Turning a portfolio into retirement income means solving three problems at once: protecting several years of spending from market declines, deciding which accounts each dollar comes from, and setting a withdrawal amount the portfolio can sustain for thirty years. The biggest threat is sequence of returns risk, which is the danger of a poor market in the first few years of retirement. Kraus Capital is a CFP®-led fiduciary firm in Boerne, Texas that builds retirement paychecks using a layered structure rather than a single withdrawal rate.
For thirty years your portfolio had one job: get bigger. You added to it every payday, you left it alone when it dropped, and time did the rest.
On the day your paycheck stops, that portfolio is handed a job it has never done. It has to produce income, monthly and reliably, through good markets and bad, for as long as you live. Same account, completely different assignment.
Most of the trouble people run into in the first few years of retirement comes from bringing accumulation habits into a decumulation problem.
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Why does the same portfolio behave differently once you start withdrawing?
Because the order of your returns starts to matter, and while you were saving it did not.
During accumulation, a bad year early is actually helpful. Your contributions buy more shares at lower prices. What matters over a thirty-year stretch is the average return.
Once you are withdrawing, order is everything. Two retirees can earn the identical average return over twenty-five years and end up in completely different places depending on which years were the bad ones.
The reason is simple. When you sell into a decline, you liquidate more shares to raise the same dollar of income, and those shares are not there to recover when the market turns. A 20% drawdown in year one of retirement is a fundamentally different event from the same 20% in year fifteen.
This is sequence of returns risk. It is the single biggest reason two households with the same balance and the same spending can end up with very different outcomes.
What does sequence of returns risk look like in dollars?
It is easier to see than to explain. Below are two hypothetical retirees. Both start with $1,000,000. Both withdraw $50,000 in year one and increase that withdrawal 3% a year for inflation. Both earn exactly the same ten annual returns. The only difference is the order those returns arrive in.
| Year | Retiree A return | Retiree A balance | Retiree B return | Retiree B balance |
| 1 | -15% | $807,500 | +8% | $1,026,000 |
| 2 | -10% | $680,400 | +8% | $1,052,460 |
| 3 | +5% | $658,723 | +8% | $1,079,368 |
| 4 | +8% | $652,413 | +8% | $1,106,710 |
| 5 | +8% | $643,829 | +8% | $1,134,470 |
| 6 | +8% | $632,734 | +8% | $1,162,627 |
| 7 | +8% | $618,874 | +8% | $1,191,158 |
| 8 | +8% | $601,971 | +5% | $1,186,147 |
| 9 | +8% | $581,723 | -10% | $1,010,528 |
| 10 | +8% | $557,803 | -15% | $803,496 |
Hypothetical illustration. Identical returns, identical withdrawals, identical 3.6% average annual return. The only variable is sequence.
After ten years Retiree B has $245,693 more, despite earning the exact same average return and spending the exact same amount. Retiree A was simply unlucky about when the bad years showed up.
You cannot control the sequence. You can control whether you are forced to sell into it. That is what the rest of this article is about.
Buckets or total return? The honest answer
Use both. The math slightly favors total return, and behavior strongly favors buckets, so the structure that actually works in a real retirement borrows from each.
| Total return approach | Bucket approach | |
| How it works | One diversified portfolio, rebalanced, withdraw as needed | Portfolio segmented by when the money will be spent |
| Strength | Efficient. Every dollar stays invested according to plan | You always know where the next three years of income is coming from |
| Weakness | Requires selling in a downturn, which is exactly when people panic | Slightly lower expected return from holding a cash buffer |
| What it optimizes | Spreadsheet outcomes | Human behavior |
A retiree who knows exactly where the next three years of income is coming from does not sell equities in a panic in March of a bad year. Avoiding that one decision is usually worth more than the efficiency the spreadsheet says they gave up.
We use both, structured rather than improvised. That structure is the practical part of our investment management work.
Are dividends a separate source of retirement income?
No. A dividend is part of your total return, not an addition to it.
The dividend-only approach is appealing: live on the income, never touch the principal. It is also built on a misunderstanding. On the ex-dividend date the share price falls by roughly the amount paid. The company moved a dollar from one of your pockets to another, and the IRS took note along the way.
The practical problem is bigger than the theory. Building a portfolio around the highest yields available concentrates you into a narrow set of sectors: utilities, energy, financials, and real estate. It also pushes you toward companies paying out more than their business can comfortably support. You end up with more risk and less diversification, in pursuit of a number that was never the point.
Dividends belong in the portfolio. They just do not replace a withdrawal plan.
The three layers of the Legacy Blueprint income structure
Your retirement paycheck comes out of three layers, each with a different job and a different time horizon.
- Shield (Keep). Near-term income protection. Several years of planned spending, held in assets that do not care what the stock market did last quarter. This is what lets everything else stay invested.
- Momentum (Grow). Diversified growth across asset classes. This layer refills the Shield in good years and is deliberately left alone in bad ones.
- Legacy (Leave). Long-horizon capital meant to outpace inflation over decades. Money for the second half of a thirty-year retirement, for a surviving spouse, and for the next generation.
The layers matter less than the rule connecting them. The Shield gets refilled from Momentum when markets cooperate, and it does not get refilled when they do not. That single discipline converts sequence risk from something that happens to you into something you have already planned around. You can see the full framework on The Legacy Blueprint page.
The other half of the work is which account each dollar comes from. Withdrawal order is a tax decision, and the difference between a thoughtful sequence and the default one runs into six figures over a long retirement. We cover that in detail in our guide to reducing taxes in retirement.
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What does living in Texas change about your withdrawal plan?
It changes the tax cost of every dollar you move, which changes the order you should move them in.
Texas charges no state income tax. A retiree in California or New York pays a state tax on every IRA withdrawal and every Roth conversion, on top of the federal bill. A Texas retiree does not. The same withdrawal strategy is simply cheaper to run here.
In practice that means Texas retirees can afford to pull more income forward into their low-bracket years. The years between retiring and starting required distributions are the cheapest window most households will ever have, and in Texas that window is cheaper still. Coordinating the Shield layer with that window is where retirement income planning and tax planning stop being two separate services.
Where to start: the three numbers you need first
Before any of this can be designed, three questions have to be answered honestly.
- What you actually spend. Not what you budgeted. What left the account last year.
- What is already guaranteed. Social Security, a pension, rental income. Claiming age changes this number significantly, which is why we look at Social Security timing before we size anything else.
- What the portfolio therefore has to cover. The gap between the first two numbers is the only figure that actually drives the plan.
Everything else follows from that gap.
Retirement income questions from Texas retirees
What is sequence of returns risk?
Sequence of returns risk is the danger that poor market returns arrive in the first few years of retirement, while you are withdrawing. Selling during a decline forces you to liquidate more shares for the same dollar of income, and those shares are not there to recover later. Two retirees with identical average returns can end up hundreds of thousands apart based on order alone.
How much cash should I hold when I retire?
Most plans hold two to five years of planned spending in cash and short-term bonds, sized to the gap between guaranteed income and actual spending rather than as a percentage of the portfolio. A household with a large pension needs a smaller buffer than one relying almost entirely on withdrawals. The goal is simple: never be forced to sell equities in a down market.
Is the 4% rule still a safe withdrawal rate?
The 4% rule is a useful starting benchmark, not a plan. It was derived from historical U.S. data using a fixed allocation and no taxes, and it assumes you never adjust spending. Real retirements involve required distributions, Medicare surcharges, uneven spending, and the flexibility to spend less in a bad year. A dynamic withdrawal approach usually supports more lifetime income than a fixed percentage.
Should I live off dividends in retirement?
Dividends are part of your total return, not a separate source of money. On the ex-dividend date the share price drops by roughly the amount paid, so nothing has been created. Building a portfolio around the highest yields concentrates you into utilities, energy, financials, and real estate, which adds risk and removes diversification without increasing what you can safely spend.
What is the difference between the bucket strategy and total return?
Total return holds one diversified portfolio and withdraws from it as needed, rebalancing along the way. The bucket strategy segments the portfolio by when the money will be spent, with near-term income in cash and short bonds. Total return is slightly more efficient on paper. Buckets are more durable in practice, because they remove the pressure to sell equities during a decline.
How do I know how much income my portfolio actually needs to produce?
Start with what you genuinely spent last year, not what you budgeted. Subtract what is already guaranteed, which typically means Social Security, any pension, and rental income. The remainder is the gap your portfolio has to cover. That single number drives the withdrawal rate, the size of your cash buffer, and how much risk you can reasonably take.
What happens to my income plan in a bear market?
In a properly structured plan, nothing changes about your monthly income. The Shield layer holds several years of spending in assets that are not correlated to the stock market, so income continues while growth assets are left alone to recover. The rule is that the Shield gets refilled from the growth layer in good years and does not get refilled in bad ones.
Does living in Texas change my retirement withdrawal strategy?
Yes. Texas has no state income tax, so IRA withdrawals, pensions, and Roth conversions carry only a federal cost. A retiree in a high-tax state pays both. That makes it cheaper for Texas retirees to pull income forward into their low-bracket years, which usually means larger conversions and a more aggressive bracket-filling strategy before required distributions begin.
Your next step
We will map your spending against your guaranteed income, size the Shield layer to your situation, and show you the withdrawal sequence along with the tax cost that comes with it. There is no cost for the initial conversation.
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Kraus Capital Management is a registered investment adviser located in Boerne, Texas. This material is for educational purposes only and is not individualized tax, legal, or investment advice. The illustration shown is hypothetical, does not represent any actual client or investment, and is not a guarantee of any outcome. Returns shown were selected to demonstrate the effect of return sequence and should not be taken as an expectation of future performance. Diversification and asset allocation do not ensure a profit or protect against loss in a declining market. All investing involves risk, including the possible loss of principal. No strategy assures success or protects against loss. Figures cited are for the 2026 tax and benefit year and are subject to change. Consult your CPA or attorney regarding your specific situation.
