How to Create Your Retirement Paycheck
One of the most disorienting shifts in retirement is the paycheck disappearing. For decades, money arrived on schedule, every month like clockwork. Then it stops. Suddenly you're responsible for creating your own income from a collection of accounts, and the decisions you make about which account to draw from, how much to take, and when to take it can mean the difference between a tax bill of thousands or tens of thousands of dollars per year.
The good news: this doesn't have to be so complicated that it requires someone else managing your accounts. This guide walks you through a system that turns your portfolio into a retirement paycheck - automatic, predictable, and tax-efficient.
For guidance on how the strategy shifts at different life stages, see my companion articles: Retirement Planning Before Medicare (Under 65) and Retirement Planning After Medicare (Age 65+).
How the System Works
Your retirement paycheck doesn't come from one place the way a salary does. The system creates a flow: money moves from your investments into a cash sweep account, and from there it transfers automatically into your checking account every month, without you lifting a finger.
Once a year (typically in the fourth quarter), you review, rebalance, and refill the system for the coming year. That's it. The rest runs on autopilot.
The annual process has six steps:
- Calculate your spending need for the year
- Determine which account to draw from
- Review your portfolio and rebalance
- Move the full year’s spending into your money market account
- Set up your monthly auto-transfer
- Check your total income before year-end
Step 1 - Calculate Your Annual Spending Need
Add up everything you plan to spend - housing, food, travel, healthcare, subscriptions, and one-off items. Then subtract any income that arrives automatically: part-time work, rental income, dividends, and interest. The remainder is what your portfolio must cover. Don't forget to include an estimate for income taxes.
| Your Numbers | Example | |
|---|---|---|
| Total annual expenses | $__________________ | $90,000 |
| Plus: estimated income taxes | + $__________________ | + $5,000 |
| Minus: part-time work | - $__________________ | - $3,000 |
| Minus: Social Security | - $__________________ | - $0 |
| Minus: pension / rental income | - $__________________ | - $0 |
| Minus: dividends + interest | - $__________________ | - $7,000 |
| Minus: any other income | - $__________________ | - $0 |
| = Withdraw from portfolio | $__________________ | $85,000 |
Step 2 - Determine Which Account to Draw From
| Account | How to Use It |
|---|---|
| Taxable brokerage (use first) | No penalties, no age restrictions. Long-term capital gains are taxed at 0% or 15% - far better than ordinary income rates. Using this account first allows you to minimize your reported income to help with ACA subsidies and continue to defer taxes as long as possible. |
| Tax-deferred (i.e., Traditional IRA/401k) (use next) | Prior to age 55, you could consider a 72(t) SEPP. Between 55-59.5 you might have access to the “Rule of 55”. After 59.5, the early withdrawal penalty no longer applies. All withdrawals are taxed at your ordinary income tax rate. |
| Tax-free (i,e, Roth IRA/401k and HSA) (use selectively) | Roth contributions and HSA withdrawals for medical expenses can be taken at any age with zero tax and zero penalty. Generally, you want these accounts to grow tax-free as long as possible, but they can be powerful if used strategically to avoid ACA subsidy and IRMAA income cliffs. |
The right mix depends heavily on your age and situation. See Retirement Planning Before Medicare (Under 65) and Retirement Planning After Medicare (Age 65+) for more details.
Step 3 - Review your portfolio and rebalance
Look at your investment allocation across all accounts compared to your target. Sell from whatever has grown the most - this both rebalances your portfolio and creates your spending money for the coming year.
Any rebalancing that needs to happen across asset classes is best done inside your tax-deferred retirement accounts (i.e., IRA, 401k, 403b, etc), where there are no capital gains consequences from selling and buying.
*Safe Withdrawal Checkpoint*: this is a great time to compare the amount you are withdrawing compared to your total investment balance.
For example, if your portfolio withdrawal is $85,000 and your total account balances add up to $2,000,000, then you have a 4.25% withdrawal rate.
| Withdrawal Rate* | Impact |
|---|---|
| Less than 4% | You might be underspending and could either be spending and/or or giving more. |
| 4% - 6% | Often considered a sweet spot that is typically sustainable assuming you have a balanced portfolio and remain flexible with future spending to stay in that range. |
| Greater than 6% | You might be overspending to a level that your portfolio can’t handle. You should consider reviewing your plan and discretionary spending. |
*This is a type of variable percentage withdrawal. This is a different method than the common “4% rule.”
How rebalancing and withdrawals work together
Rebalancing and withdrawing aren't two separate tasks - they happen at the same time, using the same sales. Here's how that plays out in practice.
The setup: You have a $1,000,000 portfolio split across a taxable brokerage ($600,000) and a traditional IRA ($400,000). Your overall target allocation is 60% US stocks, 20% international stocks, and 20% bonds. Because bonds are typically best held in tax-deferred accounts, you hold all your bonds in the IRA and only stocks in the taxable brokerage. You need to withdraw $60,000 for next year's spending.
This means the target allocations within each account look different, even though the overall portfolio hits 60/20/20:
- Taxable brokerage target: 75% US stocks, 25% international stocks (no bonds)
- IRA target: 30% US stocks, 20% international stocks, 50% bonds
Your taxable brokerage: $600,000
| Asset | Target % | Target $ | Actual $ | Actual % | Difference |
|---|---|---|---|---|---|
| US stocks | 75% | $450,000 | $510,000 | 85% | +$60,000 |
| International stocks | 25% | $150,000 | $90,000 | 15% | -$60,000 |
US stocks have run up and are overweight by exactly $60,000. Perfect - sell that amount to fund your spending.
Action: Sell $60,000 of US stocks in the taxable brokerage. This funds your entire year of spending AND brings US stocks back closer to the target in one move. Move the $60,000 proceeds into your money market settlement account as your paycheck pool. No need to buy anything in the taxable account.
After the sale, your taxable brokerage looks like this:
| Asset | Actual $ | Actual % | Target % |
|---|---|---|---|
| US stocks | $450,000 | 83% | 75% |
| International stocks | $90,000 | 17% | 25% |
| Cash (money market) | $60,000 | - | - |
The percentages above are calculated against the $540,000 still invested in stocks (not counting the cash, which is eventually leaving the account). International is still underweight - the IRA will handle the rest.
Your IRA: $400,000
| Asset | Target % | Target $ | Actual $ | Actual % | Difference |
|---|---|---|---|---|---|
| US stocks | 30% | $120,000 | $138,000 | 34.5% | +$18,000 |
| International stocks | 20% | $80,000 | $42,000 | 10.5% | -$38,000 |
| Bonds | 50% | $200,000 | $220,000 | 55% | +$20,000 |
Both US stocks and bonds are overweight in the IRA. Sell both, buy international - no tax consequences since this is inside a tax-deferred account.
Action: Sell $18,000 of US stocks and $20,000 of bonds in the IRA. Buy $38,000 of international stocks.
End result - full portfolio after all trades:
| Asset | Brokerage | IRA | Total $ | Total % | Target % |
|---|---|---|---|---|---|
| US stocks | $450,000 | $120,000 | $570,000 | 60% | 60% |
| International stocks | $90,000 | $80,000 | $170,000 | 18% | 20% |
| Bonds | $0 | $200,000 | $200,000 | 21% | 20% |
| Cash (spending) | $60,000 | - | $60,000 | - | - |
International comes in slightly light at 18% vs. the 20% target and bonds are slightly over at 21%, because $60,000 left the portfolio entirely as your spending money - shrinking the total invested base from $1,000,000 to $940,000. That's expected and normal. You're close enough to target, and next year's rebalance can clean up any small discrepancies.
You've funded your entire year of spending, sold assets that were high in both accounts, and landed right at your target allocation - all with no unnecessary tax events. The taxable brokerage handled the withdrawal; the IRA handled the rebalancing. That's the system working as designed.
This rebalancing process is often the most difficult for people to wrap their heads around, so this is a very good time for a check-in with an hourly advisor, especially the first couple years of following this process.
Step 4 - Move the full year's spending into your money market account
Transfer your total annual spending amount into your brokerage money market or settlement fund. This is your paycheck pool for the coming year.
- Fidelity: SPAXX
- Vanguard: VMFXX
- Schwab: SWVXX (must be set up manually - Schwab isn't automatic)
For more information on alternative options especially in states with high state income tax see: Where Should I Put My Cash? A Guide to Cash and Cash-Equivalent Options
Step 5 - Set up your monthly auto-transfer
Divide your annual withdrawal by 12 and set up an automatic monthly transfer from your money market account to your checking account. This is your retirement paycheck. It arrives on the same day every month automatically - no manual action needed.
Example: $85,000 / 12 = $7,083/month
Next year, repeat the process - rebalance, refill, and adjust the monthly amount if your spending has changed.
Step 6 - Check your total income before year-end
Before finalizing your annual withdrawal, tally up ALL income sources for the year and compare them to your key thresholds. This is the most important step for avoiding expensive mistakes - and a perfect time for a check-in with a Nectarine advisor.
Add these up before year-end:
- Capital gains from rebalancing
- Dividends received
- Interest earned
- Traditional IRA withdrawals
- Roth conversions done
- Social Security/pension income
- Part-time / any other income
Compare your total to:
- ACA subsidy cliff: ~$62k single / ~$84k married (2026 MAGI)
- 12% bracket top: $50,400 single / $100,800 married (2026 taxable income)
- 0% long-term capital gains zone top: $49,450 single / $98,900 married (2026 taxable income)
- IRMAA tier 1 threshold (if over 63): $109,000 single / $218,000 married (2026, based on 2024 MAGI)
Depending on where your income falls within these various thresholds, that’s where many of the retirement planning considerations come into play that are discussed in more detail in these other articles: Retirement Planning Before Medicare (Under 65) and Retirement Planning After Medicare (65+).
The Bottom Line
The retirement paycheck system is built on a simple foundation: once a year, review, rebalance, and refill. Every month, money arrives automatically.
Done right, you'll always know exactly how much is coming in, where it's coming from, and that your portfolio is staying on track. The annual process takes some thought, but the rest of the year runs on autopilot.
The harder questions (which account to draw from at your age, how much to convert to Roth, when to take Social Security, and how to stay under key income thresholds) are covered in my companion guides referenced below.
Retirement Planning Blog Series:
A quick note: this article is meant to educate, not to substitute for personalized advice. The tax figures, income thresholds, and strategies discussed here reflect 2026 estimates and change every year - and how they apply to your specific situation depends on factors I can't account for in a general guide. Before acting on anything in this series, it's worth talking through your specific numbers with a qualified financial or tax advisor.