Is There A Retirement Spending Balance: Not Too Much, Not Too Little?

People entering retirement will have to devise a smart strategy of how to spend their savings. They don’t want to outlive their nest egg, and they also don’t want to live more frugally than they need to.

The experts who warn that even $1 million in retirement savings might not be enough, keeps many near-retirees up at night. After decades of wondering if you had saved enough, now you have to ask yourself, how can I both enjoy my retirement and not run out of money? A recent article from CNBC “Four ways not to outlive your retirement savings” says that the heart of the question is “How should I spend what I have?” The question is simple, but the answer is not.

Whether your nest egg has hit the $1 million mark, or is closer to $250,000 or even less, you need a smart strategy, so you don’t outlive your money. There are a few rules that make sense.

Don’t take out too much in the first five years of your retirement. This can have a big impact on your standard of living. At the same time, don’t be led by fear. You worked too hard not to enjoy this time of your life. Can these two opposing thoughts work at the same time?

What about the 4% rule? This is a rule that was created nearly twenty years ago. The idea is that you withdraw 4% of your total retirement savings in the first year of retirement, and adjust that amount for inflation in the years that follow. The problem? We are in such a low interest environment, that your savings might not be able to sustain a 4% withdrawal every year. If you have significant wealth, the 4% may have you living far more frugally than you need to. The rule is too rigid.

Another approach is dynamic spending, where you adjust for unexpected expenses or rocky market conditions. You might start with a 4% withdrawal, but you create limits for the most and the least you’d take out that year, depending upon the state of your portfolio. Let’s say you’ve got a $1 million nest egg. The maximum annual withdrawal would be 5% and the minimum would be 2.5%. If the market drops dramatically, you adjust your withdrawals for a few years and cut spending.

Another strategy is the bucket strategy, which divides retirement savings into segments, one for withdrawal and one for growth. Think of them as short-term and long-term buckets. The withdrawal bucket should contain enough money for your annual expenses for a short period of time. Let’s say you budget $50,000 a year, so your short-term bucket contains $250,000 in low-risk, highly liquid investments. The other bucket will be invested for long-term growth. You’ll need to strike a balance between the two to be sure your investments are not too conservative or too risky.

Finally, the RMD method, based on the IRS’s required minimum distribution tables for IRAs and 401(k)s. If you have a $1 million nest egg and no spouse, and were born in December 1953, your first RMD would be about $50,500. If you have an annual return of 6%, your nest egg should stay intact until your 115th birthday.

Reference: (October 15, 2019) “Four ways not to outlive your retirement savings,”

About the author

Bob Brumfield

Attorney Bob Brumfield has been practicing law since 1984 and regularly receives the “Top Lawyers in California” award as well as the “Client Distinction” and “Client Champion” awards from Martindale-Hubbell.

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