The Retirement Paycheck System

What is a Retirement Paycheck?

We are all used to having a bank account, writing checks and making transfers to pay off other spending accounts such as our credit cards. While we are still working,  our employer's paycheck usually funds this spending, with hopefully some left over for saving. When we retire, the paycheck from our employer stops, but instead we may receive income from a pension or Social Security. In addition, we probably will receive additional money from our investment accounts, such as interest, dividends, or the drawdown of principal, in order to fund our spending needs. This is where it can get complicated. You will have to consider which accounts to get this money from, and when to withdraw it, and what investments to liquidate.

A Retirement Paycheck system is a method of financial consolidation and simplification that allows you, as a retiree, full and complete control over your money flow.

Here's why it is important to have a paycheck system that is simple and systematized. As you begin to enjoy your retirement, you may lose interest in the detailed financial process,  or later on you might become incapable of performing complex financial management functions either through ill-health or finally from very old age. Anything other than a simple system might grind to a halt.

How does the Retirement Paycheck system work?

First, set-up a consolidation account at a single institution that offers offer money market checking, debit cards, online banking and automatic bill paying. A comprehensive and detailed consolidated statement for the account will show investment positions, values, activity and year-end tax information.

Then, transfer and consolidate all investment and banking accounts into this account. All your 401k, 403b accounts etc. are rolled into IRA accounts up to FIDC maximum limits. We recommend you use No-Load mutual funds or Exchange Traded Funds that allow for reinvestment of all dividends, interest and capital gains, as investment vehicles. The investment accounts should be set up with either no transaction fees or a buy-only fee structure (since most transactions will be sales).

All retirement income (Social Security, pension distributions, etc.) should be directly deposited into the master account.

The account is managed according to the distribution method detailed in your retirement plan, which might be the Bucket System or by withdrawing from the investment accounts. Either way, your account should be reviewed every quarter to determine if rebalancing is required, and to identify which investments are to be harvested when necessary.  Harvesting will be in accordance with an investment policy statement agreed between you and your financial advisor. Harvesting will aim for tax efficiency. Taxes can be withheld from these transactions, perhaps eliminating the need for quarterly estimated tax payments.

Money from liquidating the selected assets is added to the money market account. The balance in this account is maintained at three to five months of the cash flow requirement.  The 'retirement paychecks' come from transferring money from the money market account to an operating checking account each month, or if you prefer,  by simply using the money market checking account.

Bay Area Planners can help you set up such a system, and provide the quarterly investment management review.

To set up your Retirement Paycheck, call (408) 725-7135 or click here.

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