‚ÄčNEFE’s My Retirement Paycheck will be retiring on Dec. 30, 2019. For more resources and tools, visit www.smartaboutmoney.org.

A retirement paycheck is a practical way to think about how you will pay yourself during your retirement years.

Click below to learn how each factor works together to optimize your retirement paycheck.

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Using Withdrawal Strategies

As a general rule, most people should consider withdrawing money from savings during retirement in the following order:

  1. Taxable accounts such as joint-tenant accounts, because the money already is subject to income tax and may qualify for preferential capital gains tax treatment under the right circumstances.
  2. Tax-free investment accounts because earnings are free from state and/or federal income taxes.
  3. Tax-deferred retirement accounts such as 401(k)s, 403(b)s, and traditional IRAs, so you potentially can delay paying taxes on this money as long as possible until RMD withdrawals must begin.
  4. Tax-free retirement accounts such as Roth IRAs, because waiting until the end to withdraw that money will allow it to grow and there are no required minimum withdrawals.

Combining Lifetime Income and Withdrawal Strategies

Retirement experts suggest dividing your living expenses into two categories: 

  • Essential expenses: Try to pay for essential expenses — such as housing, food, clothing, utilities and health care — with lifetime income, such as Social Security and/or annuity income. You can increase your lifetime income by working longer, perhaps on a part-time basis, to delay drawing Social Security benefits.
  • Nonessential expenses: Try to pay for nonessential expenses, such as travel, dining out and entertainment, with retirement savings following the withdrawal strategy order mentioned above. This combined approach can give you peace of mind, knowing you will be meeting your basic needs. If you do not have enough lifetime income to meet your essential expenses, you can convert some retirement savings into lifetime income, perhaps by purchasing an immediate annuity.

A good guideline is to not spend more than 4 percent of your retirement savings on lifestyle expenses in any given year. In years when retirement savings generate great returns and essential expenses are covered, you might be able to spend more on nonessential expenses. In years when returns are flat or even down, you may reduce nonessential expenses and withdraw less than 4 percent of your accumulated retirement savings, knowing that your essential expenses are covered by your lifetime income sources.