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How to Create a Retirement Paycheck

How to Create a Retirement Paycheck

| October 19, 2015

Fall is the time of year when people are most inclined to take action regarding their financial planning. Summer is over, the kids are back into the school routine, the income taxes are filed by the October 15 extension date, and Thanksgiving is still over a month away. This month I am writing about the different strategies used to generate retirement income.

Even if you are years from retirement, the decisions you are making now can have a profound effect on your financial security later. There are many different income strategies and each has its strengths and weaknesses to consider. It is also possible to combine strategies and that is the approach that we often recommend.

Pension: A pension is a retirement account that an employer maintains to provide retired employees with either a lump sum at retirement or monthly payments throughout retirement. The primary advantages of a pension plan are its simplicity and the fact that payments are usually made for the life of the retiree, no matter how long that may be. The main disadvantages are that the payments are not always guaranteed (remember the United Airlines bankruptcy?), payments often do not increase with inflation, and there are typically no assets remaining at death for heirs. Additionally, many pensions require you to work for the company for many years (20, 25, etc), and sometimes employees leave or are forced to leave before vesting in their pension.

Social Security: Social Security is a “pension” that most US taxpayers and their spouses qualify for but unlike most other pensions, payments are adjusted annually for inflation. There are many different ways to claim benefits and we work with our clients to help them coordinate their claiming strategies between spouses to maximize lifetime payouts. Social Security is often the foundation of many families' retirement plan but in recent years there have been numerous attempts by politicians to decrease the benefits from Social Security because the Social Security Trust Fund is woefully underfunded. Many people are probably too dependent on Social Security rather than their own investments.

Annuities: A fixed annuity is a contract with an insurance company where the client makes a deposit in exchange for a stream of payments in the future – similar to a pension. Payments can be lifetime, as in the case of pension, or they can also be designed to be paid out over a specific period of time such as 5, 10 or 20 years. The size of the monthly payments is guaranteed as part of the contract and is not affected by market fluctuations. A variable annuity is also a contract with an insurance company where the client can make one or more deposits and these funds are invested by the insurance company in diversified “separate accounts” that behave much like mutual funds. These contracts can be extremely complex and often have rather high expenses – sometimes more than 3% total per year. Another thing to be aware of is that these financial products often pay financial advisors an up-front commission of 7% or more. Fixed indexed annuities are hybrid products that have some of the characteristics of each and can also pay high commissions.

Income Portfolio: In the past when interest rates were higher a common strategy was to invest your retirement savings into low-risk bonds to generate reliable monthly income. Since rates are so low now this strategy is only viable if you have very modest needs or a very large retirement portfolio. With the 10 year US Treasury bond now paying 2.1% a portfolio of over $4.7M is needed to generate $100,000 per year.

Total Return Portfolio: A common current strategy is to invest in a single diversified stock and bond portfolio and withdraw a specific percentage per year, such as 4%. With this approach, the amount ofcapital required to generate $100,000 per year is reduced to $2.5M and if markets return historical averages, it is likely the annual income can increase with inflation. The main disadvantage is that this strategy is vulnerable to large market declines within 5 years of retirement. After a significant correction the proportionally larger withdrawals can deplete the portfolio to levels where payments will need to be lowered and the portfolio can even be depleted during retirement. Another major challenge with the pure total return approach is that retirees over time often tire of nervously watching their account balance swing up and down and they end shifting to a lower-volatility portfolio that will lower their return and monthly income.

What if you could combine the security of contractually guaranteed monthly payments with the long-term growth of total return investing? We as Investment Advisor Representatives of Stewardship Advisory Group believe that investments that fluctuate in value offer the potential for superior long-term growth, but we also recognize that portfolio volatility often leads to investor fatigue, particularly with retirees. One strategy we use to optimize retirement income involves both 5-year fixed annuities and diversified total return portfolios, segmented into 5-year “buckets.” Income is generated by the fixed annuity and the remaining assets are invested for increasingly higher target return rates (and volatility) according to how much time remains for those assets to grow before they will be needed to generate income. When a segment grows to the amount needed it is converted to a fixed annuity to lock in the gains and ability to generate the needed income.


Often one of the first things we do with new clients is help them restructure their overall portfolio of investments to reduce expenses and increase efficiency. Sometimes this involves transitioning away from expensive products that no longer serve a useful role. We would be happy to share our thoughts further with you if you are curious. Please call Jenny at 303.900.4018 to schedule a conversation or visit us at to learn more.