Financial advice that starts with a plan.
We help you do more with what you’ve earned.
Key Takeaways:
• Your retirement paycheck starts with what you plan to spend. Build the target from expected after-tax spending, not a percentage of your former salary.
• The money comes from several places at once. Social Security, pensions, and cash reserves cover part of the need. Investment accounts fill the rest.
• Which account you pull from changes the tax bill. Social Security taxation, Medicare premium surcharges, and required minimum distributions all key off the same income figures.
• The years between the last paycheck and the first required distribution are the widest tax planning window most people ever get. What happens there echoes for decades.
• The number moves. Markets, inflation, taxes, and healthcare costs all shift across a retirement that can run 30 years or more, so the plan has to move with them.
Retirement changes how money reaches your household. Direct deposit ends. Housing, healthcare, travel, and the grocery bill keep going.
Building a replacement means blending income that arrives on its own with planned withdrawals from your portfolio, so cash keeps landing in checking on a rhythm you can count on. The sources behind each deposit shift over the years. The rhythm should not.
Figure Out How Much of Your Paycheck Actually Needs to Be Replaced
Start with what you expect to spend, not a percentage of your old salary. Salary-based rules of thumb miss how households really spend money once work ends.
Build the number from two pieces. First, regular monthly expenses. Second, the large irregular costs: property taxes, insurance premiums, travel, home repairs, and major medical bills. Keeping them separate gives you a cleaner baseline.
Then compare that after-tax figure against income you already have coming. Whatever is left is what the portfolio has to supply.
That gap rarely matches your account balances. Traditional IRA distributions are taxed as ordinary income. Pension payments are taxed. Brokerage sales can trigger capital gains. Your plan may need to generate noticeably more than you intend to spend just to net out to the right number.
In California, that math gets tighter. The state does not tax Social Security benefits, but it does tax IRA and 401(k) withdrawals and capital gains as ordinary income, with no preferential rate for long-term gains. A San Diego retiree pulling $80,000 from a traditional IRA faces a state tax bill that an identical retiree in Nevada or Texas does not. Any national article about withdrawal strategy is quietly assuming that bill away.
Build Your Retirement Paycheck From Multiple Sources
Most retirees pull cash from several places at once. Some payments arrive on a schedule you do not control. Others involve real choices about timing, taxes, and which investments to sell.
The mix determines how hard the portfolio has to work. The more of your spending covered by income that shows up on its own, the less pressure sits on invested assets.
Income That Arrives Without You Doing Anything
Social Security: Paid for life and adjusted annually for inflation. Claiming before or after your full retirement age permanently changes the monthly benefit, so the timing decision follows you the rest of your life.
Pension and annuity payments, if you have them: A steady lifetime stream, though the payment structure and survivor provisions decide how much of it you can plan around.
Part-time work: Earnings can cover part of the gap while you delay Social Security or wait for other income to start. Worth checking the tax cost before you commit.
Rental income: Net cash flow is what counts, not gross rent. Vacancies, repairs, insurance, and management fees come out first.
Accounts That Fill the Remaining Income Gap
Cash reserves: Fund near-term spending without forcing a sale. This lets longer-term investments carry the growth work.
Taxable brokerage accounts: Sell securities for cash, and the tax depends on cost basis and realized gain, not the full withdrawal amount. Long-term gains get preferential federal rates.
Traditional IRAs and 401(k)s: Often the largest pool. Distributions are taxed as ordinary income, and they eventually become mandatory.
Roth accounts: Qualified distributions come out federally tax-free and stay out of the income figures that drive Social Security taxation and Medicare surcharges. That makes Roth dollars the most useful lever you have in a high-income year.
Health savings accounts: Qualified medical withdrawals are tax-free. After 65, the additional 20% tax on nonqualified withdrawals no longer applies, though those withdrawals are still taxed as ordinary income.1
The Roth Five-Year Rules, Explained Correctly
Tax-free comes with clocks. Two of them, and they work differently.
The first is the five-year rule for earnings. Roth IRA earnings come out tax-free only if you have had a Roth IRA open for five tax years and you meet a qualifying condition, usually being 59½ or older. The clock starts January 1 of the tax year of your first contribution to any Roth IRA. It runs once. Open a Roth IRA at 60 with a $100 contribution and the clock starts. Five years later, every Roth IRA you own has cleared it.
The second applies to conversions. Each conversion carries its own five-year clock for the 10% early-distribution penalty. If you are already 59½, this one does not apply to you.
What that means in practice: if you are over 59½ and have had any Roth IRA open for five years, the conversion clocks are irrelevant. If you are 58 and just opened your first Roth IRA, you have a real waiting period on earnings, and it pays to know that before you count on the money.
Roth 401(k)s run a separate clock, and it does not carry over when you roll the account into a Roth IRA.2 Opening a Roth IRA early, even with a token amount, starts a clock you may want later.
How Social Security Actually Gets Taxed
Most people are surprised their benefits get taxed at all. The mechanism is a figure called provisional income, sometimes called combined income: adjusted gross income, plus tax-exempt interest, plus half your Social Security benefits.
Compare it to two thresholds:
| Filing status | Up to 50% of benefits taxable | Up to 85% taxable |
| Single | Above $25,000 | Above $34,000 |
| Married filing jointly | Above $32,000 | Above $44,000 |
Four things about this trip people up.3
The percentages describe how much of your benefit gets added to taxable income, not the rate you pay on it.
The thresholds have never been indexed for inflation. They were set in 1983 and 1993 and have not moved since. Every cost-of-living increase pushes more retirees across them.
Municipal bond interest counts. It is tax-exempt federally, then added right back into provisional income. If the reason you own munis is keeping Social Security untaxed, they do not do that job.
The $6,000 senior deduction created in 2025 (available through 2028 for taxpayers 65 and over) lowers taxable income but not AGI. It can cut your tax bill. It does not change how much of your Social Security is taxable.
Qualified Roth withdrawals stay out of the calculation entirely. That is the mechanical reason Roth dollars matter more in retirement than they did while you were working.
Turn Those Sources Into a Consistent Monthly Retirement Paycheck
Once you know the gap, the work is converting balances into cash on a schedule. A set process beats reacting month to month:
1. Set the monthly amount: Base it on regular after-tax spending. Keep large irregular purchases out of this figure.
2. Subtract the income already coming in: What remains is the portfolio’s job.
3. Decide which accounts fund it: Draw based on your full tax picture, not habit.
4. Build a spending reserve: Hold enough near-term cash that ordinary spending never depends on selling investments in a down market.
5. Set aside taxes and irregular costs separately: Keep them out of the monthly number so they do not distort it.
6. Automate the transfer: Schedule money into checking so it arrives with a payroll-like rhythm.
7. Refill the reserve on purpose: Use dividends, interest, and planned sales. Do not let it drift down unnoticed.
The Gap Years Are Your Widest Tax Planning Window
There is usually a stretch between the day you stop working and the day Social Security and required distributions fill your tax return back up. It might run from 62 to 73. It might be shorter. Whatever the length, it is the most flexible tax position you will ever occupy, and most people spend it doing nothing.
Two moves are worth studying.
Roth conversions. You move money from a traditional IRA to a Roth IRA and pay ordinary income tax on the converted amount. The point is paying a known rate now instead of an unknown rate later on a balance that has grown. Run across several years, conversions shrink the pre-tax account that eventually drives required distributions, cut how much of your Social Security gets taxed, and build a pool you can draw from without adding to income.
The catch is that a conversion is income in the year you do it. It can push you into a higher bracket, pull more Social Security into taxable income, and raise Medicare premiums two years out. The work is sizing each conversion to fill a bracket without spilling past it.
Tax-gain harvesting. For 2026, long-term capital gains are taxed at 0% federally until total taxable income reaches $49,450 for single filers and $98,900 for joint filers.4 Below those lines, you can sell appreciated stock, owe no federal tax on the gain, and buy it back at a higher cost basis. The wash sale rule blocks losses, not gains.
California offers no preferential rate on long-term gains, so a San Diego retiree harvesting gains still owes state tax on them. The federal savings are real. The math is narrower than a national article makes it look.
One constraint worth knowing: conversions and gain harvesting compete for the same bracket space. You generally cannot max out both in the same year.
Two Cliffs Worth Watching
Most of the tax code phases in gradually. These two do not.
Medicare Premium Surcharges (IRMAA)
Medicare charges higher-income beneficiaries a surcharge on Part B and Part D premiums, called the income-related monthly adjustment amount. For 2026, it starts once modified AGI passes $109,000 for single filers or $218,000 for joint filers. The standard Part B premium is $202.90 a month. At the top tier, it reaches $689.90.5
Two features make IRMAA a planning problem instead of a line item.
It is a cliff, not a phase-in. One dollar over a threshold triggers the full surcharge for that tier for the entire year. For a couple with both spouses on Medicare, crossing the first line costs roughly $2,300 across the year.
It looks back two years. Your 2026 premiums are set by your 2024 tax return. A Roth conversion done this year shows up in your Medicare bill two years later. Running a multi-year conversion plan means checking every year of it against the threshold two years downstream.
If your income dropped because of a life-changing event, including retirement itself, you can request a new determination using Form SSA-44. Plenty of people who qualify never file it.
Required Minimum Distributions
Eventually the IRS makes you take the money. Under current law, required minimum distributions start at 73 if you were born between 1951 and 1959, and at 75 if you were born in 1960 or later.6
The amount is your prior-year December 31 balance divided by a factor from the IRS Uniform Lifetime Table. At 73, the factor is 26.5, which works out to roughly 3.8% of the balance. The percentage climbs every year after that.
Three details matter more than the arithmetic.
You can delay your first RMD to April 1 of the following year. It is usually a bad idea. The second RMD is still due on December 31, which stacks two years of distributions into one tax year. That can push you into a higher bracket, drag more Social Security into taxable income, and trip an IRMAA threshold at the same time.
Missing an RMD costs 25% of the shortfall, cut to 10% if you correct it within two years. IRA amounts can be aggregated and taken from any single IRA. 401(k) plans cannot. Each one distributes on its own.
If you give to charity, a qualified charitable distribution from an IRA after age 70½ satisfies the RMD without adding to AGI. The 2026 limit is $111,000 per person. It is one of the few moves that lowers your income tax and your Medicare premium exposure with a single transaction.
Keep Your Retirement Paycheck Sustainable Over Time
Keeping the paycheck durable takes ongoing attention, since markets, costs, and income all move. A workable amount today may need to change as those inputs do.
What the 4% Rule Actually Is
It comes up in every retirement conversation, so it is worth being precise about it.
In 1994, financial planner William Bengen published research in the Journal of Financial Planning testing how much a retiree could withdraw each year, adjusted for inflation, without running out of money over 30 years. Using market history back to 1926, the worst-case answer came in around 4%. That finding became the 4% rule.
Bengen has revised his own number upward since. His 2025 book puts the historical worst case closer to 4.7% for a more diversified portfolio, and he has argued many retirees could reasonably start higher. Morningstar, using forward-looking return assumptions rather than history, put the safe starting rate for a 2026 retiree at 3.9%.7
Serious researchers landing between 3.9% and 5.5% should tell you something. The number is not a constant. It is an output of assumptions: how long the retirement runs, what the portfolio holds, how much of your spending other income already covers, and whether you will cut back after a bad year.
Treat 4% as a sanity check on the scale of the problem, not as a plan. A retiree with a pension covering half their spending and a retiree with no outside income are not running the same math, even with identical balances.
Protect the Portfolio From Withdrawal and Market Risk
A sustainable withdrawal level depends on retirement length, asset allocation, outside income, spending flexibility, and total savings. No single percentage fits every household.
Early market losses do the most damage, because selling into a decline locks in losses the portfolio might otherwise have had time to recover from. That is sequence-of-returns risk, and it is the entire reason for the spending reserve described above.
The portfolio still needs growth. A retirement running 30 years or more has to keep up with inflation, and cash will not do that. The balance between stability now and growth later is the actual design question.
Adjust Withdrawals as Taxes, Income, and Spending Change
The account you draw from changes the tax on that dollar. Looking at your accounts together, rather than defaulting to the same one every year, is what makes withdrawal sequencing worth anything.
Your income changes too. Part-time work ends. Social Security starts. Required distributions arrive. And when one spouse dies, the survivor files as single the following year, which compresses the brackets and can raise the tax bill on nearly the same income. Reviewing spending, portfolio value, taxes, and available income on a regular schedule keeps the paycheck matched to where your finances actually stand.
Replacing Your Paycheck in Retirement FAQs
1. How much of my working paycheck do I need to replace in retirement?
Base the target on expected after-tax spending rather than a fixed salary percentage. Add regular costs and realistic irregular spending, then subtract the income you already have coming. What remains is the portfolio’s job.
2. Which retirement income source should I use first?
A reasonable default is scheduled income first, then taxable accounts, then tax-deferred accounts, saving Roth withdrawals for years when taxable income is already high. That order shifts based on your tax situation, upcoming required distributions, and estate goals. It is a starting point, not an answer.
3. Is the 4% rule still valid?
It was never a rule. It was a finding about historical worst cases with a specific portfolio and a 30-year horizon. Bengen himself has since revised the number to roughly 4.7%, while Morningstar’s forward-looking work puts it at 3.9% for 2026. The useful takeaway is the range, not the number. Your sustainable rate depends on your horizon, your allocation, your other income, and how flexible your spending is.
4. Should I do a Roth conversion?
It depends on the gap between your tax rate today and the rate you expect later. Conversions tend to make sense in low-income years before Social Security and required distributions start. They can backfire if they push you into a higher bracket, increase the taxable share of your Social Security, or cross an IRMAA threshold two years down the road. Size matters more than the yes-or-no question.
5. When do required minimum distributions start?
Age 73 for those born between 1951 and 1959, and 75 for those born in 1960 or later. The first one can be delayed to April 1 of the following year, though that usually stacks two distributions into a single tax year.
6. Do I have to worry about IRMAA?
Only if your modified AGI passes $109,000 single or $218,000 joint. About 7% to 8% of Medicare beneficiaries pay it. If a one-time event like a large conversion, a home sale, or an inherited IRA distribution pushes you over, the surcharge shows up two years later.
7. Should I live only on dividends and interest in retirement?
Not necessarily. A total-return approach, combining interest, dividends, and planned sales while keeping the portfolio at its target allocation, usually gives you more flexibility than restricting spending to whatever income the portfolio happens to produce.
8. How much cash should I keep to support my retirement paycheck?
Enough to cover near-term needs without making ordinary spending depend on selling investments at a bad time. The right amount depends on your spending, your outside income, and your tolerance for market swings.
9. How do taxes affect how much retirement income I actually get to spend?
Different sources produce different results. Traditional distributions raise taxable income. Qualified Roth withdrawals generally do not. Brokerage sales create gains or losses. In California, most of it gets taxed again at the state level. Gross cash flow and spendable cash are rarely the same number.
10. What happens to my retirement paycheck when the stock market falls?
Cash reserves, outside income, and spending flexibility all reduce the need to sell depressed assets to cover normal expenses. A well-built withdrawal plan adjusts around market conditions instead of forcing a sale at the worst possible moment.
Get Help Building a More Durable Retirement Income Plan
Replacing your paycheck means connecting spending, income, accounts, taxes, and portfolio management into one system that works together.
Bull Oak Financial Advisors is a fee-only fiduciary firm in San Diego. We work with near-retirees and retirees on exactly this problem: mapping what you have against what you need to spend, working out how much the portfolio has to provide, and deciding which accounts it comes from and when.
Tax planning is part of that work, including Roth conversion modeling, withdrawal sequencing, Social Security timing, and managing income around the IRMAA and RMD thresholds above. We do not prepare or file tax returns. Clients who want that work done can engage TrackCPA directly.
As retirement progresses, we revisit withdrawal sources, portfolio risk, taxes, and changing spending needs so the system continues to fit your life. Schedule a free introductory call to see if we’re a good fit.
Resources
1. IRS: Publication 969, Health Savings Accounts
2. IRS: Publication 590-B, Distributions from Individual Retirement Arrangements (IRAs)
3. Social Security Administration: Income Taxes and Your Social Security Benefits
4. IRS: Revenue Procedure 2025-32, 2026 Inflation Adjustments
5. Centers for Medicare & Medicaid Services: 2026 Medicare Parts A & B Premiums and Deductibles
6. IRS: Retirement Plan and IRA Required Minimum Distributions FAQs
7. Morningstar: The State of Retirement Income. William P. Bengen, “Determining Withdrawal Rates Using Historical Data,” Journal of Financial Planning (1994).
