Why "Just Live Off the Interest" Doesn't Work Anymore

A generation ago, retirees could buy Treasury bonds yielding 6-8% and live off the interest without touching principal. That math doesn't work today. Even with rates higher than they were a few years ago, living purely off interest income usually means either accepting a very modest lifestyle or holding a portfolio too conservative to keep pace with inflation.

Modern retirement income planning requires a more sophisticated approach—one that balances current income needs with long-term growth, tax efficiency, and flexibility.

Start With the Number You Actually Need

Before we talk strategy, we need to know the target. What does your life actually cost?

Fixed expenses: Housing, insurance, utilities, property taxes, healthcare premiums—the baseline that doesn't change much month to month.

Variable expenses: Food, transportation, entertainment, travel—things that flex based on choices you make.

Discretionary spending: Gifts to family, charitable giving, hobbies, second homes—the things that make life enjoyable but aren't strictly necessary.

Irregular big expenses: New cars, home repairs, medical procedures, helping kids with down payments—the lumpy costs that don't happen every year but definitely happen.

Most people underestimate what they spend. We typically find that when clients track their actual spending for a few months, it's 10-20% higher than their mental estimate. Start with reality, not wishful thinking.

The Bucket Strategy: Matching Money to Time

One of the most effective frameworks for retirement income is the "bucket" approach. Instead of treating your portfolio as one big pool, you mentally (and sometimes physically) divide it into segments based on when you'll need the money:

Bucket 1: Now (1-2 years). Cash and cash equivalents—money market funds, short-term Treasuries, maybe a CD ladder. This is your paycheck. It's not earning much, but it's stable, liquid, and available when you need it. Knowing this bucket is full lets you sleep at night when markets get volatile.

Bucket 2: Soon (3-7 years). Conservative investments—short to intermediate-term bonds, maybe some dividend-paying stocks. This money will replenish Bucket 1 over time. It has some growth potential but limited downside risk. If the market drops, you're not forced to sell—you can wait.

Bucket 3: Later (8+ years). Growth investments—stocks, real estate, alternatives. This is money you won't need for a decade or more. It can afford to take risk because it has time to recover from downturns. This bucket is what keeps your purchasing power intact against inflation over a 20-30 year retirement.

The beauty of this approach is psychological as much as financial. When the market drops 20%, you're not panicking—because you know you won't touch Bucket 3 for years. Your near-term income is protected.

Layering Income Sources

Your portfolio isn't the only source of retirement income. A well-designed plan layers multiple income streams:

Social Security. The timing of when you claim matters enormously. Benefits increase about 8% for each year you delay between 62 and 70. For many people, delaying to 70 while drawing from savings earlier is the right move—but it depends on your health, other income, and tax situation.

Pensions (if you have one). Defined benefit plans are increasingly rare, but if you have one, the decision of when to start—and whether to take survivor benefits—is critical.

Rental income. If you own investment property, rental income can provide inflation-adjusted cash flow. But it comes with management headaches and illiquidity tradeoffs.

Part-time work or consulting. Many retirees work a few hours a week—not because they have to, but because they want to stay engaged. This income, even modest, can significantly reduce portfolio withdrawals in early retirement years when sequence risk is highest.

Annuities (maybe). Annuities are often oversold and overpriced, but in certain situations, a simple income annuity can provide guaranteed income that covers fixed expenses. We're cautious here, but we don't rule them out.

The Tax Dimension: Where You Draw From Matters

You probably have money in several types of accounts: traditional IRAs or 401(k)s (taxed as ordinary income when withdrawn), Roth accounts (tax-free), and taxable brokerage accounts (taxed on gains and dividends). The sequence in which you draw from these accounts dramatically affects your lifetime tax bill.

The conventional wisdom—"spend taxable first, then traditional, then Roth"—is often wrong. A better approach considers:

Filling lower tax brackets. If you're in a low-income year, it might make sense to withdraw from traditional accounts (or do Roth conversions) to use up the lower brackets, even if you don't need the money.

Managing Medicare premiums. IRMAA thresholds create cliffs where a small amount of additional income can cost you thousands in Medicare premiums. Strategic withdrawals can keep you below these thresholds.

Avoiding the tax torpedo. Social Security taxation, NIIT, and IRMAA can all stack on top of each other, creating effective marginal rates much higher than your nominal bracket.

Preserving Roth for later. Roth accounts are often most valuable later in retirement—when RMDs from traditional accounts are forcing taxable income, or when you want to leave tax-free money to heirs.

This is where coordination between your investment advisor and CPA becomes critical. The optimal withdrawal strategy changes year by year based on your income, deductions, and life circumstances.

Building Flexibility Into the Plan

No retirement income plan should be rigid. Life changes. Markets change. Tax laws change. The best plans have built-in flexibility:

A spending buffer. If your core needs are $150,000 but you're planning for $180,000, you have room to cut discretionary spending if markets decline sharply.

Multiple income sources. If one source underperforms, others can pick up the slack.

Annual reviews. We revisit income strategies every year, adjusting for market performance, tax law changes, and evolving goals.

What We Do for Clients

Creating reliable retirement income isn't a one-time calculation—it's an ongoing process. Here's how we approach it:

We start with your life, not your portfolio. What do you want to do in retirement? What does your ideal week look like? What are you worried about? The income strategy serves your life goals, not the other way around.

We model extensively. We run your plan through thousands of market scenarios to see how it holds up. What happens if the market drops 40% in year one? What if inflation runs hot for a decade? What if you live to 100? We want a plan that survives the bad scenarios, not just the average ones.

We coordinate across your accounts and advisors. We work with your CPA to optimize withdrawals, with your estate attorney to ensure your plan aligns with your legacy goals, and with Social Security timing to maximize lifetime benefits.

We automate where it makes sense. For clients who want a true "paycheck" experience, we can set up automatic monthly distributions that deposit directly to your checking account. You get the consistency you're used to without the hassle.

If you've accumulated significant retirement savings and you're wondering how to turn that into income you can count on, let's talk. This is exactly what we help families figure out.