As an advisor with a specialty in an income investment strategy, a majority of our clients rely on their portfolios as one of their primary sources of income in retirement. That also means their portfolio needs to be around throughout their entire lifetime. I manage both portfolios as well as client’s expectations in order to help them avoid the devastating possibility of running out of money.
Are You Spending Too Much?
No one likes to be told they are spending too much, or they need to work a few more years before retirement. Most people approach this problem from the completely wrong direction. They want to know, “what is the maximum I can withdraw from my portfolio.” We’ve said it a million times before, but a good financial plan starts with a budget (See my article: The Importance of a Solid Budget).
Initially, I recommend clients plan on spending the same amount in retirement as they did when they were working. If you are younger than 65, it may be even more because of the wildcard expense of healthcare.
It is very easy to feel the impact of spending an extra $500 per month today, but nearly impossible to comprehend how it will affect a portfolio 15 years from now. I relate this to the Stanford Marshmallow experiment on deferred gratification.
Instead of a 4 year-old and a marshmallow, it involves a mature, rational retiree with a portfolio they’ve spent years to accumulate. How did the successful 4-year olds survive the longest 15 minutes of their life? They came up with a distraction.
Enjoying Retirement the Right Way
After 30+ years of work, now seems like the right time to enjoy it. However, one must keep in mind this is the same portfolio that needs to support you 20 years from now. Also, you might not be the only one relying on these funds. Include a spouse in the picture and your time horizon can quickly expand beyond 30 years.
If only we could see the future and this would be easy. Will I spend more or less in retirement? Will that number get bigger or smaller as I age? Will the market go up or down today, this month, this year? A lot of advisors like to answer these questions with a 30 year projection loaded with assumptions.
A Sustainable Spending Plan
I suppose these projections are an acceptable starting point, but too many people give them too much weight. They may see a large portion of the portfolio left after 30 years and decide now is a good time to buy a new car or go on a vacation.
Each year a retiree should set a spending plan within the capabilities of their portfolio. At least annually it should be reviewed and updated for the future.
No one dreams of running out of money, but they do plan enjoying their golden years. Overspending may not be evident until mid-way through retirement when lifestyle changes can be difficult. Starting out conservatively and living within one’s means is critical in the early years.
