How to Create a Retirement Paycheck

retirement check bucket system

If someone offered you a job that required 10 hours of work per year and a $100,000 salary, would you say hell yes? I’d bet most people would. 

What if I told you I created this job for myself, and you could too? 

What is this miraculous job? Being the CFO of your own investment portfolio after reaching financial independence. 

In this post, I will explain how you can set up a system, so you get a paycheck every two weeks. Just like you did when you had a full-time job working for the man. 

I call it the retirement paycheck. It’s similar to what others in the personal finance space call the bucket strategy. I’d argue it’s more straightforward, but I’ll let you all decide.

This system started with a goal, early retirement.

Setting goals is at the heart of the simple money habits I used to create financial freedom for myself. Creating financial goals and implementing a plan helps you achieve your desired lifestyle. 

You can do way better than investing in a 401k and hoping it’s enough for retirement. Actually, if that’s your plan, you’re effed. Sorry, you had to hear that from me. 

In 2015 I set a goal for myself, financial independence. I wanted the flexibility to work because I wanted to, not because I needed money to pay the piper. 

I took that goal and assigned a taxable brokerage account to help me achieve this. This account would be the source of my early retirement paycheck. 

The retirement bucket strategy

Most of the versions of the bucket strategy I’ve found online consist of three buckets. Cash, income, and long-term growth. 

I don’t see the need for the second and third buckets if you have a simple investment portfolio. So I have two buckets, cash and investment portfolio. 

Bucket one: Cash

I had my paycheck direct-deposited into my checking account when I was working. And all my expenses get paid out of my checking account. So to make life easy, let’s keep everything going as is!

All I needed to do was replace my employer’s direct deposit with my own!

My checking account balance always hovered around two months of expenses. So I kept that the same.

Then I repurposed a money market account at the same bank to act as a cash buffer between my checking account and investment portfolio. My target balance for this account is five months of months expenses. 

Creating the “retirement paycheck” is as simple as setting up a recurring transfer. Cash gets transferred from my money market account to my checking account. 

Every two weeks, like my old paychecks. 

So, bucket one has two accounts: 

  • Checking: 2 months of cash 
  • Money Market: 5 months of cash

I need to fill the money market account with more cash, so I don’t run out of money in 5 months! I do this quarterly with cash flow from bucket two. 

Bucket two: Investment Portfolio 

I have a simple investment portfolio of index funds. 

  • 70% stocks
  • 30% bonds

This investment account has dividend reinvestment turned off. Instead, I let the cash pile up each month from the ETFs in the account. Then, at the end of every quarter, a recurring transfer sends cash to the money market account in bucket one. 

That’s it! The portfolio churns out cash from index funds, and it’s transferred to my cash bucket at the end of every quarter. 

The dividend income is about 140% of my monthly expenses. So I have a built-in buffer. I use some excess dividend income to pay taxes and reinvest into the portfolio. 

If the portfolio income decline during a recession, I have two options. I can adjust my spending or sell bonds to meet my spending needs. 

Part of the 30% bond allocation includes short-term treasuries. I like to have about 18 months of cash invested in short-term treasuries. 

At the end of the year, I’ll manually pull out the cash I need for taxes. And use the excess money to help rebalance the portfolio. 

The net tax rate on this strategy is low. Around 0 – 12% in the current tax schema. With qualified dividends and no wages, the tax man leaves you alone for the most part. 

Implementing the retirement paycheck system

This system is so easy to set up. 

One recurring transfer from the investment portfolio to the money market account. And one recurring transfer from the money market account to the checking account. 

At the top of the post, I said this job requires 10 hours per year. That’s how long it takes me to “manage” the system. I spend most of my time updating my financial freedom spreadsheet at the end of the month. This is the spreadsheet I use to track all my expenses by category, account balances, and income. 

It also takes a little time to rebalance the portfolio at the end of the year. 

This system works when you know the following. Your monthly expenses and portfolio income. The one basic expectation is that your portfolio value will grow with inflation. 

This paycheck system is my primary strategy for early retirement income. All by itself, the odds it will serve me well are high. 

I have other investment accounts that service other goals. Those are plans B, C, D, and E 🙂

What do you think? 

Does this retirement paycheck system make sense to you? Would you take the 10 hours of work per year job, if it paid you $100k? You may be bored only working 10 hours a year. You could get a second job if you wanted to. I guess that would be OK 🙂 

There are many ways to plan for retirement income. However, when I think about this puzzle, I gravitate to a solution that is very easy to execute. For me, that’s running my finances the same way I did while working. 

Which is why the simulated paycheck is a plausible solution. The downside is you need a sizable investment portfolio. If you wanted $100k, you’d want at least 3 million bucks in the portfolio. That would give you a solid, safe withdrawal rate. 

Hit me up on Twitter with any burning questions or passionate insights 😉