The biggest fear retirees have is outliving their money. Overspending in retirement is one of the main reasons why this could happen.
You might not know how much to pull from savings to make up your lost income. You might not know how long your savings will last. You might not know how much things will cost in the future.
But, what you do know is that you just worked hard for 40 years and now you’re finally done. You dreamed about retirement. You finally have the time to do the things YOU WANT TO DO. You worked hard all those years, shouldn’t you get to spend those hard-earned dollars?
Retirement planning is a balancing act between enjoying it to the fullest, while not sacrificing your long-term security. Not overspending in retirement requires diligent planning, and course corrections along the way.
In this week’s video, Casey shares 2 tips to help you not overspend in retirement!
- Here are the key takeaways:
– Overspending in retirement can be as problematic as underspending, and expenses will drive many other aspects of retirement planning.
– Longevity risk is a crucial factor: for a married couple aged 65, there’s a 50% chance one will live to 90, meaning retirement plans often need to cover 30-40+ years.
– Keep an eye on your distribution rate from investment accounts, especially in early retirement years. The rule of thumb is not to exceed 4% annually.
– Don’t rely on just living off the gains in your retirement account. Market returns are rarely average each year, and you may need to use both gains and principal over time.
– Overspending might not be noticeable in the short term but can compound over the long term, potentially causing significant issues.
– Retirement planning is an ongoing process, not a one-time event, as circumstances will change over a 30-40 year retirement period.
How You Can Avoid Overspending in Retirement – Links
Life Expectancy Assumptions – Kitces
Average Investment Returns – Ryan Detrick
How You Can Avoid Underspending in Retirement – Mullooly Asset Show
How You Can Avoid Overspending in Retirement – Transcript
This week’s video we’re going to talk about how not to overspend in retirement.
Last week we talked about underspending in retirement or not spending as much as you otherwise could. This week we’re going to talk about the other side of that coin and that’s overspending in retirement. A lot of the same factors are at play.
Expenses are going to drive the boat. How much you spend is going to dictate a lot of the other retirement plan pieces, some of the other factors at play are how much you have saved in those investment accounts, what those investments are going to earn on average over time, inflation (we know things are going to cost more in the future).
And one we didn’t touch on last week but that’s super important is longevity and longevity risk – the risk or basically how long you can expect to live for.
So just some stats to shed light on that.
For a married couple who are both age sixty-five, there is about a fifty percent chance that one of them will live until age ninety.
For a single female aged sixty-five years old, there’s a fifty percent chance that she’s going to live till she’s eighty-five.
For a single male who’s aged sixty-five, there is a fifty percent chance that he lives until eighty-two.
Alright, so now that we know the playing field, how do we avoid overspending in retirement?
The first tip is to keep an eye on your distribution rate from your investment accounts in the early years of your retirement. So your distribution rate is going to be how much you need to pull from your investment accounts on a yearly basis divided by the starting balance of those investment accounts each year.
Common wisdom or the rule of thumb says that you shouldn’t take out any more than four percent of your starting balance on a yearly basis, and that’s a pretty good place to start. I would add that any multi-year stretch or prolonged time spent in the five, six, seven percent portfolio distribution rate range is probably going to put you behind the eight ball.
The second tip is to forget about just living off the gains in your retirement account.
We use average returns in our retirement plans (five, six, seven, eight percent, whatever number you wanna use), we bake that into the cake for the investment return side of the equation.
But dating back to 1950, there have only been four instances in which the market has given us average returns on a yearly basis. That’s four out of seventy-four years of market data. That’s less than five percent of the times a market gives us average returns on a yearly basis.
We talk about it a lot here on podcasts and videos. It never really works out where you’re getting a smooth five, six, seven, eight percent per year. It’s going to be plus thirty, down markets are going to do nothing for a period of time, and over thirty, forty, fifty years, it’s going to be an average of that number. But we can’t bank on that every year.
Just living off the gains would mean constantly tweaking your risk tolerance, which would mean you’re letting what the market’s going to dictate your risk tolerance, which is something we also try to avoid.
We try to avoid this to maintain a balanced asset allocation across both equities, bonds, and cash, and to have appropriate time horizons for those different buckets of your investments as well. Look, things can and will be tweaked over the course of your retirement. We’re talking thirty, forty years here.
Things are going to change. Your life’s going to change. Circumstances are going to be way different in ways that we don’t even expect, in ways that we can’t plan for.
This is why planning is a process and not a one-time event.
As with compound interest in the stock market, overspending from your retirement account might not be noticeable in the short term in the couple of years. But over the long term, it’s going to compound on itself. So don’t let those overspending years get out of hand.
Get a plan in place.
If you need help, talk to us. We’d be more than happy to help you plan things out for your retirement.
That is going to do it for this week’s video. Thanks as always for tuning in. We’ll see you next week.
