How Much Can I Spend in Retirement?
“If you don't know where you're going, you might not get there.” Yogi Berra
You’ve Arrived!
Whether your retirement is planned, or you were gently nudged it can often be a bigger deal than you expected. I meet people who are approaching their retirement years and have managed to save a substantial amount...then comes the big question – “How can I both enjoy my retirement and not run out of money?”
How do retirees run out of money?
The answer generally falls into the following four areas:
- Longevity - Underestimating your own longevity as well as the spiraling cost of care in the last decade of life.
- Sequence of Stock Market Returns – This is the impact several consecutive years of negative market returns, especially in the early retirement years, can have on your savings.
- Inflation - Failing to plan for the increasing cost of living that slowly eats away at the buying power of your retirement income.
- Household Financial Shocks – An unexpected early loss of a pension, the need to support aging family members, the impact of cognitive decline, and a large out-of-pocket medical expense, to name a few.
An important distinction to make in retirement is knowing the difference between protecting your retirement principal (what you have saved), and generating a retirement income that will maintain your dignity and independence in retirement. For example, a purely fixed-income investment strategy is aimed at protecting the principal, however, it may leave you seriously exposed to the erosion of your future retirement income purchasing power. Simply, a 100% fixed-income strategy may not sustain you through a long-retired life of rising living costs. This is where your financial planner can be a significant help to you.
Also, a time when your retirement assets are most vulnerable to market downturns can be the time between when you stop working and when you are claiming social security, as during this period you are living on your savings. It is ideal to hold off on claiming Social Security benefits until the age of 70 (if possible and you are in good health), this will ensure you receive the largest monthly Social Security benefit.
“... just 10% of nonretired Americans plan to wait until that age [70] to start their monthly benefit checks, a new survey from asset management company Schroders finds[1].”
Knowing Where You are Going.
At Boerum Hill Financial Advisors we specialize in helping people, who are near retirement and retired, find financial peace of mind and fulfillment in retirement. I'm often asked, “How much can I afford to spend in my retirement?” “Do I have enough to retire?” “I’ve always wanted to take this cruise with my friends, can I afford it?”
General and traditional financial planning tools are notorious for producing a probability of success score for your retirement and may also use a Rules of Thumb like - the 4% Rule[2]. For our clients, this doesn't cut it! This is like saying I have an 85% chance of arriving at the airport on time. For many of us, this would leave us feeling anxious and uncertain. Don't sell yourself short in retirement. We provide retirees with a GPS for their retirement, we understand the landscape and what could be ahead, and we have the tools to guide them safely on their journey. We aim to provide clarity and peace of mind. Retirees have first-hand experience of life’s highs and lows, the good income years, and the not-so-good income years. The retirement income guardrails that we create for our clients ensure, just like in the past, that we can prepare for changes in retirement income, either up or down. We monitor our retirement income plans in real-time, and we take account of economic indicators that can impact our future income – the rate of inflation, unemployment levels, interest rate changes, economic growth, and stock market pricing, amongst others.
Our dynamic retirement income planning clearly helps clients understand the answers to important questions:
- Will I outlive my income?
- What happens to my income if I’m widowed early?
- How much can I afford to spend now?
- If the stock market drops how much will my income drop?
- Can I afford to help my grandkids pay for college?
- Can I take this trip?
- Can I spend more now and less in the future? and so on
It is both rewarding and gratifying to be able to sit with a client and watch their anxiety leave them as they start to understand how they can manage and impact their retirement paycheck. Once our client knows how much they can spend, and the impact of market downturns on their retirement plan they can then focus on enjoying their retirement.
If you’d like to discuss this or any other personal finance topics further, please contact us and schedule a no-obligation strategy call. We look forward to meeting you!
[1] https://www.cnbc.com/2023/08/08/survey-just-10percent-plan-to-wait-until-age-70-to-claim-social-security.html
[2] The 4% rule suggests retirees can safely withdraw the amount equal to 4 percent of their savings during the year they retire and then adjust for inflation each subsequent year for 30 years.
