How to create a retirement 'paycheck'

Your expenses don't end when your paychecks do, but creating a reliable income stream in retirement can be tricky. The right choices can result in sustainable income for the rest of your life. The wrong choices could leave you uncomfortably short of cash.

In fact, retirement includes so many important, potentially irreversible decisions that most people could benefit from a few sessions with a fee-only, fiduciary financial planner. (Fiduciary means the adviser is committed to putting your interests ahead of her own.) These ideally would start about 10 years before retirement. Understanding some key concepts could make those discussions easier — or keep you from making serious mistakes if you take a do-it-yourself approach.

Social Security will make up 60% to 80% of most retirees' income, so maximizing those checks is essential, said actuary Steve Vernon, a consulting research scholar at the Stanford Center on Longevity.

Social Security checks can start at age 62, but abundant research shows most people are better off delaying. Waiting until 70, when benefits max out, is typically the optimal strategy for single people and the higher wage earner in a couple, said Vernon. People's situations can vary, though, so they should consult Social Security calculators to help them decide when to start. AARP's site has a free one, or search for more sophisticated versions from Maximize My Social Security ($40 and up) and Social Security Solutions ($20 and up).

A planner might recommend tapping retirement accounts or working just enough to substitute for the income you would otherwise receive from Social Security.

Ideally, fixed expenses in retirement would be covered by guaranteed income, such as Social Security and pensions, so that your basic lifestyle isn't jeopardized by stock market fluctuations. If those sources aren't enough to cover basic costs, an income annuity could help fill the gap, says certified financial analyst Wade Pfau, author of "Safety-First Retirement Planning."

Income annuities are insurance products that can offer a lifetime stream of monthly payments in exchange for a lump sum. Unlike variable annuities or other investments, the amount you get doesn't vary if the stock market goes up or down.

Financial planners' "4% rule" suggests withdrawing 4% of your portfolio the first year, adjusting the amount each year afterward for inflation. This strategy historically has posed a low risk of running out of money.

Some planners, however, worry that 4% may be too high given current low interest rates and high stock valuations. The "Spend Safely in Retirement" method, which Vernon created with the help of the Society of Actuaries, recommends using annual withdrawal rates based on the IRS' required minimum distribution rules. The percentage rises slightly each year according to age. A 60-year-old might withdraw 2.72%, a 65-year-old would tap 3.13% and a 70-year-old would take 3.65%. The withdrawal would be made at the end of each year, then the money is moved into a savings account or other investment that protects the principal, so it's available to spend the following year without risk of market losses.

Unlike the 4% rule, the "Spend Safely in Retirement" approach poses no risk of running out of money but can result in income that varies considerably from year to year. Retirees who have their basic expenses covered by guaranteed income might look at their portfolio income as a bonus, Vernon said. A bigger one can pay for splurges, while a smaller bonus might require cutting discretionary spending.

Many retirees are tempted to move their money into "safe" investments such as bonds, certificates of deposit or savings accounts. Unfortunately, those investments may not keep up with inflation. Devoting at least 50% of investment portfolios to stocks — ideally using a low-cost target date, balanced or stock index fund — can produce more income over time, Vernon said.

Once you create a retirement paycheck, your work isn't done. You will still need emergency funds for unexpected expenses and a strategy to pay for long-term care, among other tasks. But establishing a reliable income stream can help you meet your regular expenses in retirement without worrying you'll run out of cash.