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Paying Myself

Howard Rohleder

WHEN I RETIRED 10 years ago, I need to replace my biweekly paycheck. Because I was retiring early, and there would be no pension or Social Security for many years, my goal was to use savings to create a synthetic paycheck.

During my final few years of work, I prepared by channeling most of my paycheck into both taxable and tax-deferred accounts. My pay was much higher than what I needed for living expenses.

As I’d religiously tracked my spending in Quicken, I could run reports of my historical outlays. I added what would become my single largest expense in the first decade of retirement—purchasing health insurance. I also reduced my budget for those costs I figured would go away in retirement, such as dry cleaning.

I built an Excel spreadsheet showing my total expected annual expenses. Next, I divided the annual total by 26 to see my biweekly spending needs. I wanted to track how closely my actual expenses matched my estimate.

Though interest rates are nowhere near as high as when I began investing in the late 1970s, I tried to earn as much interest as possible on my savings until I spent the money. Our taxable investment account was a money market fund at Fidelity Investments. I also opened a high-yield savings account with Synchrony, the online bank. Between the two, I kept enough cash for two years of expenses, plus an emergency fund.

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Over the next 10 years, I moved money between Fidelity and Synchrony to catch the higher rate. For instance, during the pandemic, Fidelity’s money market rates dropped to 0.01%, while Synchrony’s high-yield savings rates stood at 0.5%. Neither was very satisfying, but I moved cash to Synchrony to earn the higher rate.

I’d also purchased certificates of deposit at each company, laddering them so one would mature every four months or so. When CD rates dropped to nothing during the pandemic, I still had several that paid 2% to 3%. As they matured, I didn’t buy new CDs because I didn’t want to lock in the low yields. Eventually, I began tapping retirement accounts to meet expenses, moving the money to the Fidelity money fund or Synchrony.

I keep my checking account at the local bank, replenished with transfers from Fidelity and Synchrony on the 15th and 30th of each month. I can transfer electronically between all three firms.

With each transfer to my checking account, I move enough cash to bring the balance up to a predetermined amount. Being somewhat meticulous, this transfer is to the penny. I might have a transfer of $2,321.47 if that’s what it takes to hit my desired target.

On each transfer date, I pay whatever bills have accumulated, and also enter anticipated electronic withdrawals into Quicken. My health insurance premiums and my utilities are due on the first of the month. I arranged for all my credit card bills to be due around the 15th to help balance my monthly spending.

Occasionally, I have earnings from consulting or some other onetime payment. Since these are deposited into my checking account, they allow me to lower my next biweekly withdrawal from savings.

Each year, I compare my total withdrawals to my investment balance. I want to see how my actual withdrawals compare to the magical 4% figure that many sources say is a sustainable withdrawal rate. I also revisit my annual expenditures in Quicken to see if I need to adjust the biweekly transfers to my checking account.

The Synchrony and Fidelity accounts are replenished with interest, dividends and mutual fund distributions. With inflation spiking, I expect CD rates to begin inching up. I’ve begun rebuilding my CD ladder at Synchrony whenever the bank offers a special rate. For instance, it was recently offering 1.15% on a 13-month CD.

All this juggling between accounts takes time, but I figure it adds $1,200 to $1,600 a year over what I could earn at my local bank. I do lose some of that to taxes, but every little bit helps. If nothing else, it pays for a month of health insurance.

Howard Rohleder, a former chief executive of a community hospital, retired early after more than 30 years in hospital administration. In retirement, he enjoys serving on several nonprofit boards, exploring walking paths with his wife Susan, and visiting their six grandchildren. A little-known fact: In May 1994, Howard was featured—along with five others—on the cover of Kiplinger’s Personal Finance for an article titled “Secrets of My Investment Success.” Check out his previous articles.

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UofODuck
UofODuck
1 month ago

I’ve done something similar, although it doesn’t drive my monthly transfers to quite the same level of exactness as yours does. Like you, I am focused on my spending rate, which I compute each year, after taking into account investment income, pension and Social Security. Since I retired in 2014, our spending rate has been comfortably below below 4% of our capital base (excluding real estate). However, it seems clear to me that maintaining this favorable spending rate is likely to be more difficult in the next 5-10 years, as opposed to the prior 10 years.

Nate Allen
Nate Allen
2 months ago

I am wondering why anyone would do bank savings or CDs right now?

One can buy US bonds directly from most brokerages like Fidelity and the yields are much better. For instance, one could ladder 1-, 2-, and 3-year US bonds for 1.7%, 2.5%, and 2.7% respectively. (At the time of this writing.) I know Fidelity (and likely others) also offer an auto-renewal option to keep it even simpler.

CDs and savings accounts pay much less.

https://www.cnbc.com/bonds

tshort
tshort
2 months ago

Thanks for this. Interesting approach. I’m a data geek, too, and have detailed actual spending tracked in a spreadsheet I built with pivot tables and my own chart of accounts. Works great, although a bit labor intensive to keep up to date.

I’ve been studying up on decumulation in anticipation of ending up with no more paychecks, waiting to take social security, waiting for medicare eligibility, and having to cover a steady stream of expenses.

Reading your account, two things came up for me.

  1. When it comes to withdrawing funds from your portfolio, some schools of thought say there’s no point doing it in small chunks throughout the year – just take your annual amount all on January 1 and be done with it. You can’t time the market anyways, and some years this will be a big win, and others maybe not so much. This is McClung’s philosophy along with his Prime Harvesting methodology as described in his book Living Off Your Money. Still making up my mind on this.
  2. As for CD ladders, I recently learned about a newish alternative called a MYGA – multi-year guaranteed annuity. Don’t let the A-word scare you :-). These work pretty much like CDs and can be set up in ladders. Check out the rates on Blueprintincome.com or gainbridge.life. Might be surprised how much more these pay out.

I find this whole topic – decumulation – fascinating, wickedly complex, and more than a little scary. Enjoy the journey! And thanks for sharing a bit about yours.

Last edited 2 months ago by tshort
Howard Rohleder
Howard Rohleder
2 months ago
Reply to  tshort

Good luck with your decumulation planning! I don’t actually withdraw from my portfolio in the sense of selling assets to generate cash. In my taxable investment account, I have dividend paying stocks and a variety of mutual funds. The funds are set to pay all distributions into the cash account. This generates some cash through the year and a lot at year end. I use this to replenish the Synchrony account as needed. Occasionally I rebalance. If the year end distributions are more than I need, I re-invest.

John M
John M
2 months ago

Our community bank will usually match the big banks’ rates assuming a reasonable balance. However, a relationship like that takes a bit of effort and not dodging in and out of it.

Rick Connor
Rick Connor
2 months ago

I admire your detailed accounting and precision. Sounds like a plan that works great for you. Thanks for the fun story.

R Quinn
R Quinn
2 months ago

Now for the $64,000 question. DO your withdrawals for expenses actually match the 4% rule?

Of course that really depends more on the level of expenses and investment balance than 4%

Howard Rohleder
Howard Rohleder
2 months ago
Reply to  R Quinn

Yes, I am well within the 4%.

Guest
Guest
2 months ago
Reply to  R Quinn

Bit of a tangent but while I’m no market forecaster I’d argue that 4% figure should be dialed way back. I expect to do that when I retire in about 5 years at 65.

ishabaka
ishabaka
2 months ago
Reply to  Guest

This time it’s different.

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