The First Five Years of Retirement Decide the Next Twenty
Wade Pfau's research shows the first 10 years of retirement drive about 77 percent of the final outcome. Sequence of returns risk is the most underestimated threat retirees face.
We tell clients to think of retirement income like a wedding cake. Each layer serves a different purpose, and you need all five.
A client walked into our office last month with $1.8 million saved and no idea how to turn it into monthly checks. She had spreadsheets showing withdrawal rates, Monte Carlo simulations, and three different opinions from three different advisors. What she needed was a system.
Layer 1: Social Security (The Foundation)
Social Security is your concrete foundation. For most retirees, it covers 30% to 40% of expenses. The average benefit in 2024 is $1,907 per month. A couple both collecting can see $3,800 monthly.
The trick is timing. Claim at 62 and you get 70% of your full benefit. Wait until 70 and you get 124%. That's a 77% difference. We run the numbers for every client, but here's the pattern: if you're healthy and have other assets, waiting usually wins.
Layer 2: Pensions and Annuities (The Guarantee)
Pensions are rare now, but if you have one, it's gold. Same with annuities you already own. These are your guaranteed checks beyond Social Security.
We see teachers with CalSTRS pensions worth $4,000 monthly. Federal employees with FERS benefits. Some clients buy immediate annuities to create their own pension. A 65-year-old putting $300,000 into an immediate annuity today gets about $1,750 per month for life.
Layer 3: Investment Income (The Workhorses)
This is where your 401(k), IRA, and brokerage accounts live. Most retirees pull 3% to 5% annually from these accounts. On $1 million, that's $30,000 to $50,000 per year.
We use a bucket strategy here. Keep two years of expenses in cash and short-term bonds. Put five years in balanced funds. Everything else stays in growth mode. When the market drops (and it will), you have seven years before touching your growth bucket.
Layer 4: Part-Time Work (The Buffer)
Nobody talks about this, but half our clients work part-time in early retirement. Not because they have to, but because they want to. A consulting gig here, seasonal work there.
One client makes $30,000 yearly managing her HOA. Another refs high school basketball for $15,000 per season. This income lets them delay Social Security and leave investments alone during down markets.
Layer 5: Home Equity (The Reserve)
Your house is Plan B. Or Plan C. We never count on it for regular income, but it's there. The median home equity for retirees is $280,000. That's real money if you need it.
Options include downsizing (sell the $800,000 house, buy the $500,000 condo), a reverse mortgage line of credit, or renting out rooms. One client rents her casita for $1,500 monthly on Airbnb.
Making It Work
Stack these five layers and most people have more income than they think. Take our $1.8 million client. Her plan:
- Social Security at 67: $2,850/month
- Small pension: $1,100/month
- 4% from investments: $6,000/month
- Part-time consulting: $2,000/month
- Home equity: untouched reserve
Total: $11,950 monthly before taxes. More than she ever made working.
If you want help building your own 5-layer plan, our team at Compound Advisory does this work every week. You can schedule a complimentary assessment at compoundadvisory.co/free-assessment.
