Retirement Spending: How Much Variability Can You Afford?

Being able to determine how much you can annually withdraw from your portfolio in retirement is a matter of (financial) life or death.

That may sound dramatic, but when you consider the consequences of missing the target, it really isn’t.

Being able to plan for how much you can expect to live on in retirement is a key reason many people hire a financial planner.

And while planning¬†for the future and what actually happens in the future can be different things, that fact doesn’t, or shouldn’t,diminish the value of working with a financial planner.

So what’s a way to approach how much to withdraw annually?

Well, a good place to start is to determine your comfort level with spending:

Are you absolutely not comfortable with any possibility of running out of money? Or, are you wanting to maximize lifetime spending, and have a preference for spending while you can?

Or are you somewhere in between these 2 extremes?

Most people are somewhere along the band between the 2.

After you determine where you lie along the spectrum, you then proceed to identify how flexible you are with year to year spending.

Do you need to know, with no uncertainty, how much you can spend every year?

This would be a constant dollar amount that you plan on each year, and would be the same each year, indexed for inflation.

Or, are you totally flexible, comfortable with having more to spend one year, and less to spend another year?

This would be a flexible percentage each year, and based on a percentage of your portfolio.

Or might it be a combination of the 2, with your basic costs being met by a constant dollar amount, and your discretionary costs being met by a percentage?

This is one of the starting points in a conversation with a financial planner regarding retirement-income planning.

It’s incredibly important to understand where you lie along each of these 2 spectrums; your financial planner’s success in creating your financial plan is only as good as the accuracy of the information you provide them with.