The Last Paycheck

Living comfortably in retirement means stitching together different sources of income.

When you retire, you’ll share a common experience with everyone who has already made the change: You won’t get a paycheck anymore. Without this steady stream of revenue, you’ll have to arrange for the income you’ll need to live. Specifically, you’ll need to consider the following:

• What sources of income are you confident you can count on?
• How much income will they provide each year?
• How and when will the income be paid?
• How will you coordinate payments from different sources to create a steady stream of income so that there’s money in the bank when you need it?

What the sources are

You’ll probably count on income from a number of different sources.

Social Security income is paid to people who contribute to the system, to their spouses, and in some cases to their dependents.

Pensions provide income from a retirement plan your employer has established for you or in your name.

Employer-sponsored defined contribution plans let you use pretax salary to build an investment portfolio. You must begin to withdraw your assets either when you retire or after you turn 73 in most cases.

IRAs are individual retirement accounts in which your investments grow tax deferred. You may begin withdrawals without penalty, usually after age 59½, and must take minimum required distributions from traditional IRA accounts after you turn 73.

Annuities are tax-deferred insurance company contracts that can be converted to a regular stream of income, which may either continue throughout your lifetime or for a specific period you choose.

Personal investments in stocks, bonds, mutual funds, real estate, CDs, and other products can provide retirement income, be converted to cash, or be used to buy income-producing investments.

Jobs, either part-time or full-time, can provide income as you need it.

The income they’ll provide

The amount of income you’ll receive from Social Security or a defined benefit pension depends on your work history and your final salary. In most cases, the longer you work and the more you earn, the more retirement income you can anticipate.

On the other hand, tax-deferred retirement plans (including employer-sponsored plans), IRAs, and variable annuities produce income in relation to the amounts you put into them and the investment choices you make.

The average retired person gets the largest percentage of his or her retirement income from Social Security, continuing employment, employer pensions and other retirement savings, and the rest from a combination of investment assets, according to an analysis of US Census Bureau data by the Employee Benefit Research Institute. In the future, though, there’s consensus among retirement experts that employer pensions and Social Security will provide less. That means personal investment assets are going to have to play a much larger role for most people.

Putting it together

Managing your finances during retirement involves juggling your sources of income to make sure you have enough money to live on. It’s a lot like making a quilt: No piece by itself is big enough to keep you warm at night. But properly stitched together, the pieces can provide a lot of comfort.

Investments but not income yet

Though you may have substantial net worth, not all of your investments may produce income. Certain stocks have value but don’t give you access to cash until you sell them or use them as collateral to borrow. And unless you have thousands of shares, even stocks that pay regular dividends rarely provide enough money to live on.

If your primary real estate investment is your home, it won’t produce income either. You may be able to arrange a reverse mortgage, or loan against your equity. But unless you’re quite old, the amount will be relatively small. What’s more, you’ll be increasing the amount of the loan that must be repaid every time you draw on your equity.

An alternative is to shift some of your assets gradually into investments that provide income either through annuitization — a regular, lifetime payout from an annuity — or a systematic withdrawal arrangement. What you need to make the best use of your investment assets is a plan for producing the income you need and a strategy to make it happen. One caution, though, is that the guarantee behind lifetime annuity income depends on the claims-paying ability of the issuer.

When the money arrives

Unlike a paycheck, which arrives regularly, retirement income arrives on different schedules. Social Security checks and annuity and pension payments usually come monthly. Others, like stock dividends, arrive quarterly. Interest on most bonds is paid semi-annually. Few, if any payments, are weekly or bi-weekly. That means you have to think about balancing the amount coming in to meet your expenses.

This information is provided with the understanding that the authors and publishers are not engaged in rendering financial, accounting or legal advice, and they assume no legal responsibility for the completeness or accuracy of the contents. Some charts and graphs have been edited for illustrative purposes. The text is based on information available at time of publication. Readers should consult a financial professional about their own situation before acting on any information.