You spend decades saving and investing for retirement. You work hard, you make sacrifices, and you do everything you can to build a nest egg that will one day give you freedom. But here’s the challenge: when you finally reach retirement, your 401(k) or IRA doesn’t automatically turn into a paycheck. You have to create that paycheck yourself. And if you don’t do it carefully, you risk one of two outcomes—running out of money too soon, or spending too little and not fully enjoying the lifestyle you worked so hard to earn.
Turning Savings into a Paycheck
In this article, I’m going to walk you through three simple but essential steps that can help you turn your savings into a sustainable paycheck with a retirement income strategy. The steps themselves are straightforward, but the nuance within them is where most people get tripped up. Those nuances are what make the difference between a retirement that feels confident and one that feels uncertain.
The three steps are: (1) understanding your portfolio’s sustainable withdrawal rate, (2) factoring in taxes, and (3) coordinating your withdrawals with other income sources. To make this practical, let’s walk through these steps with a real example.
Meet Mary: A Real-World Example
Meet Mary. She’s 65 years old and has $1 million in her portfolio—$700,000 in a traditional IRA and $300,000 in a taxable brokerage account. That brokerage account is fully invested in an S&P 500 index fund, which she bought years ago for $150,000. It has since grown to $300,000.
Step One: Understand Your Withdrawal Rate
You may have heard of the 4% rule. It comes from research by financial planner Bill Bengen in the 1990s, which found that retirees could safely withdraw 4% of their portfolio each year (adjusted for inflation) and have their money last for at least 30 years, even through challenging market periods like the Great Depression or the 1970s. But here’s the thing: the 4% rule was never meant to be a one-size-fits-all solution. It’s a guideline based on historical data, not a personal plan.
In fact, Bengen himself has said that the 4% rule is often too conservative for many retirees. If you had the benefit of hindsight, most retirees could have withdrawn closer to 6% or 7% and still been fine. But because none of us know what kind of market environment we’re retiring into, a reasonable middle ground today is around 5%, assuming a well-diversified portfolio and proper adjustments over time.
So, for Mary, if we apply a 5% withdrawal rate to her $1 million portfolio, that gives her $50,000 per year. That $50,000 represents the portion of her annual paycheck that comes directly from her savings.
Step Two: Factor in Taxes
This is where the nuance really starts to matter. That $50,000 isn’t all Mary’s to spend. Taxes still apply, but how much you pay in retirement depends heavily on where your income comes from. Unlike your working years, when nearly every dollar you earn is taxed as ordinary income and subject to payroll taxes, retirement income is much more complex—and, if managed well, can be much more tax-efficient.
When you’re working, your paycheck is subject to both income tax and payroll tax (Social Security and Medicare). That payroll tax alone is 7.65% for most employees. In retirement, you no longer pay payroll taxes on withdrawals from your investments, pensions, or Social Security benefits. That alone can significantly lower your overall tax rate.
Social Security also receives special tax treatment. Depending on your income, anywhere from 0% to 85% of your benefit might be taxable at the federal level, and most states don’t tax it at all. If you’re over 65, you also qualify for a higher standard deduction, meaning more of your income is tax-free. And if part of your income comes from long-term capital gains, those are taxed at lower rates than ordinary income.
How Mary’s Tax Picture Changes in Retirement
Let’s look at how this plays out for Mary. Last year, when she was still working and earning $100,000 in wages, her total tax bill (federal plus payroll) was about $21,500, or roughly 21.5% of her income. This year, in retirement, she plans to have $100,000 in total cash flow again: $30,000 from Social Security, $40,000 from her IRA, and $30,000 from her brokerage account.
But here’s the difference. Of that $30,000 from her brokerage account, half ($15,000) is simply her original investment coming back to her. That part isn’t taxable. The other $15,000 represents long-term capital gains, taxed at a preferential rate. Only 85% of her Social Security is taxable, meaning $4,500 is completely tax-free. Add in her higher standard deduction for being over 65, and her taxable income ends up much lower than it was when she was working.
When we run the numbers, her total federal tax liability drops from over $13,000 to just over $6,000. That’s before even considering that she no longer pays payroll taxes. So even though her total cash flow is still $100,000, her effective tax rate falls from about 21.5% down to roughly 6%. That means she keeps far more of what she withdraws.
This is why tax planning is such a crucial part of retirement income planning. Two retirees with the exact same savings can have dramatically different outcomes depending on which accounts they withdraw from first, how they structure their withdrawals, and how they coordinate with Social Security and other income sources.
Step Three: Coordinate with Other Income Sources
In retirement, your income likely won’t come from a single source. Instead, it will be a combination of Social Security, pension benefits, portfolio withdrawals, and possibly rental income or part-time work. The key is to bring all of these together in a way that creates a reliable and sustainable paycheck.
For Mary, that might mean combining $50,000 from her portfolio, $30,000 from Social Security, and possibly another $20,000 from other sources. But she also has the flexibility to decide how and when she wants to receive that money. Some retirees prefer to have a monthly “paycheck” deposited into their checking account on the first of each month. Others like to mimic their old pay cycle, taking half on the first and half on the fifteenth. Some even set aside part of their income in a separate “vacation fund” for travel or special purchases.
Understanding the Timing of Social Security
Social Security is the one piece of the puzzle you can’t fully control when it comes to timing. Your filing decision determines when you start receiving benefits, but once you do, the Social Security Administration pays based on your birthday. If you were born between the 1st and 10th of a month, your payment arrives on the second Wednesday; between the 11th and 20th, the third Wednesday; and between the 21st and 31st, the fourth Wednesday. Your portfolio withdrawals, on the other hand, are entirely up to you.
Planning for Changing Spending Needs
It’s also important to recognize that your retirement paycheck probably won’t look exactly the same year after year. Your spending will likely follow what researchers call the “retirement spending smile.” In the early years of retirement, you tend to spend more on travel and leisure. In your 70s and 80s, spending often declines as you settle into routines and travel less. Then, in later years, spending can rise again due to healthcare or long-term care expenses.
Building flexibility into your withdrawal strategy is key. There may be years when you take out more for a big trip, a home renovation, or to help a family member. Other years, you might withdraw less. The right plan allows for both.
Don’t Overlook Home Equity
Finally, don’t overlook your home equity. For many retirees, home equity represents one of the largest untapped sources of wealth. Whether you plan to downsize, relocate, or explore options like a reverse mortgage, your home can play an important role in extending the longevity of your portfolio.
Bringing It All Together
Creating your own paycheck in retirement isn’t about chasing rules of thumb or following cookie-cutter formulas. It’s about understanding your unique mix of assets, income sources, and goals — and building a coordinated plan that supports the lifestyle you want while protecting you from running out of money.
At Root Financial, this is what we help clients do every day. If you’re approaching retirement and want confidence that your savings will support your future, visit our website and reach out to our team. Even if you don’t work with us, take the time to understand your sustainable withdrawal rate, the impact of taxes, and how to coordinate your various income sources. These three steps, applied thoughtfully, can turn your lifetime of savings into the secure, flexible paycheck you deserve.
This article is for educational and informational purposes only and should not be construed as personalized investment, tax, or legal advice. It discusses general early-retirement tax concepts—such as ACA health-insurance subsidies, Roth conversions, tax-gain harvesting, RMDs, and Social Security/Medicare considerations—and is not a recommendation to take any specific action.
Tax and benefit rules change. Brackets, thresholds (including ACA subsidy eligibility, capital-gains bands, IRMAA surcharges), RMD ages, and deductions are subject to revision and can vary by state. Your filing status, other income, deductions, and residency may materially change outcomes. Always verify current rules and consult qualified professionals before acting.
Hypothetical case study. “John and Jane” are illustrative only and do not reflect any specific client. Projections and scenario analyses are estimates and not guarantees of future results.
Investing involves risk. Past performance is not indicative of future results. All investments can lose value, including loss of principal. Diversification and asset allocation do not ensure a profit or protect against loss.
Not tax or legal advice. Root Financial Partners, LLC (“Root Financial”) provides tax planning as part of its financial-planning services; we do not provide tax preparation services, represent clients before the IRS, or offer legal advice. Ideas discussed here—including but not limited to Roth conversions (including backdoor strategies), tax-gain or tax-loss harvesting, ACA subsidy planning, charitable strategies, estate-planning tactics, Social Security claiming strategies, and withdrawal sequencing—can trigger tax consequences or legal implications. Consult your CPA and/or attorney to evaluate suitability and compliance for your circumstances.
Suitability depends on your full picture. The appropriateness of any strategy depends on your income, age, health-insurance status, account types and cost basis, risk tolerance, time horizon, estate plan, and other factors. Nothing herein should be interpreted as a recommendation to adopt a particular tax position, make a specific investment, or change coverage.
Root Financial Partners, LLC is an investment adviser registered with the U.S. Securities and Exchange Commission. Registration does not imply a certain level of skill or training. For additional information, please review our Form ADV and firm disclosures available upon request.