Flipping the Switch — When to Start Spending Your Retirement Savings — Guilt Free

You’ve disciplined yourself for the past 45 years to delay gratification and to build up your asset base for retirement. Now that retirement is upon you, can you shed all those years of programming and suddenly start splurging on yourself? How much can you spend each year out of your retirement without outliving your money? And, what about the kids, “shouldn’t I leave them something”?

You’ll have to come to terms with these thoughts and emotions and have a plan where there’s enough money for the changing phases and spending habits during your retirement, but you’re also not naïve, you want to have enough funds to last your entire lifetime.

This article is not an advice column as to how much to save in your younger years to have a great retirement, that ship has left. We’re hereby addressing your crossing the threshold from work to retirement.

We’re going to solely address withdrawals and not investing or asset allocation, for more info on that read:

Don’t Outlive your Money in Retirement

The Tipping Point

O.K. during your working years you religiously listened to Tony Robbins and Suze Orman, and maximized your productivity at work and only bought “needs” and not “wants” and socked away 15% of your earnings into a tax deferred retirement account. You’ve paid down all debts including your mortgage, the flywheel is spinning as you cross the finish line.

Basically, you were super smart with your money and now retirement is upon you. You could be 60, 65, or even 70 years old.  After you get over the initial realization that there’s no more money coming in from an employer, you figure, “Hey, I now have Uncle Sam sending us a monthly check and he’ll be the last to go bankrupt (won’t he?). But social security just isn’t enough to make ends meet, you’ll need to start pulling money out of your retirement account. Yikes!

The Switch from the Long Game to the Short Game

After those years of working, pinching pennies, saving for your kids’ college education, paying down the mortgage you needed to really discipline yourself and do without in a lot of what, heretofore, you considered indulgences. That took a lot of mental discipline and daily habits and now it’s difficult to shut that off as you transition into retirement.

You got good advice in your youth and played the “long game”. Envisioning a future with a desirable lifestyle is why you took out your student loan and studied hard in college, graduated, got a decent job, made money, married a great spouse, raised beautiful kids – all on a disciplined budget.

Now that you’re at the cusp and retirement, can you shut it off?  Can you now play the “short game”, you know you’re going to die someday only now it’s not that far away. Can you intelligently spend to enjoy the fruits of your lifetime of earning and saving while making it last until the end for you and your spouse? The future is now.

 Yes, Indulgence is Allowed

The short game requires a flip of the switch in attitude toward money. You’re switching from “savings mode” to “spending mode”.  And, with a good forecasting spreadsheet, you can enjoy those indulgences and not suffer the consequences of running out before you meet St. Peter.

In reality, many retirees never end up spending all of their retirement assets. In a 2016 study, Vanguard reports that individual savings tend to rise even after retirement, and financial planners suggest that retirees are often too frugal, denying themselves pleasantries and ultimately never spending through the assets they’ve worked so hard to save.

A Word about Children’s Legacy

In the parlance of financial planning “legacy” is merely the inheritance your children will receive after you and your spouse have expired.

A very noble feeling is to want to leave money to your children when you go; to make life easier for them. Just don’t go overboard. If you’re not a baron with millions to pass on to the next generation, you’re probably wondering just how much to leave.

Think of when you were a younger adult and your attitude toward your parents’ retirement.  Didn’t you want them to thoroughly enjoy it?  When they passed, you weren’t counting on anything, and if you did get something, it was a bonus.  Well, your kids feel the same way about you. They don’t want you skimping just so they can have more.

It’s time to shake that feeling – no guilt.

The Spending Buckets

When it comes time to spend during retirement, you have to relegate your spending into two separate buckets.

The first is the living expense bucket, and the second is your fun spending bucket.

Living Expense Bucket

This is like death and taxes, they’re the expenses you face each and every year. It’s basically your family budget before you retired but with some notable drop in work related expenses.

What’s key about this bucket is that it’s fairly fixed and can be projected out a couple of decades or more. It probably won’t vary much.

Fun Spending Bucket

This is the “play money” bucket, this is where you can get a little frivolous:

• Boat payments
• RV payments
• World travel
• Second home in Florida

This second bucket will be more difficult to forecast, and it will vary depending upon investment growth. The withdrawal formula should be revisited each year.

The Fun Spending Downward Slope

One aspect of aging is the steady decline of the human body. No matter how much you exercise, eat right, sleep plenty, with each ensuing year, you’re going to be less vigorous.

World travel and traveling across America in your RV will be somewhat demanding on your physicality. It’s best pursue these adventure travels in your sixties and seventies.  In your eighties and nineties, you’ll probably be sticking closer to home.

If you believe in the 4% rule of withdrawing money from your IRA, you may want to consider bumping it up in your earlier retirement years to say 6%, with the idea of scaling it back in your later years to 4%. You’ll have more money for adventure in your vital and less in your older years when you’re probably more sedentary.

The Withdrawal Calculator

So, how do you determine how much you can withdraw over the next few years without running out of money in your later years?

This will require you build a spreadsheet with assumptions you can tweak to see how much you can safely withdraw now without bankrupting the future.

Build a column for each year of your retirement and belief as to how long you and your spouse will live. The first known data point will be your beginning balance of your IRA.

In our example, we use $920,000 which Charles Schwab determined from a survey of serious savers to be the mean. Again, yours may be more or less, whatever it is plug it in here.

Then you’ll need to make an assumption as to what rate your IRA will grow. In our example we use 5%. Obviously there will be better years, and unfortunately some really bad years. But keep adjusting year after year to the reality of the times.

Our example, we went heavier on the withdrawal in the earlier years of retirement and then scaled it back later on. With that, you can see that there’s a comfortable balance for you and your spouse all the way to age 90 and should continue for years further if necessary.

Here is a spreadsheet you should build for yourself and tailor to your parameters.There are a number of issues we did not cover, namely end of life costs for assisted living, nursing homes and hospice, for more info on that please read:

Entering Your Golden Years? Managing your IRA disbursement can be Tricky

Black Swans

The big what if?

What if some unforeseen financial calamity occurs and your retirement balance is too low to cover it?

• You or your spouse contract Alzheimer’s and need expensive care
• A granddaughter has a rare deadly disease but there’s an experimental drug that may help but it’s uncovered by insurance, do you spend the $200,000 for treatment?

Your formula will need a healthy balance for end of life for you and your spouse. It’s costly to die.

FitCommerce advises you keep the value of your house at its maximum through proper upkeep. In the unlikely event some unforeseen but very costly event occurs, you have the option to reverse mortgage your house. This is the only scenario we recommend doing so.

If you never face a black swan, then the house will be added to the legacy you leave to your kids.

Conclusion

Nobody has a crystal ball. It’s unfortunate that we know our exact birth date, but we have no idea what our end date will be. That makes it difficult to plan retirement spending. Too aggressive and you outlive your money. Too little and you leave it all to your heirs without properly enjoying the fruits of a life of work.

Build your own spreadsheet, keep modeling different scenarios until you find your comfort level and adjust it annually.

No go out and enjoy your well-deserved retirement.