financial security as a retiree.

While Social Security is the most common source of retirement income in the U.S., chances are it won’t provide enough cash flow to cover your essential living expenses. That’s why most folks will want to collaborate with their financial advisor to create a portfolio of retirement income or what many refer to as a “retirement paycheck.” Your portfolio of retirement income may also include pension payments, annuities and/or investments.

To help you put the puzzle pieces together, renowned retirement and longevity expert Steve Vernon shares key concepts and strategies that can help you secure an income stream for the rest of your life.

Steve, you’ve written quite a bit about creating a portfolio of retirement income. What is a portfolio of retirement income, how does one go about creating it, and why is it so important?

I recommend that retirees develop a portfolio of retirement income that will last the rest of their lives, no matter how long they live. Such a portfolio often consists of guaranteed retirement paychecks (AKA lifetime protected income) and variable paychecks.

The most common sources of lifetime protected income are Social Security, income annuities and bond ladders. A potential new form of protected income for retirees with significant home equity is tenure payments from a reverse mortgage.

Social Security is the best source of protected income since it’s indexed for inflation, won’t go down when the stock market crashes, is paid for the rest of your life and has survivor benefits. As a result, it’s a good idea to maximize the value of your Social Security benefits.

However, many retirees want more lifetime protected income than that provided by Social Security. In this case, you’ll want to explore the pros and cons of the other types of lifetime protected income described previously. Your financial advisor can help you understand the pros and cons of each type and decide which might be best for you.

Variable paychecks include dividend and interest payouts from invested assets or even systematic withdrawals from invested assets that carefully withdraw principal with the intention that your withdrawals and assets could last for life. Critical decisions are the types of investments (stocks, bonds, real estate, etc.) and the withdrawal rate. Here again, your financial advisor is well positioned to help you make these decisions.

Once you’ve set up your portfolio of retirement income, it’s a good idea to match your regular income with your living expenses.

How much of one’s monthly expenses in retirement do you recommend covering with protected income? How much should come from the markets?

The answer is highly personal and would reflect how well you could tolerate fluctuations in your retirement income. One strategy is to cover most, if not all, of your basic living expenses with sources of protected income. This way, if the stock market crashes, you don’t need to move in with your kids.

Basic living expenses would include your mortgage or rent; food and utilities; insurance premiums; and federal, state, and local taxes. Of course, there could be other living expenses that you’d consider to be basic and would need to cover with protected income.

Another possible answer is to have sufficient protected income so that you don’t panic and sell when the stock market is crashing. Study after study shows that panicking and selling during a market downturn is one of the worst financial moves you can make.

However, during a long retirement, it’s inevitable that you’ll experience a handful of stock market downturns. The problem is that nobody has a reliable track record of predicting when the market will crash. As a result, you’ll want to develop a strategy that allows you to survive future stock market crashes when they happen without needing to know when they will happen. Usually such a strategy involves building sufficient lifetime protected income.

Social Security is a key part of creating protected retirement income. In your work you typically recommend waiting until age 70 to begin collecting Social Security payments. You also acknowledge most Americans don’t wait that long. But if people want to retire before 70, should they still delay their Social Security benefits? When is it (or is it ever) a good idea to claim Social Security before reaching age 70?

A common misconception that many people have is that they need to start Social Security benefits when they retire. However, there are good financial reasons to decouple those decisions—there can be significant financial advantages to delaying the start of Social Security benefits after you retire.

While delaying the start of Social Security benefits is often the best financial strategy for many people, there are exceptions to this guidance. For example, for married couples, often the most optimal strategy is for the primary wage-earner to delay until age 70 while the other spouse starts benefits before age 70. Another situation that might call for starting benefits before age 70 is single retirees who might have serious health conditions.

I suggest that pre-retirees work with a qualified retirement advisor to determine the optimal strategy given their circumstances. Additionally, there are several Social Security optimizers that are available online. One of my favorites is Open Social Security, which is free.

If people delay Social Security benefits until age 70 but retire before then, what are some strategies they can use to help bridge the gap in protected income while waiting to collect Social Security?

The best way to bridge the gap while you are waiting to collect Social Security is to earn enough income from working to replace the Social Security benefit that you’re delaying. In this case, you’re not dipping into your retirement savings, allowing your retirement savings to continue to grow with investment earnings.

If working isn’t desirable or possible, then the next best way to bridge the gap is to set up a Social Security bridge strategy. With this strategy, use a portion of your retirement savings to pay yourself the monthly income you would have received had you started Social Security when you retired. I’ve completed research that shows this strategy is one of the most effective ways to generate additional lifetime protected income.

With a Social Security bridge strategy, you’ll need to decide the amount of retirement savings that you dedicate to this strategy and how to invest those savings. The savings you dedicate to a Social Security bridge have a short investment time horizon. As a result, most likely you’d invest these assets differently from your other long-term retirement savings. Your financial advisor can help you set up a Social Security bridge strategy.

From your years of research on longevity and experience working in the retirement field, what is the most important step you’ve personally taken to help secure your retirement that you believe is missing from most Americans’ financial plans?

My wife and I plan for the long game. We believe we could live well into our 90s, and we consider the implications of another 25 to 30 years of life. We spend time thinking about our life, health and finances, and we make very informed decisions. It doesn’t need to be a lot of time, but it’s simply an important priority for us.

We learn from the examples of our older relatives and friends. We revisit our plans when our life circumstances change.

We view this investment of time as training for our “retirement career,” just as we devoted time throughout our working lives to training and updating our skills. We believe that our future selves and our family will be grateful that we have planned to live long and live well.

Steve Vernon is not affiliated with Northwestern Mutual, and the views expressed by Steve Vernon do not necessarily represent those of Northwestern Mutual or its subsidiaries.

This material does not constitute investment advice and is not intended as an endorsement of any specific investment or security. Please remember that all investments carry some level of risk, including the potential loss of principal invested. Diversification and strategic asset allocation do not assure profit or protect against loss.

Under limited circumstances, a reverse mortgage can work as a part of your financial plan during retirement. Homeowners should consider all the risks and explore all of their options before taking out a reverse mortgage, and even then, should use the loan funds wisely. Make sure you fully understand how a reverse mortgage will work with your overall financial plan, and the costs associated with a reverse home mortgage. Because the process can involve complicated documents, it’s also advisable to work with a legal professional to understand the risks and the impact on your heirs and estate plan.