How to Recreate Your Paycheck in Retirement 

Why Retirement Income Planning Matters 

Retiring is likely the biggest financial transition most people will ever make. For decades, the goal is usually straightforward: earn income, save consistently, invest, and grow your net worth. Then retirement arrives, and the formula changes completely. 

Instead of receiving a steady paycheck from an employer or your business, you now need to live off the nest egg you’ve accumulated during your working years. That can be uncomfortable, even for people who have done a good job saving. 

The question is no longer only, “How much can I save?” It becomes, “How much can I safely spend, and how do I make this money last?” 

That is where retirement income planning becomes so important. You need to think through your investment strategy, withdrawal rate, taxes, Social Security, spending needs, health care costs, and the possibility that retirement could last much longer than expected. 

The Longevity Challenge 

One of the most important retirement planning risks is not a market crash. It is longevity. 

According to the American Academy of Actuaries, a couple aged 65 has a 25% chance that at least one spouse will live to age 96. That means retirement could last 30 years or more, which is about as long as an entire working career for many people. 

That reality changes the way you may want to think about money. A retirement plan does not just need to work for the first few years after you stop working. It needs to be durable enough to support decades of spending, inflation, market cycles, health care costs, and unexpected life events. 

A study by the Stanford Center on Longevity, also showed that many people underestimate their own life expectancy. They often assume it is mostly tied to genetics or how long their parents lived, when often times the picture is more complicated than that. At the same time, many retirees overestimate market volatility and may become too cautious with their money. 

That combination can lead to poor planning decisions. Some people hold too much cash. Others avoid growth assets. Some delay planning because the numbers feel overwhelming. 

It can be difficult to save your way to enough money without getting growth on those career earnings. I’ve run the numbers using a 30-year accumulation phase: money in the bank earning 2.5% versus a portfolio of stocks and bonds earning 6%, which is a hypothetical assumption used solely for illustrative purposes. In this example, investing reduced the savings burden by close to half. 

The key point: For many investors, maintaining some exposure to growth-oriented investments may be an important component of a long-term retirement strategy. Cash alone usually cannot do the job. 

The 4% Rule: A Helpful Starting Point 

If you do not yet have a detailed financial plan, the 4% rule can be a useful starting point for estimating your retirement number. 

William Bengen created the rule in 1994. He was a young financial advisor trying to understand the retirement math for his older clients. He studied historical returns for a 60/40 portfolio, along with inflation history, and concluded that withdrawing 4% of the initial portfolio value had historically been a sustainable starting withdrawal rate over a 30-year retirement. 

Here is the simple version: If you retire with $1 million, the 4% rule suggests withdrawing $40,000 in the first year. After that, the withdrawal amount increases each year for inflation. It is not 4% of the portfolio every year. It is 4% of the starting value, adjusted over time. 

The 4% rule has been debated, tested, revised, and discussed for decades, including by Bengen himself. Some people argue that retirees may be able to withdraw more because Bengen was calculating a rate that historically should not fail, and the investment portfolios available today can be more diversified than the portfolios he originally studied. 

Still, if you are close to retirement, 4% of your portfolio value can be a reasonable starting estimate. If you are further away from retirement, you can work backward. Take the amount you want your portfolio to provide each year, not including Social Security or other income sources, and multiply it by 25. 

For example, if you want your portfolio to generate $60,000 per year in retirement income, multiplying that number by 25 gives you a target of $1.5 million in today’s dollars. 

The Retirement Smile 

How you spend money in retirement is rarely a straight line. 

Research on retiree spending patterns often points to what is called the “retirement smile.” Spending tends to be higher in the early years of retirement because people are more active. This is when travel, hobbies, home projects, family experiences, and bucket-list items often happen. 

Then spending may decline during the middle retirement years as people slow down. But that lower-spending period should not be viewed as permanent. Later in retirement, health care and long-term care costs can increase sharply, causing expenses to rise again. 

That is why retirement planning should not be based only on the lowest-spending years. A better plan accounts for the full pattern: higher spending early, lower spending in the middle, and potentially higher costs again later in life. 

One planning tool worth considering is long-term care insurance. It is not right for everyone, and costs, coverage features, underwriting requirements, and suitability considerations should be evaluated carefully. Women, in particular, may want to pay attention to this area. Three in five caregivers are women and, according to a study by Bowling Green University, women are twice as likely to be widowed than men. Both situations can create financial and emotional stress in retirement. 

When you think about your withdrawal rate, do not anchor your plan to the lowest-spending stage of retirement. Plan for the higher numbers too, because later-life costs may bring spending back up. 

Simple Does Not Mean Easy 

During the early days of COVID, I put on some weight. Not quite the full “COVID-19,” but close. By the fall, I had lost the extra pounds. A friend asked how I did it, clearly hoping I would reveal a secret. 

The answer was simple: I moved more and ate less. 

Simple? Yes. Easy? Not really. 

Investing works the same way. A common long-term approach is to own a diversified basket of low-cost funds or ETFs, hold them through market cycles, and continue investing over time. When new money becomes available, you invest more. Over 20 or 30 years, that type of discipline can help build a strong retirement nest egg. 

But simple does not mean easy. 

For years, Morningstar has studied how investors perform in the funds they own compared with how those funds actually perform. Across five separate 10-year studies, Morningstar found that investors underperformed their own investments by 1.1% per year because of poor timing decisions. This gap appeared across categories, including index funds. 

That is one of the biggest challenges in retirement planning. The math may be straightforward, but behavior often gets in the way. 

Common Mistakes That Can Hurt Retirement Plans 

Not understanding market history. Over one-year periods, stocks can produce extremely different outcomes. They can be down 37% or up 52%. Over longer periods, the historical odds of loss have generally declined. The long game has often mattered more than any single bad year. 

Losing patience. Historically, investors who remain disciplined and invested over longer periods have often experienced different outcomes than investors who make frequent changes based on short-term market movements. I often see investors with reasonable diversified returns become frustrated because a small group of AI-driven technology stocks is performing better. But the point of investing is not to win a conversation at the golf course. The point is to fund your retirement. 

Misunderstanding Warren Buffett’s “never lose money” idea. Buffett’s rule is often misunderstood. It is not about avoiding every short-term decline. It is about avoiding permanent loss of capital. A stock going to zero is permanent. A diversified portfolio dropping during a bear market and later recovering is different. Many investors fight the wrong battle by trying to avoid volatility instead of avoiding speculation, concentrated bets, and poor timing decisions. You can read more about Buffett’s rule here: Warren Buffett’s investing rules. 

Holding too much cash. Cash is useful for emergencies and short-term needs, but too much cash can become a long-term problem. After taxes and inflation, excess cash may lose purchasing power compared with a diversified portfolio of stocks and bonds. A reasonable emergency fund may cover three to six months of expenses, but money beyond that should have a clear purpose. 

Relying only on income-focused strategies. Many retirees do not want to touch principal, so they look for investments that produce income. That can lead to risks they did not intend to take, such as longer-term bonds with more interest rate risk, lower-quality bonds that may struggle during market stress, or dividend-focused portfolios that are less diversified. In some cases, a total return approach may be more effective. That means investing for the best long-term return that fits your risk tolerance, then creating withdrawals from the portfolio as part of a larger income plan. 

The Tax Piece 

Taxes can have a major impact on retirement outcomes. 

Charlie Munger once said that when you buy and hold, the government’s tax system can give you an extra one to three percentage points per year with compounding effects. He was referring to lower portfolio turnover, but the idea can be expanded to include asset location and tax-loss harvesting. 

Lower-turnover investment strategies can help reduce unnecessary capital gains. Asset location can help place less tax-efficient investments inside retirement accounts. And in down markets, tax-loss harvesting in a brokerage account can help offset future gains. 

Another important piece is building your tax-free bucket. Qualified Roth contributions grow tax-free and can come out tax-free. Even people who earn too much to contribute directly may be able to use backdoor Roth contributions, depending on their circumstances. This is one of many planning strategies investors may wish to evaluate with their tax and financial professionals. 

Retirement tax planning is not only about reducing taxes this year. It is about creating more flexibility over the next 20, 30, or even 40 years. 

Putting It All Together 

A strong retirement income plan brings several pieces together. 

You need a reasonable withdrawal strategy. The 4% rule can be a helpful starting point, but it is not a complete plan by itself. You need enough growth to help your savings last. You need to understand how your spending may change over time. You need to avoid the mistakes that prevent investors from earning their fair share of market returns. You also need to think carefully about taxes, account types, Social Security, health care, and risk. 

That may sound simple. But like most important things, simple does not mean easy. 

Your retirement is too important to use as a test of whether you are a good do-it-yourself investor. The goal is not just to retire. The goal is to build a plan that gives you confidence in how your income, investments, and spending will work together. 

Frequently Asked Questions

What is the 4% rule in retirement planning?

The 4% rule says that a retiree can withdraw 4% of their portfolio value in the first year of retirement, increase that dollar amount each year for inflation and, theoretically, the portfolio should be able to fund a 30-year retirement. William Bengen created the rule in 1994 after studying historical market returns and inflation. The 4% rule is a helpful starting point, but it does not take into account investment fees or taxes, and it should not replace a personalized retirement income plan. 

How much money do I need to retire comfortably?

A simple starting estimate is to multiply the amount you want your portfolio to provide each year by 25. For example, if you need $60,000 per year from investments, using the 4% rule it would suggest that you need $1,500,000. This is a rough estimate and does not include the impacts of Social Security, pensions, taxes, health care costs, or personal spending goals, and your personal situation will vary. 

Why can holding too much cash hurt a retirement plan?

Cash is important to help fund emergencies and short-term expenses, but too much cash can erode purchasing power after taxes and inflation. Retirement can last decades, so most retirees need some level of investment growth. A balanced financial plan usually separates short-term cash needs from long-term investment assets. 

What is the retirement spending smile?

The retirement spending smile describes how expenses can change during retirement. Spending is often higher early in retirement because of travel, hobbies, and time spent on life experiences. Spending often declines in the middle years as life slows, then rises in later years due to health care and long-term care costs. A thoughtful retirement plan should account for all three retirement stages. 

How can I reduce taxes on retirement savings?

Retirees may be able to reduce taxes by using lower-turnover investment strategies, placing tax-inefficient assets in the right types of investment accounts, harvesting losses when appropriate, and building tax-free Roth assets. Roth conversions or backdoor Roth contributions may also help in certain situations, depending on income, account structure, and long-term tax planning goals.

A published author, Sammy wrote the book Beyond the Basics: Maximizing, Allocating, and Protecting Your Capital, which focuses on key decisions that help individuals grow and safeguard their wealth. He also shares his views on financial planning and investing through his blog, The Boston Advisor. In 2024, Investopedia selected Sammy as a founding member of its Advisor Council.  

Visit The Boston Advisor, where Sammy draws on his experience as a long-time financial advisor sharing articles, videos, and educational content focused on retirement planning, tax efficiency, wealth preservation, business succession, and long-term financial decision-making. 

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This is intended for informational purposes only. You should not assume that any discussion or information contained in this document serves as the receipt of, or as a substitute for, personalized investment or tax advice from Savant. Please consult your investment or tax professional regarding your unique situation.