How will you replace your salary when you retire?

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The answer becomes more urgent for those who retire early. Use these 3 steps to create a "retirement paycheck" that can potentially last 30 years or more.
Whether by choice or chance — an illness or layoff, for example — nearly 50% of us retire sooner than we'd planned.Footnote 1 And retiring earlier means living in retirement longer: The assets you've saved over your working years will need to stretch farther, even as you stop contributing to your 401(k) or other retirement accounts.
"Retiring at 55 can have meaningfully different implications versus retiring at 65," says David H. Koh, managing director and senior investment strategist in the Chief Investment Office for Merrill and Bank of America Private Bank. "Fifty-somethings will likely need to make their retirement savings last an extra decade or more." In addition, early retirees often have higher expenses than those retiring later in life; for instance, you may still be paying a mortgage or tuition bills. And you might have to cover the full cost of health insurance until you're eligible for Medicare.
As a result, the strategies early retirees use to create their "retirement paycheck" can take on heightened importance. In working to create an income stream designed to support what could be a long retirement, there are questions you need to ask yourself:
  • Will I still be able to pay all of my bills and live the life I want in retirement?
  • How much will I be able to withdraw monthly without jeopardizing my long-term financial security?
  • What are the tax implications — and tradeoffs?

3 steps to creating your retirement paycheck

Make two lists: expenses and income sources
First, sit down with your spouse or partner — if you have one — and calculate your regular expenses, which generally include housing, food, transportation and insurance as well as possibly charitable donations, education costs, travel and gifts.
An overly conservative portfolio is unlikely to provide the growth you may need for a longer-than-expected retirement.
— David H. Koh,
Managing Director and Senior Investment Strategist,
Chief Investment Office,
Merrill and Bank of America Private Bank
Next, you'll want to identify the income sources you can draw from to create a monthly "paycheck." Your list may include a severance package, a pension and retirement accounts — such as traditional or Roth 401(k) or 403(b) plan accounts, and traditional and Roth IRAs — in addition to Social Security benefits and possibly even rental income and disability benefits.
Then compare your ongoing expenses with your expected income in retirement. You need to determine whether you can cover your costs — and whether that spending rate is sustainable for the remainder of your lifetime, based on your assets, age, income sources, tax considerations and other factors.
If you're currently spending more than your projected monthly retirement income, consider adjusting your plans — by delaying retirement or taking on part-time or consulting work, perhaps, or moving the date at which you begin claiming Social Security benefits. You might also begin to look for ways to trim expenses or contribute more to your retirement savings accounts.
Create a plan for tapping your assets
It isn't enough to know how much you can afford to draw from your income sources each month. You'll also need to think through the tax and investment implications of withdrawing money from each source. A tax advisor can help you understand your choices. As you create your drawdown plan, you'll want to try to avoid landing in a higher tax bracket or derailing the asset allocation you've chosen.
From a tax perspective, it's generally wise to withdraw from your taxable accounts first, then tax-deferred, then tax-free.
From a tax perspective, it's generally wise to withdraw from your taxable accounts first, then tax-deferred, then tax-free. That's because the money you take from a taxable account (such as a brokerage account) may be taxed as capital gains at a lower rate than what you'd owe on distributions from traditional 401(k) plan accounts, traditional IRAs and certain other tax-deferred savings, which are taxable as ordinary income.
Know when you can make withdrawals. Especially when you retire early, you need to pay attention to the age requirement for taking money out of your retirement accounts. Typically, you'll owe a 10% additional tax if you tap a workplace retirement plan or IRA before age 59½, unless certain exceptions apply. But if, for instance, you leave your job during or after the year you turn 55, the Rule of 55 generally allows you to tap your account under your employer's retirement plan, such as a 401(k), without owing the 10% early withdrawal tax.
You'll also have to make decisions about two other potential retirement income sources:
Social Security. Though you can generally begin collecting Social Security at age 62, your benefits will increase each year you wait, up to age 70. "If you can afford to delay tapping your Social Security benefits, you'll benefit from having a higher income later, when you may need it most," says Koh. It usually makes sense to defer as long as possible. One time when it might make sense to consider claiming benefits sooner is if doing so will allow you to delay withdrawing money from your retirement savings accounts to give them more time to grow. (For more tips and insights, read Social Security: Aiming for smarter payments.)
Lump sum or monthly payments? Pensions and some retirement packages may offer you a choice: either take a lump-sum payout or begin monthly payments immediately — or, if you retire early, delay those payments until the normal retirement age under the plan or later. It's a good idea to consult your tax advisor on the implications of each option.
Continue to pursue investment growth
After you've addressed your short-term income needs, it's time to review your portfolio to see whether it has the potential to last 30 or more years, and then to adjust your asset allocation as needed. "An overly conservative portfolio is unlikely to provide the growth you may need for a longer-than-expected retirement," says Koh — especially in a high-inflation environment.
An overly conservative portfolio is unlikely to provide the growth you may need for a longer-than-expected retirement.
— David H. Koh,
Managing Director and Senior Investment Strategist,
Chief Investment Office,
Merrill and Bank of America Private Bank
You may be tempted to play it safe at the beginning of retirement. Yet taking a cautious approach out of fear of stock market volatility might lead you to favor only lower-risk — and lower-yielding — investments such as bonds, CDs, money market funds and Treasury bills. And over a 30-year retirement, an all-cash portfolio may not be able to keep pace with inflation or rising healthcare costs. One approach that may make sense for you is to set aside several years of living expenses in cash or other liquid investments, and then invest the rest of your retirement savings in a stock and bond mix that gives you the potential for growth.
Diversification is vital. One risk you shouldn't take is keeping too much of your retirement savings in one single stock or sector — and that includes shares in your former employer or the industry where you worked.
Finally, it's a good idea to review your plan regularly so that you can make adjustments depending on market conditions, inflation, personal goals and other factors. That way, you can feel confident that you're managing the retirement assets you've saved over your working life in the most thoughtful way possible.

Next steps

Footnote 1 Employee Benefit Research Institute, "2022 Retirement Confidence Survey," April 2022

Important Disclosures

Opinions are as of 9/15/2023 and are subject to change.

Investing involves risk including possible loss of principal. Past performance is no guarantee of future results.

This information should not be construed as investment advice and is subject to change. It is provided for informational purposes only and is not intended to be either a specific offer by Bank of America, Merrill or any affiliate to sell or provide, or a specific invitation for a consumer to apply for, any particular retail financial product or service that may be available.

The Chief Investment Office (CIO) provides thought leadership on wealth management, investment strategy and global markets; portfolio management solutions; due diligence; and solutions oversight and data analytics. CIO viewpoints are developed for Bank of America Private Bank, a division of Bank of America, N.A., ("Bank of America") and Merrill Lynch, Pierce, Fenner & Smith Incorporated ("MLPF&S" or "Merrill"), a registered broker-dealer, registered investment adviser and a wholly owned subsidiary of Bank of America Corporation ("BofA Corp.").
Asset allocation, diversification, and rebalancing do not ensure a profit or protect against loss in declining markets.
Investments have varying degrees of risk. Some of the risks involved with equity securities include the possibility that the value of the stocks may fluctuate in response to events specific to the companies or markets, as well as economic, political or social events in the U.S. or abroad.

This material should be regarded as educational information on Social Security and is not intended to provide specific advice. If you have questions regarding your particular situation, you should contact the Social Security Administration and/or your legal advisors.

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