For many retiring or simply leaving their jobs to pursue other opportunities, one of their primary questions is: how do I get a paycheck now that it’s not coming from my employer? I still need to pay bills, buy groceries, etc., so how do I fund my bank account?

For most, it means a transition from accumulating assets (contributing to the 401k, deferring income from bonuses, etc.) to supporting your spending from the portfolio you’ve built. Getting a paycheck from your investments can be done in two ways:

 

The Income Approach is simple to set up and execute but has significant drawbacks. Let’s find out what they are and learn the key to generating a paycheck from your investments via a Total Return approach.

The Income Approach

This method is how many retirees funded their lifestyle in the past. It’s a simple method by which income from your investments is deposited in your bank account. The naïve approach appeals to some as it’s easy to set up and because the income from bonds is consistent and tangible. However, this approach comes with a big problem:

You are ignoring a huge number of investment opportunities. By focusing solely on bonds and dividend-paying stocks, your portfolio neglects massive chunks of the market, which can reduce your returns and increase risk by leaving your portfolio overly concentrated in bonds.

 

The Total Return Approach

If the income approach leaves us taking undiversified and underperforming, what’s a better way? Enter total return investing.

Here, portfolio returns come from income and dividends, sure, but also capital gains. Your paycheck is then generated through a rebalancing process. Through this process, you sell investments that have increased as a percentage of your portfolio and move some of the funds into your bank account to fund your spending. If there is money left over, it’s used to buy assets that are below your target allocation—therefore completing the rebalancing process. Rebalancing not only generates a paycheck in retirement but also reinforces the “buy low, sell high” behavior that is critical to investing success.

 

The total return approach makes your portfolio more balanced (not concentrated with bonds or high dividend stocks), and by rebalancing, you can get a paycheck from your investments and maintain a well-diversified, balanced portfolio.

Conclusion

Making the decision to retire can be difficult. Knowing how you are going to get paid can help ease the anxiety and allow you to pursue a rewarding life after work.

As we just showed, knowing how to get a paycheck is important, but you also should consider what account to pull your paycheck from. In an upcoming article, we will look at “withdrawal order” (the sequence in which you withdraw money from your taxable, tax-deferred, and tax-free accounts) and the significant impact this can have on your portfolio value and the taxes you end up paying in retirement.