How to Pay Yourself in Retirement: A Step-by-Step Guide

Transitioning from earning a paycheck to withdrawing from your savings is one of the biggest challenges retirees face. In this episode, David and Pat break down the mechanics, tax strategies, and psychological shifts needed to turn your nest egg into a sustainable income stream.

The Mindset Shift: From Saving to Spending

• The Challenge: After decades of disciplined saving, retirees often struggle to reverse course and start spending their hard-earned investments.

• Stable vs. Variable Income:

  • Stable: Social Security, pensions, annuities—predictable, lifelong income.

  • Variable: Investment portfolios (stocks, bonds)—fluctuates with markets.

• Key Insight: Cover fixed expenses (e.g., housing, healthcare) with stable income to reduce stress during market downturns.

Retirement isn’t about pinching pennies—it’s about spending confidently within a plan. —Pat Kalish

Tax-Smart Withdrawal Strategies

• The Three Buckets:

  • Taxable Accounts (e.g., brokerage): Withdrawals trigger capital gains taxes.

  • Tax-Deferred Accounts (e.g., 401(k), IRA): Withdrawals count as ordinary income.

  • Tax-Free Accounts (e.g., Roth IRA): Withdrawals are untaxed.

• General Rule: Start with taxable, then tax-deferred, then Roth, but customize based on constraints related to:

  • IRMAA: Medicare premiums tied to income levels.

  • Social Security Taxation: Higher income = more taxable benefits.

• Pro Tip: Long-term planning (e.g., Roth conversions in low-income years) can slash lifetime taxes.

The Bucket Strategy: Smoothing Out Market Volatility

• Short-Term Bucket (1–2 years): Cash/money markets—covers immediate needs.

• Intermediate Bucket (3–10 years): Bonds/fixed income—replenishes the short-term bucket.

• Long-Term Bucket (10+ years): Stocks—fuels growth and inflation protection.

• Why It Works: Avoids selling investments at market lows and provides psychological comfort.

David’s Analogy: "Like a champagne waterfall, long-term growth trickles down to fund your spending needs."

Dynamic Spending: Adapting to Retirement’s Phases

• The "Retirement Smile": Spending follows three phases:

  • Go-Go Years (Early retirement): Higher spending on travel, hobbies.

  • Slow-Go Years (Mid-retirement): Reduced activity, lower costs.

  • No-Go Years (Late retirement): Healthcare costs dominate.

• Flexibility Matters: Adjust withdrawals based on market returns (e.g., spend more in up years, tighten in downturns).

• Tech Tools: Continuum’s software models 1,000+ scenarios to stress-test your plan.

Final Takeaways

• Coordinate Income Sources: Optimize taxes and Medicare costs by sequencing withdrawals strategically.

• Embrace Buckets: Separate funds by timeline to mitigate market panic.

• Spend with Purpose: Align withdrawals with your lifestyle goals, not just fear of running out.

Next Episode: Healthcare in Retirement—navigating Medicare, IRMAA, and rising medical costs.