Early in my career, I had a few prospective clients who are interested to do a financial plan ask me these common questions: “How much can I have per month for my retirement expenses and how will you generate income for me from my retirement portfolio?

Well, my favorite answer is always:” It depends….as I don’t have the right answers for you now”. And in fact, as a financial planner, this is the major part of our value proposition.

For most of us who are employed, the paycheques are automatically deposited into our bank accounts on regular basis, and we build our financial lives by paying our periodic commitments. And then suddenly, when retirement begins, the paycheques stop, triggering the most pressing concerns among retirees on how would they replace the ongoing paycheques that they have been receiving for the past 30 years so that they can fund their retirement expenses for the next 30-40 years.

Before answering your questions, I have made 2 assumptions about you:

1. I assumed you have done your financial planning or, at a minimum, have it well underway. You understand your financial resources and you have accumulated sizeable retirement assets.

2. I assumed your goal is to make the next chapter of your life satisfying, enjoyable, and fulfilling. You have addressed a broad range of issues or changes in retirement.

While there are many credible ways to generate retirement income, the right starting point is the one that’s aligned with the client’s preferences, priorities, and expectations, in order to determine the best strategy for retirement income.

3 strategies to create a forever paycheque in retirement:

1. Income Protection Strategy

This is a more traditional “income-focused” approach; to simply invest in vehicles that can produce a steady stream of cash flows in retirement. With this approach, capital gains are not the primary focus, and/or are not actively invested. You are willing to give up the upside potential, for the perceived safety of a contractual income.

This strategy might be buying into a mixture of bonds that pays interest and stocks that pay a dividend, along with some additions to the income-portfolio mix such as real estate investment trusts (REITs) and some structured products or money market funds. Immediate and deferred annuity (offered by the insurance companies) can be considered to support the downside spending by relying on contractually guaranteed income for a certain period of time. You are willing to make a full commitment to a strategy that provides the utmost safety protection for the retirement income. The ongoing income payments will be transferred to your retirement account.

2. Hybrid Strategy

The downside risk of the income-focused approach is that the investment markets don’t always pay the level of “income” that you desire, especially during the low-yield environment. This drives some investors to look for high yield by taking on additional risk and increasing the possibility that the income itself may stop or be cut in difficult times such as a recession.

This hybrid approach provides a blend of investment growth potential with guaranteed lifetime income benefits, generally through a variable annuity either equity-linked or index-linked annuity offered by offshore life companies. By adding in the capital gains component, you are less reliant on just traditional income alone, but relying on the capital gains requires you to develop a system (or engage a financial advisor/planner) to be able to generate a consistent retirement paycheque from inconsistent capital gains.

One option is an investment-based time segmentation approach where you divide your money into different categories, such as short-term (1-3 years), intermediate-term (4-7 years), and a long-term bucket for spending that comes after 8 years and beyond. Interest and dividends are still being accumulated and held in cash first and might be supplemented by liquidating whatever investment that was up the most- to generate the additional cash for the short-term bucket. In the event that markets were down, this cash might be used instead, to avoid liquidating equities while they are down, for the next quarterly or annual distribution.

Over time, the longer-term portfolio can gradually replenish the short-term category as these are used to pay for retirement expenses. Alternatively, you can also hold additional cash reserves outside the investment portfolio to manage the market volatility or to fund unexpected expenses.

3. Total Return Strategy

This strategy is for you if you prefer to draw income from a well-diversified investment portfolio, and remain liquid and flexible rather than the less flexible contractual sources to fund your retirement expenses. You also won’t mind the variability of drawing income from the portfolio that will fluctuate in value, and you are willing to be flexible around the unknown income stream.

This total return strategy invests in a more growth-oriented portfolio and reinvests fully if there are any interest and dividends. Portfolio growth would be expected to support a sustainable spending rate.

When you need distributions, you can simply sell the desired investments if/when/as needed to generate that cash- at the exact moment it is needed to fund a retirement paycheque. Moreover, there are a few asset management companies or platforms that have incorporated a new feature of a regular withdrawal plan in the investment portfolio to enable regular withdrawal in order to fund your retirement expenses.

While some advisors may rely on a single ”favorite” income strategy to recommend to clients, recognizing that retirees actually have a range of preferences (as well as their expectations) on how to source their retirement income can help you better develop sensible yet effective strategies that our clients may be more inclined to follow.

In the end, it’s not about the particular strategy for generating retirement withdrawals. We need to recognize that some clear and consistent policy, as well as decisions about specific retirement income processes, is needed to consistently generate retirement income for our clients.

So what about you? How do you create paycheques in retirement?