What Happens When the Paycheck Stops?
Learn how to turn retirement savings into sustainable income while managing market risk, taxes, inflation, and unexpected expenses.
Author: Matthew Williams CFP®, RICP®, CEXP®, CASL®, AEP® | Director of Financial Planning at Impact Advisors Group
Saving for retirement should be based on the income your retirement needs to produce, rather than hitting a universal number such as $1 million or 10 times your salary. Two households can have exactly the same amount saved and be in completely different positions depending on their spending, Social Security, pensions, taxes, investments, and expected retirement length.
That is why I rarely start a retirement conversation by asking, “How much have you saved?” I want to know what you expect retirement to cost and how much reliable income you will already have.
Rules such as saving $1 million, $2 million, or 10 times your salary can be useful benchmarks. They cannot tell you whether you personally are ready to retire.
Consider two couples who both want to spend $80,000 per year after taxes.
The first couple expects $50,000 annually from Social Security and a pension. Their investment portfolio needs to provide roughly the remaining $30,000, before accounting for taxes, inflation, and other planning factors.
The second couple wants the same $80,000 lifestyle but has no pension. Their investment portfolio needs to do considerably more work.
Both couples want the same lifestyle. Their required nest eggs could be very different.
That is why saving for retirement works better when you start with an income goal and work backward.
Your retirement spending is unlikely to stay exactly the same every year.
Many retirees spend more during the early years of retirement when they are traveling, pursuing hobbies, dining out, or helping family. Some expenses may eventually fall. A mortgage could be paid off, commuting costs disappear, and travel may slow down.
Other costs can rise later.
Health care, home assistance, and long-term support can become a larger part of the budget as you age.
A strong retirement plan should therefore look at spending in stages rather than assuming one flat annual number for the next 30 years.
One of the most useful exercises you can do when saving for retirement is create two budgets.
Budget 1: Your essential retirement
Estimate what you need to cover the core lifestyle you want to protect, including:
Budget 2: Your preferred retirement
Then add the things that make retirement enjoyable or personally meaningful:
These two numbers give you a much more useful retirement range.
The lower figure can tell you what may be required to maintain financial security. The higher figure can show what would allow you to enjoy more flexibility and discretionary spending.
Once you understand your spending, identify the reliable income you expect to receive.
That may include:
Then subtract that income from your expected expenses.
The amount remaining is the gap your investment portfolio needs to help support.
For example, suppose you expect to spend $90,000 annually and anticipate $55,000 from Social Security and pension income. Your investments may need to generate approximately $35,000 per year, plus enough growth to account for inflation, taxes, and future changes in spending.
Social Security timing can also change this calculation. For people born in 1960 or later, the Social Security Administration currently lists full retirement age as 67, while delaying benefits beyond full retirement age can increase the monthly benefit until age 70.
That is why delaying Social Security can sometimes change the amount a portfolio needs to provide later in retirement.
A retirement that begins at age 60 could last 30 years or longer.
That means an $80,000 lifestyle today will probably cost considerably more decades from now.
Inflation affects groceries, housing, insurance, travel, medical care, and nearly every other expense in a retirement budget. Even relatively modest annual increases compound over long periods.
This is why saving for retirement cannot focus exclusively on today’s expenses. Your investment plan also needs enough growth potential to help support future purchasing power.
Our discussion of investment planning and your retirement nest egg provides additional context for how investments fit into that long-term income picture.
Two people can each have $1 million saved and still have very different retirement situations.
Imagine one person has the entire $1 million in a traditional IRA or 401(k). Another has a combination of Roth assets and taxable investments.
Those dollars do not necessarily create the same spendable retirement income.
Traditional IRA distributions are generally taxable when withdrawn. Roth IRA contributions are made with after-tax dollars, while qualified Roth distributions can be tax free.
That means I want to know two things when reviewing a retirement plan:
1. How much have you accumulated?
2. Where have you accumulated it?
Many investors are familiar with asset allocation, which means how investments are divided among stocks, bonds, cash, and other assets.
Asset location deserves attention too.
Asset location looks at which types of investments are held inside taxable, tax-deferred, and Roth accounts. The mix can influence your future tax bill and how efficiently you can create retirement income.
For families approaching retirement, that can create important planning opportunities during what we discuss as the retirement tax window.
Longevity is one of the hardest retirement variables because nobody knows exactly how long retirement will last.
For a married couple, the plan also needs to consider the possibility that one spouse lives well into their 90s.
A retirement strategy that works until age 82 looks very different from one designed to support a surviving spouse at 95.
That is why good planning evaluates a range of outcomes.
Questions may include:
Planning does not require assuming that everything will go wrong. A strong plan simply should not require everything to go right.
Rules that suggest withdrawing a certain percentage of your portfolio each year can be useful starting points, but they should not be treated as guarantees.
A sustainable withdrawal strategy can depend on:
Someone who can reduce discretionary spending during a difficult market may have more flexibility than someone whose entire budget consists of fixed expenses.
The timing of market returns can also be especially important during the first years of retirement. A major decline shortly after retiring can place more pressure on a portfolio when withdrawals are occurring at the same time.
Your retirement target should therefore reflect your actual situation rather than a single withdrawal percentage pulled from a general rule.
Finding a gap does not automatically mean retirement is out of reach.
It gives you a specific problem to solve.
Possible adjustments might include:
Working Another Year or Two
Additional working years can help in several ways. You may continue saving, delay portfolio withdrawals, shorten the period your assets need to support, and potentially increase future Social Security benefits.
Reducing Recurring Expenses
A few permanent reductions can have a larger effect than people expect because the savings repeat every year throughout retirement.
Reconsidering Social Security Timing
Delaying Social Security beyond full retirement age increases monthly benefits until age 70 for eligible workers.
That may reduce the amount your investment portfolio needs to provide later.
Reviewing Taxes Before Retirement
The tax treatment of retirement accounts can materially affect spendable income. Traditional retirement account withdrawals are generally taxable, while qualified Roth distributions can be tax free.
That makes tax planning an important part of determining whether your current savings can support your desired lifestyle.
Adjusting Discretionary Goals
Sometimes the difference between retiring now and working several more years comes down to the optional portion of the budget rather than core expenses.
Having separate essential and preferred retirement budgets makes those tradeoffs much easier to see.
If you are saving for retirement, replace the search for one magic number with three more useful questions.
1. What will our retirement lifestyle actually cost?
Build a realistic budget based on your needs, priorities, and how spending may change throughout retirement.
2. How much reliable income will we have?
Estimate Social Security, pensions, and other predictable income sources.
3. How much income must our investment portfolio provide?
Subtract reliable income from expected spending. That remaining gap gives your portfolio a specific job.
From there, you can evaluate whether your current savings can reasonably support that need over your expected retirement.
Is $1 million enough to retire?
It can be enough for some households and insufficient for others. The answer depends on your spending, Social Security, pensions, taxes, investment strategy, longevity, and other income sources.
How much of my salary should I save for retirement?
Salary-based benchmarks can provide a starting point, but your retirement target should ultimately reflect projected spending and future income rather than salary alone.
Does it matter whether my retirement money is in a Roth or traditional IRA?
Yes. Traditional IRA distributions are generally taxable, while qualified Roth IRA distributions can be tax free. The same account balance can therefore create different after-tax retirement income.
Should I pay off my mortgage before retiring?
The answer depends on your cash flow, interest rate, available assets, taxes, and personal comfort with debt. Paying off a mortgage may reduce required monthly spending, but using a large amount of retirement savings to do it can create other tradeoffs.
Can working a few more years make a big difference?
Yes. Additional working years may allow more saving, fewer portfolio withdrawals, a shorter retirement funding period, and potentially higher Social Security benefits if claiming is delayed.
Saving for retirement becomes much more useful when you stop chasing a number that was designed for someone else.
Start with your lifestyle. Determine how much reliable income you expect. Then calculate what your portfolio needs to provide.
Your target may end up being a range rather than one exact figure. One number may show that you can comfortably cover essential expenses. A higher target may give you more freedom for travel, family support, charitable giving, or unexpected costs.
That range provides something more valuable than a generic retirement benchmark. It gives you a plan connected to your actual life.
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