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How to Pay Yourself in Retirement: Best Strategies

How to Pay Yourself in Retirement: Best Strategies

When we discuss optimal strategies to pay ourselves in retirement, we need to consider several aspects of our income flow. For example, most of my clients receive Social Security either shortly before or after their retirement kicks off (I do have one client who does not receive Social Security but a railroad pension instead). Some professions opt out of Social Security altogether and have their own specific pension options. Yet, once you receive Social Security, you want to determine how your income flow will work around that accordingly. For many people, that means not relying too much on their savings or portfolio.

As we examine how to pay ourselves, there are many different strategies to contemplate. Some people choose to pull money out of their investments, perhaps on a monthly basis—which is in fact most common. However, you can also pay yourself weekly. In one example, I have a client who receives Social Security (both personally and for his wife). He set up a payment schedule that allows some money to flow in each and every week, which is his preferred method in this regard. In contrast, other clients choose to “survive” off their Social Security and maybe their pension while pulling money from investments in big chunks.

One consideration that helps dictate how exactly you pay yourself is the amount of debt you have. In this way, if you don't have debt payments resulting from a mortgage, vehicle, etc., you can perhaps afford to live off of your Social Security plus other income from investments or even pensions. When thinking about how to best pay yourself in retirement, let’s go ahead and discuss some specific investments that produce income—as well as investment strategies—wherein you can leverage portfolio income to supplement monthly Social Security payments.

First and foremost, let’s talk about investments that produce income. The number-one option here is annuities, which will immediately churn out monthly payouts after you put money into them. These are called single premium immediate annuities. Alternatively, you can also keep your money in an annuity and let it grow, eventually taking out regular payments on either a monthly or quarterly basis: whatever is best for you. Knowing this, you can certainly place a chunk of your money into an annuity and begin to produce income. As an aside, I am a fee-based fiduciary financial planner and wealth manager, and as such, do not sell any insurance products. However, I do have access to commission-free annuities that I manage for my clients, and so oftentimes, they enjoy higher payments because the insurance company is not obligated to pay me—the financial planner—a commission.

Moving away from annuities, a second option is dividend-paying stocks. These have been around for a long time and provide you with the opportunity to place a portion of your money into either an exchange-traded fund (ETF) or mutual fund: with the primary objective of buying stocks that pay high dividends. Now I would certainly not suggest that you go through and pluck out five or 10 dividend-paying stocks on your own (or even with the help of your financial advisor). Why? You’ll lack diversification. If you do happen to have $250,000 laying around that you can put into dividend-paying stocks, then I would in fact recommend cherry-picking individual stocks rather than relying on a very low-cost ETF or mutual fund that invests in dividend-paying stocks. With respect to dividend-paying ETFs, one of my favorites is the Schwab US Dividend Equity ETFTM (SCHD).

You can also of course invest in a rental property to provide you with income. Several of my clients often choose this route, but as they begin to get into their sixties and seventies, they tire and grow weary of the associated maintenance. Nevertheless, we are happy to offer a decided service that assists our clients as they look to buy single-family homes, condos, or townhomes and then list them on short-term vacation rental platforms like Airbnb and VRBO: thus producing income in the neighborhood of 5-7% per year. There are myriad benefits: It requires minimal effort on their part. It's insured. It's nestled inside an LLC. It’s very protected. If you in fact own income-producing real estate,  you can pair this with Social Security to help cultivate your spending patterns and—naturally—the methods you’ll use to pay yourself in retirement.

Bonds present yet another retirement income-generation strategy. At the time this article was written in August 2021, these are paying around 1.3-2% . These are extremely low rates historically, and 1.3% is on the ten-year treasury note (which has historically paid 4.28%). The face value of bonds is high, or you could also say their associated yields are very low—an analogous situation.  As such, placing your money into bonds (at least the safe ones) and expecting any type of decent return for retirement is probably not a wise idea, but you can certainly do that if you wish. Either which way, bonds will offer and pay you an income that's still higher than most stocks.

By and large, my favorite strategy for withdrawing money during retirement is from your securities: defined as publicly traded stocks, bonds, ETFs, mutual funds, etc. Specifically, I always recommend creating a truly diversified portfolio wherein many of the assets are not correlated. Why is this, you ask? It’s simple: a portfolio that reflects this strategy will not suffer tremendous drops in value that can mess with your planning and perhaps result in you outliving your money. If we have, for example, a huge crash in one particular asset class (whether stocks or bonds or gold) and then suddenly you're withdrawing money that same year, this is a painful shot to take. It really is like the uppercut punch in boxing, if you will. Or a grand slam hit in the ninth inning against your favorite team, if baseball is more of your thing. If your pitcher throws a pitch and the hitter wallops it out of the park with the bases loaded, it's nearly impossible for your team to find victory in that situation. Another analogy, perhaps? In football, let’s consider a pick six: when your quarterback throws an interception in the red zone and the other team runs it back for a touchdown. Ouch! 

No matter your favorite sport, the key takeaway is that it's very hard to win when your portfolio takes a tremendous dive and you're pulling out money. Unless you are living well below your means on a tight budget and have plenty of funds with no chance that the well will run dry, then perhaps it's not that big of a deal. Regardless of how much money you have, however, this will impact your estate and the goals you're able to achieve in retirement. Another option is to  put gold in IRAs and taxable accounts by relying on a GLD (a trust sponsored by the World Gold Council). When I say “gold,” I don't literally mean physical gold (although it does represent an investment in this precious metal). It's a security and an ETF, so you can assemble a nicely diversified portfolio with non-correlated asset classes: meaning assets that don't perform the same under certain market conditions. So, in other words, when the stock market goes up, some bonds may go down or remain neutral in this scenario. The same holds true for gold or any other types of asset classes. 

Another strategy to pay yourself in retirement is utility stocks—mentioned earlier in this article—which share a low-to-moderate correlation with the US stock market overall. If you buy these, they can produce a nice income for you (much like dividend-paying stocks). Companies like Duke Energy and Southern Company are two specific utility stocks that provide energy (the former) or electricity and gas (the latter) to millions of customers in various US regions.

What about pensions? We don’t discuss these much anymore, and they are becoming less and less popular with each passing year. Many of my clients still do in fact have pensions; however, that number continues to dwindle as more people retire over time. Nevertheless, pensions should also be mentioned in a discussion about how to pay yourself in retirement. 

Whenever we discuss cashflow—like we’re doing right here in this article about retirement income, specifically—we always want to consider just simply going with what you have. If you amass a nice non-correlated portfolio and decide to withdraw 5% annually (which, on a $1 million dollar portfolio, would of course be $50,000 a year, plus Social Security, plus whatever else you have coming in), then you should build your spending around your income and not the other way around. Of course, most of my clients know this all too well; otherwise, they wouldn't have walked through my door. To be frank, most people I work with are wealthy and have a positive net worth. On the other side of the coin, the majority of Americans will die possessing a negative net worth. So, if you're reading this article to gain a better understanding of these principles, remember that you want to build your cashflow first—prioritizing this before building your budget and spending around that—and always maintain a cushion.

Before we wrap up, let’s consider a tangible example. One of my favorite strategies currently employed by my clients is first establishing a nice portfolio and then setting up an Airbnb rental that supplies a nice income—of course with Social Security also coming in concurrently. As mentioned earlier, the Airbnb rental income produces between 5-7% (really more like 6-7%) annually. Beyond this, there is a distinct opportunity for my clients to earn property appreciation whenever they decide to sell the real estate—and they can just sit back and enjoy! Right now, I like to see a combination of something like my Airbnb example, stocks, bonds, gold, income-producing real estate, Social Security, and—if they're lucky—a pension thrown in as well.

If you have questions about how to best pay yourself in retirement, click on this link to set up a no-cost, no-obligation “retirement ready success” call. During our chat, we can examine where you are now, where you want to be in the future, and I'm happy to share some tips I use with my clients to help them achieve similar goals. Then, moving ahead, at the end of the call we can decide if it’s best to schedule additional meetings. Cheers!