What if you refrained from thinking about retirement in terms of years and instead thought about it in paychecks?
More and more financial advisers are suggesting a new way of handling retirement income to their clients: take monthly paychecks as their source of income after retirement.
The whole concept is simple. Let’s say you retire at the age of 65 and you reckon that you will be alive until 85 – it would be 20 years. Multiply that by 12 months, and you’ll have 240 monthly paychecks for the period to divide and spend.
It is the very essence of simple, yet this shift in thinking is empowering not just a few but a good number of people, and as a result, they are not only making wiser financial decisions but are also becoming less fearful of the prospect of outliving the money.
How Is the Scheme of Monthly Paychecks a More Rational Strategy for Retirement Planning?
The question most commonly seen in retirement planning over the last few decades has been how much money you need to retire properly.
Still, for most of the population, the amount, which is the overall sum needed for retirement, like $1.5 million or $2 million, seems to be a bit distant and incomprehensible.
Things look different when the number becomes a monthly figure since it becomes a friendly and not so overwhelming process.
“People already plan their monthly consumption of resources. So, taking a monthly paycheck in the course of the retirement stage is a natural theme; and secondly, it contributes to financial discipline and ensures that the retiree doesn’t get caught spending too much too early,” says Sarah Golden, a retirement planner.
How the 240 Paycheck Framework Works
Now, at least there are ways to continue with this method; you can start with a simplified example namely with the 20-year idea and then go from there.
- Initially, you decide on 20 years of retirement (or longer if you believe you will exceed 85).
- You move to the next stage of your plan where you do a simple 12 X 20 which will give you the total of 240 pay periods.
- Set aside a monthly set of your savings.
- Count your regular income (Social Security, pension, annuities).
- Make up for the difference using savings withdrawal.
The objective is to convert your entire retirement savings into a fixed income that can help your lifestyle last longer—without using everything too quickly.
Planning for More Than Just the Basics
The majority of American citizens believe that Social Security will take care of everything they need during their retirement. However, the average monthly payment of about $1,997 is hardly ever enough, especially with the growing costs of housing and healthcare.
By establishing a “retirement paycheck” yourself, you can develop a comprehensive strategy that includes several different sources of funds like:
- Guaranteed income (Social Security, pensions, annuities)
- Investing and saving (401(k), IRAs, brokerage accounts)
- Other assets (home equity, part-time income, etc.)
Using this approach also facilitates the adjustment of your plan to any life changes such as a health crisis or a drop in the market.
What About Longevity?
Even though the 240-paycheck model assumes a 20-year retirement, most advisors now advocate planning for 30 or more years.
So you have to prepare a 360-paycheck budget, especially if you’re fit and well or if there’s a family history of longevity.
It is wiser to predict more and spend less than to be 83 and have no savings left.
Tips to Set Up Your Retirement Paycheck System
Here are some of the things you need to do:
- Estimate your retirement timeline — age 65 to 85 (or longer), or perhaps even longer.
- List all sources of income — including Social Security and pensions — those are two examples.
- Calculate your monthly needs — housing, healthcare, food, travel, etc. — all your daily, monthly, and annual needs.
- Use scheduled transfers from your accounts to mimic a paycheck — that would be a named beneficiary.
- Review yearly and adjust for inflation, healthcare, or emergencies and then also change the content for the aforementioned reasons.
Some retirees opt not to take their Social Security until age 70 to get the most out of it. Some people, in contrast, rely on both tax-free {} and taxable [] accounts for controlling the withdrawal and minimizing the tax consequences, accordingly.
Avoid These Common Mistakes
Financial specialists highlight several regular failures that people do when regarding monthly retirement income:
- Spending too much early in retirement.
- Disregarding the inflation issue in the course of time.
- Withdrawing money from the wrong accounts in an unsuitable order.
- Not having a look at the tax side of the investment withdrawal.
- Lacking the adaptability to deal with downturns in the marketplace.
How can you sidestep these potential pitfalls? You should plan your income in a very fluid manner–as though it were an actual monthly wage.
Pay Yourself Like a Pro
If you spent your whole life working, you have a right to feel secure in retirement. On the one hand, running a business has the responsibility to manage the payroll; on the other hand, planning your personal financial future is necessary so that you can cover your monthly expenses throughout your life.
A monthly point of view is much better than having one large figure that you race after.
Furthermore, it is also a smarter way to approach things.
