Many investors wonder about the details of replacing paychecks when they retire. Kahlilah Dowe explains how investors should evaluate their income needs.

She also explains how a portfolio can provide different sources of income.


Gary Gamma: So we’ve got a question from Roger in California who writes, “What are the nuts and bolts of actually replacing your paycheck, not just the numbers, but what do you actually do?” So maybe he has multiple accounts, order withdrawals. What do you do there?

Kahlilah Dowe: Right, that’s what it sounds like, and that’s a great question. It’s one that we get all the time. So let’s say you’ve accumulated or you feel comfortable that you’ve accumulated what you need in order to retire. The question becomes, okay, well how do I get the income that I actually need? So when you think about replacing the paycheck, I think there’s another question that comes with that. And really the first question which is how do I get the income that I need to cover living expenses? And that’s important because it can be very different than replacing a paycheck. But I think that’s how most investors look at it, like I’m coming from getting a paycheck every week or every two weeks. How can I keep that going?

So I’ll speak with clients who will often say to me, “I need to get $100,000 from my portfolio every year.” And I may say, “Okay, but how much do you actually need to cover your living expenses?” And it’s often a very different number. It’s maybe 50 or $25,000. So I think that’s part of it.

The other thing is I think most investors think in terms of having the portfolio generate income, so the question becomes how can I structure my portfolio so that it generates a certain amount of income; and how can I keep that income going? And I usually think in forms of dividends when you think of it that way.

The nuts and bolts of it is usually a combination of a few things. So if he has, let’s say, a taxable account, an IRA account, a Roth IRA account, for my clients, let’s say, I’ll just use a real example. Let’s say we need $50,000 from the portfolio. That’s usually a combination of taking the income that the portfolio generates and then selling shares from a taxable account if we have to. Sometimes the income is enough.

If you’re, let’s say 70½ and you have required minimum distributions, that’s often the first source of income. And then if you have a Roth IRA, then we look at maybe spending from that last. So it really depends on the types of accounts that you have first and then a combination of income and selling shares as you need to.

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