Decumulation
What we must decide is perhaps how we are valuable rather than how valuable we are. ~ Edgar Z. Friedenberg (1921-2000), American Scholar.
Question: Outliving my savings is a concern. How should I estimate what to comfortably spend in retirement?
Answer: While planning for retirement you focused on saving and investing for years and accumulating funds. When it’s time to start the “decumulation” phase it can be challenging to shift gears. Typically, there hasn’t been considerable thought put into how funds will actually be withdrawn.
Without a plan in place some retirees may opt to live on Social Security and the required minimum distributions (RMDs) from retirement accounts to meet their needs. This may lead to unnecessary sacrifices during the retirement years. According to research from BlackRock, after almost two decades into retirement, most current retirees still have 80% of their pre-retirement savings.
Uncertainty
Just as you mentioned, fear of outliving your nest egg causes many retirees to spend as little as possible. There may be other reasons too such as the desire to leave a generous sum for heirs or for philanthropic purposes, but the majority just aren’t sure how to identify a sustainable withdrawal rate to match their life expectancy. The worry is usually based on the “what ifs” during retirement years.
Portfolio returns vary, and healthcare costs can quickly increase. You’re not alone with your concerns, only 25% of baby boomers believe their savings will last throughout retirement, according to the Insured Retirement Institute. By spending less and allowing their savings to potentially grow in the early years of retirement, they hope to offset some of the uncertainty.
Inflation
Inflation is known as an “invisible thief” as it steals money without being noticed. Inflation increases the cost of living. Presuming that you could have a 30-year retirement span and using an estimated cost of living increase of 4.2% per year for 30 years, inflation could potentially increase a retiree’s cost of living by 300% in the latter years. Bottom line is that over the long-term, inflation can erode savings.
Collaborating with your financial advisor can help increase your confidence about having enough money to live comfortably in retirement. Just like in your working years, in retirement you can establish a just-in-case cash cushion that helps put you at ease. Having a sound distribution strategy in place reflecting your income sources, lifestyle, asset locations and tax situation can help you enjoy the retirement lifestyle you envisioned.
Withdrawals
Here are three ways to categorize expenses when you begin withdrawing retirement assets:
- Essentials such as food, housing, and insurance,
- Lifestyle needs/wants for vacations and hobbies,
- Unexpected expenses such as healthcare costs, auto repairs and in South West Florida, hurricane damage.
Consider paying for essential expenses with income sources such as Social Security or money markets. Growth or income investments may be used to pay for lifestyle expenses while maintaining a cash reserve for any unexpected costs that might occur.
Flexibility
Market downturns are often an appropriate time to tighten the reins on spending. Or, when you experience extraordinary investment gains it may be the time for a vacation. Income needs will fluctuate during retirement. We call the early years the “go-go years” with travel and big-ticket items which require additional withdrawals. As time goes on, you’ll likely shift into the “so-so years” where travel may decrease, and medical costs could increase. The result is that spending tends to decline in the later years of retirement. People ages 55 to 64 spend on average $60,076 per year, while people ages 65-plus spend $45,221, according to the Bureau of Labor Statistics. My thoughts are that these numbers are higher in SWFL, yet the difference between age groups is most likely the same.
Regularly touching base with your CFP® Practitioner can help your budget stay on track. Building in flexibility allows you to go with the flow. We can assist you with developing and monitoring your retirement income and distribution strategies. We can run hypothetical simulations based on withdrawal rates, life expectancy or any other contingencies, which provides a better idea of how much you can comfortably and confidently spend in retirement to help achieve your goals.
You’re unique and your plan should be customized to match your goals. Establishing a withdrawal strategy that’s right for you while also keeping your emotions in check is often a good plan of action. Stay focused and plan accordingly.
Raymond James & Associates, Inc., member New York Stock Exchange/SIPC. The opinions expressed are those of the writer as of October 18, 2024, but not necessarily those of Raymond James and Associates, and subject to change at any time based on market conditions and other factors. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Raymond James does not provide tax or legal services. Please discuss these matters with the appropriate professional.
Certified Financial Planner Board of Standards Center for Financial Planning, Inc. owns and licenses the certification marks CFP®, CERTIFIED FINANCIAL PLANNER®, and CFP® (with plaque design) in the United States to Certified Financial Planner Board of Standards, Inc., which authorizes individuals who successfully complete the organization's initial and ongoing certification requirements to use the certification marks. This article provided by Darcie Guerin, CFP®, First Vice President, Investments & Branch Manager of Raymond James & Associates, Inc. Member New York Stock Exchange/SIPC 606 Bald Eagle Dr. Suite 401, Marco Island, FL 34145. She may be reached at (239)389-1041, email darcie.guerin@raymondjames.com Website: www.raymondjames.com/Darcie
