How to create a 'forever paycheck' without paying for an annuity

By Beth Pinsker

Jean Chatzky's new book lays out several strategies for creating steady retirement income

Your strategy for income in retirement will differ from what you do to save money while working.

When you've worked your whole adult life, retirement can be scary without a steady paycheck coming in.

To replace it, there's Social Security - but most people supplement that from their own pockets. If you're not among the 18% currently in a pension plan, you have to replicate the process of turning your savings into a steady source of income if you want to feel secure.

An annuity does this: You buy a contract from an insurance company, usually for a lump sum, and they pay you a monthly amount for the rest of your life. The amount of money involved is typically more than a down payment for a house, and you tend to spend it at exactly the same time you stop getting a regular paycheck for work. That makes it a hard sell for most retirees, which is why less than 15% of Americans have bought into this process.

It's a good thing, then, that there are other ways to get what Jean Chatzky's new book calls "The Forever Paycheck." After decades of preaching financial prudence in saving for retirement and getting out of debt, Chatzky, now 61, has turned her attention to what happens on the other end of this process when you start to spend your nest egg.

"The dialogue is already changing," Chatzky said in a recent interview with MarketWatch. Given Chatzky's platform, "The Forever Paycheck" will have a lot of sway. Most of Chatzky's attention these days goes to the HerMoney universe, which includes a website, podcasts, coaching and educational services. Chatzky appears frequently on TV - especially on "The Today Show," where she was formerly the financial editor - and she serves as the financial ambassador for AARP.

What prompted this new work was that Chatzky was seeing a problem with aging Americans being afraid to spend. She consulted on a study by Corebridge Financial that found that 60% of retirees had more money now than when they stopped working, while 14% had about the same. They were so afraid of running out of money that it was stymieing their ability to enjoy today.

The solution was getting people comfortable with spending by providing them with monthly income generated from their own savings. Instead of watching the pile dwindle each month, they could focus on the guaranteed amount deposited into their bank account each month.

"Building a paycheck gives you freedom to spend the money that you saved exactly for this purpose," Chatzky said. "And if you don't do that, the chances are much greater that you're just going to hoard it."

Annuities, however, are not the only answer - and even if you do get one, Chatzky's approach is not intended as an all-in strategy. The target is setting aside about 25% of your retirement portfolio to generate monthly income; this makes it work for any income level. If you have $400,000, that allows you to comfortably purchase a $100,000 annuity to get $600 a month (as a 61-year-old woman living in Pennsylvania might get) and still have $300,000 invested. If you have $4 million, you could get much more monthly income. And if you have $40,000, you could still guarantee a portion of it to augment your lifestyle above Social Security.

In her book, Chatzky also talks about other routes to fashioning a monthly paycheck through your own investment choices.

The total-return approach

This is the default way most people handle their retirement investments, and most like what you are doing now in your 401(k) or other investments. "You set your asset allocation and you choose the investments for each asset category," Chatzky noted.

You will either do this manually, by picking stocks and bonds yourself; go to a financial adviser for help; or choose a target-date fund or similar actively managed fund to do it for you. It's best to be fully diversified with this strategy, and to align your risk with your age and mentality - getting more conservative as you age. So you might start out retirement with 50% in stocks and 50% in fixed income, and then slowly increase your fixed-income portion while trimming equity exposure.

The way you need to tweak it for retirement is to pay more attention to how you are going to take money out of that pile to spend it.

"Once a year, you are going to rebalance your holdings and bring your asset allocation back to the target point," said Chatzky. "As you do that, you're going to use the proceeds of winners to fund your paycheck for the next year."

Chatzky doesn't like to use a withdrawal formula, like 4% distributions, as a hard number, but said you can use one to gauge whether you're on track and if your money will last for your lifetime. You can take distributions monthly to simulate being paid, or once a year.

The trouble with this approach is that when there's a bump in the economy - stocks dip, bonds crater, inflation rises or there's global chaos - you may have to adjust your lifestyle.

"You could end up having to spend less than you want, and take smaller paychecks along the way," Chatzky said. "Like in 2022, a lot of people using this methodology didn't spend as much as they wanted."

A bucket approach

It's easier for some people to think of their money in buckets: There's a long-term bucket that's your growth engine, with stocks in it; a midterm bucket, for the five- to eight-year range, that has your fixed income like bonds, CDs and TIPS; and then you have cash in a high-yield savings account for several years' worth of living expenses - maybe more in times of crisis, and perhaps a shorter time period in good years.

When you get to the end of each year, Chatzky said to look at the performance of each of the buckets and think about what you may need to move as the years go by. You set your spending from the cash bucket, refill it with fixed-income yields, and then buy new fixed-income products with the sale of stock.

"This is the most behavioral-finance approach," Chatzky said - because when there's turmoil, you have enough in the cash and fixed-income buckets that you don't have to touch your stocks for 10 years.

Build a target-date glide path

Annuities and other forever-paycheck features are not yet automatic in target-date funds. For today's retirees and soon-to-be retirees, you have to opt into any annuitization of your retirement savings.

"We're on our own," Chatzky noted, "but defaults are coming."

For millennials and younger generations - many of whom are automatically invested in target-date funds in their workplace plans - that means that they may seamlessly flow into annuities by the time they retire. The custodians who manage these plans, like Fidelity and Vanguard, will make it easy at age 50 or 60 to sign up for a guaranteed-income plan when the time comes.

Today, however, it's still a bit of an effort to get through the process. Most custodians have options available to annuitize part of a retirement account upon retirement or set it up for regular withdrawals, but you may have to look around for it and proactively opt in.

One way that might help people conceptualize the benefits of annuities is custodians displaying a potential income number prominently on account display pages that says something like: "You're on track - your savings could generate $5,000 a month in retirement income."

"It's kind of like focusing on paying down credit-card debt, and there's a box on your statement that shows you how long it will take you to pay off at the minimum," Chatzky said.

As far as retirement income, Chatzky thinks Americans are finally ready to hear about their options.

"We didn't realize that we would need it," she said. "The audience has finally gotten there, and now we can formulate a plan."

Got a question about retirement? Fill out our new questionnaire or write to me directly at beth.pinsker@marketwatch.com (please put "Fix My Portfolio" in the subject line).

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-Beth Pinsker

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09-10-26 1613ET