The answer becomes more urgent for those who retire early. Use these 3 steps to help create a “retirement paycheck” that can potentially last 30 years or more.
Replacing your salary in retirement requires a disciplined and growth-oriented approach, while considering tax implications. By understanding your expenses, structuring withdrawals thoughtfully, and maintaining a diversified portfolio, you can help create a retirement paycheck designed to last your retirement.
PLANNING HOW TO REPLACE your salary in retirement is critical — especially if you retire earlier than expected. Whether by choice or circumstance, many individuals leave the workforce sooner and need to consider strategies to help their savings last for decades.
Roughly half of individuals retire earlier than planned due to factors like health issues or job changes.1 And retiring earlier potentially means living in retirement longer: The assets you've saved over your career will need to stretch farther, even as you stop contributing to your 401(k) or other retirement accounts.
"Retiring at 55 can have meaningfully different implications versus retiring at 65," says Nevenka Vrdoljak, managing director and senior investment strategist in the Chief Investment Office for Merrill and Bank of America Private Bank. "Fiftysomethings will likely need to make their retirement savings last an extra decade or more." In addition, early retirees often have higher expenses than those retiring later in life; for instance, you may still be paying a mortgage or tuition bills. And you might have to cover the full cost of health insurance until you're eligible for Medicare.
Early retirement can extend your financial horizon by 10+ years, meaning your savings will need to stretch further while covering ongoing expenses, such as:
A well-structured retirement income plan helps answer key questions like:
Your financial and tax advisors can help answer those and other questions as you work together to create an income stream designed to help support you throughout your life.
“If you can afford to delay tapping your Social Security benefits, you’ll likely have greater funds available later, when you may need them most.”
Start by calculating your regular expenses, including both essential and discretionary spending:
Next, you’ll want to identify the income sources you can draw from to help create your “monthly paycheck”:
This will help provide a view of your income gap — the difference between what you need and what you have.
Once you have a clear picture of your finances, your financial and tax advisors can help you determine an appropriate overall withdrawal strategy, based on your assets, age, income sources, tax considerations and other factors. If you're currently spending more than your projected monthly retirement income, they may also suggest ways to help you adjust your finances — by delaying retirement or taking on part-time or consulting work, perhaps, or moving the date at which you begin claiming Social Security benefits. You might also begin to look for ways to trim expenses in one area or another.
A successful retirement income strategy isn’t just about knowing how much you can afford to withdraw — it’s about how and when you access different income sources. Creating a withdrawal plan after considering all relevant tax implications can help extend the life of your portfolio while helping manage your overall tax burden.
You can generally begin collecting Social Security benefits as early as age 62, but your benefit amount increases each year you delay, up to age 70. "If you can afford to delay tapping your Social Security benefits, you'll likely have greater funds available later when you may need them most," says Vrdoljak. Delaying benefits may provide higher guaranteed income later in retirement — when healthcare costs and other expenses often rise.
Still, sometimes it might make sense to consider claiming benefits sooner, like in these situations:
Whatever the circumstance, the key is aligning Social Security timing with your broader retirement income strategy.
Pensions and some retirement packages may offer you a choice:
Each option carries different tax implications, income stability considerations, and legacy planning trade-offs, making it important to evaluate carefully with your financial and tax advisor.
When it comes to withdrawals from your retirement accounts — such as 401(k)s and IRAs — those are governed by complex rules and tax treatments.
For example:
Understanding these rules can help you avoid additional taxes and optimize after-tax income.
From a tax perspective, one option to consider is withdrawing from your taxable accounts first, then tax-deferred, then tax-free, as in the order described below. Though it is important to take your individual tax situation into account. This strategy generally allows you to maximize tax deferral in tax-qualified accounts, as the money in tax-qualified accounts is generally able to grow tax-deferred or even tax free.
However, the optimal strategy depends on your individual tax situation, income needs, and long-term goals.
“Your financial advisor can help you determine the best mix of withdrawals,” says Merrill Wealth Management Advisor Lisa Kent. “As you create your drawdown plan, you’ll want to try to avoid landing in a higher tax bracket or derailing your preferred asset allocation,” she notes, adding, “When clients convert their retirement assets into cash, we generally help transfer them someplace liquid and secure until they need them.”
“An overly conservative portfolio is unlikely to provide the growth you may need for a longer-than-expected retirement.”
Even in retirement, your portfolio should continue working for you. With lifespans extending and inflation impacting purchasing power, growth remains essential. After you've addressed your short-term income needs, it's time to review your portfolio to see whether it has the potential to last 30 or more years. In a low-interest-rate environment, "an overly conservative portfolio is unlikely to provide the growth you may need for a longer-than-expected retirement," says Vrdoljak — especially if you enter a period of high inflation. So you may want to consult with your financial or tax advisor on the appropriate asset allocation mix.
For growth purposes, you should engage your financial and tax advisor to help determine what the right income solutions would be for you, given your risk appetite and tax sensitivity, considering the following:
An effective portfolio with consideration given to creating a thoughtful diversification framework can help balance:
Diversification is vital, adds Merrill Wealth Management Advisor Mary Jo Harper. “The biggest mistake I see among retirees is a portfolio overly concentrated in the stock of a former employer or in one sector, usually the sector the client worked in,” she explains.
Finally, it’s a good idea to review your plan with your financial and tax advisor regularly so you can take comfort in knowing you’re managing the retirement assets you’ve saved over your career align with your long-term objectives and evolve based on:
1Employee Benefit Research Institute and Greenwald Research, "2025 EBRI/Greenwald Retirement Confidence Survey," April 2025.
2Individuals who invest in these strategies may be required to meet certain income or net worth thresholds to qualify, depending on the type of alternative investment. An advisor can help determine whether you’re qualified.
Opinions are as of 5/1/2026 and are subject to change.
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