The Paycheck That Doesn’t Require You to Go to Work

For most of our adult lives, our financial arrangement is simple. We go to work, and somebody pays us. Every few weeks, a paycheck appears. Over a career, we hope that paycheck grows through raises, promotions and opportunities so our income can keep pace with our increasingly expensive life.

Then one day, if we are fortunate and have planned well, something remarkable happens. We retire. But the bills? They don’t get the memo. The grocery store does not care if your paycheck stopped. Neither does the insurance company, the tax man or the person repairing your furnace.

Your paycheck stops. Your expenses do not.

Perhaps this is an oversimplification, but an essential idea nonetheless. We may spend 40 or 45 years saving for retirement, and then another 25 or 30 years living from that savings. With improvements in longevity, the distribution phase can last nearly as long as the accumulation phase. Given that length, retirement income must do more than endure; it must grow.

Growing your paycheck while you worked was likely straightforward. But where will your raises come from after that paycheck ends?

Yes, cost of living adjustments (COLA) provide some relief. But social security and pension programs often have miniscule raises baked in for years when inflation runs hot. If your retirement income doesn’t grow at a substantial rate that matches — or ideally outpaces — inflation, your lifestyle may need to shrink.

Suppose a couple considering retirement spends roughly $100,000 per year to maintain their lifestyle. If their cost of living rises by an average of 3% annually, that same lifestyle requires about $134,000 in 10 years, roughly $181,000 after 20 years, and more than $240,000 after 30 years. On a fixed income, that $100,000 is buying a whole lot less.

Something must give. Maybe the couple travels less, keeps the car longer, eats out less often, reduces charitable giving or helps their family less. Eventually, healthcare may also consume dollars once spent on the parts of life they most enjoyed.

My goal isn’t to scare people, but to better prepare them. The mathematics of purchasing power aren’t kind to those who disrespect it. And inflation rarely arrives as one enormous bill. Like a cancer, it takes a little this year, a little more next year, and even more the year after. Although you may see the same number of dollars deposited into your account, the amount of life they can buy steadily declines.

That’s why we must be careful with the idea of “fixed income.”

Bonds and other fixed-income investments can significantly help a retirement plan. They offer stability, diversification and contractual income. But think about the words themselves: Your income is fixed. Are your expenses?

If your grocery bill stayed static for 30 years, this equation would be much simpler. But food prices aren’t fixed. Neither are the cost of property taxes, insurance premiums, healthcare, utilities, restaurant meals, airline tickets or automobile maintenance. Can you think of one product or service that is less expensive today than 30 years ago? This is why a bond payment may arrive exactly as promised yet buy less with each passing year.

Retirement planning should therefore focus not only on saving money but on growing your income. During your career, you work for your money. In retirement, you need that accumulated capital to begin working for you.

One way to do that is by owning successful, profitable businesses that return a portion of their profits to shareholder-owners through dividends. More importantly, I encourage seeking businesses with the financial strength and earnings growth necessary to increase those dividends over time.

Think of this as creating a paycheck that doesn’t require you to show up at work. You don’t punch the clock or attend the staff meeting. But as an owner, you may participate in the results. If the businesses you own prosper and increase their dividends, your paycheck may receive a raise.

This does not mean you should chase the highest dividend yield available. A large yet unsustainable dividend isn’t much of a retirement plan. The quality of the underlying business is important, as is its ability to maintain and increase what it pays owners.

People naturally ask, “How much money do I need to retire?” which is certainly reasonable. But I think a better question is, “How much growing income will I need during retirement?” The first focuses on accumulating a pile of money while the second seeks a standard of living.

A dollar is valuable only for what it can buy. If you retire with $100,000 of annual income and spending, and you still have $100,000 in annual income 30 years later, your lifestyle likely shrunk as your expenses rose.

For 40 years, you go to work for your paycheck. Once retirement arrives, that relationship reverses. Then your money goes to work for you. That’s the retirement paycheck worth planning for: not one that simply arrives after work ends, but one that can give you a raise.

Because if retirement lasts 30 years or longer, those raises are not merely something you may want, but something you may need.