Key Points
- Explore Diverse Retirement Spending Strategies: Learn about various strategies like inflation-adjusted dollar amounts and portfolio percentages to make the most of your retirement savings.
- Purpose Built’s Unique Approach: Discover how Purpose Built Financial Services uses Retirement Spending Stages and Portfolio Percentages with Ceiling and Floor for personalized financial planning.
- Advantages and Disadvantages: Understand the pros and cons of each retirement spending strategy to make an informed decision tailored to your individual needs.
- Risk Management in Retirement: Learn how to balance risk and reward in your retirement spending, ensuring a stable income without depleting your nest egg.
- Consult a Financial Advisor: If you’re unsure which strategy suits you best, find out why consulting a financial advisor can provide valuable insights into your retirement planning.
Introduction
As investors plan for retirement, one of their most important decisions is how to spend their savings. There are many different strategies to choose from, and the best approach will vary depending on individual circumstances.
In this blog post, we will discuss three of the most common retirement spending strategies:
- Dollar amount grown by inflation
- Retirement Spending Stages
- Percentage of portfolio
- Percentage of portfolio with ceiling and floor
We will also provide a brief overview of the trade-offs associated with each strategy.
Dollar amount grown by inflation
This strategy is simple to understand and, because of that, is the most commonly used in the planning industry: the investor decides on a dollar amount of spending in the initial year of retirement, and then adjusts that amount for inflation each year. For example, if an investor decides to spend $50,000 in their first year of retirement, and inflation is 2%, they would spend $51,000 in their second year, $52,020 in their third year, and so on.
The advantage of this strategy is that it provides a high degree of spending stability. The investor knows exactly how much they will be able to spend each year, which can help them to budget and plan for the future.
The disadvantage of this strategy is that it can be risky. If the markets perform poorly, the investor may not be able to generate enough income to cover their spending. In this case, they may have to dip into their savings, which could reduce their retirement nest egg.
Retirement Spending Stages
The Retirement Spending Stages strategy is a three-part approach to retirement spending that takes into account different stages of retirement. The three stages are:
- Go-Go Years: This is the early stage of retirement, when retirees are typically in good health and have the most energy. They may be traveling, pursuing hobbies, or spending more time with family and friends. During this stage, retirees may want to spend more money than they did before retirement.
- Slow-Go Years: This is the middle stage of retirement, when retirees may be starting to slow down a bit. They may be less active, and they may have more health concerns. During this stage, retirees may want to start to reduce their spending.
- No-Go Years: This is the later stage of retirement, when retirees may be in poor health and may need more assistance with daily living. Traveling may become harder to do and less enjoyable. During this stage, retirees may want to focus on their health and well-being, and they may need to reduce their spending even further.
The Retirement Spending Stages strategy allows retirees to adjust their spending based on their individual needs and circumstances. This can help retirees to ensure that they have enough money to last throughout their retirement, and it can also help them to enjoy their retirement years without having to worry about money.
The Retirement Spending Stages strategy is the one Purpose Built starts with for our financial plans since it is simple to understand and follows the most common spending pattern for most retirees. The stage changes can be fully customized but we start with the full inflation adjusted expense forecast through age 74, decrease that amount by 10% for ages 75 through 84, and then reduce it by an additional 5% after that.
Percentage of portfolio
This strategy is more complex than the dollar amount grown by inflation strategy, but it can also be more flexible. Under this strategy, the investor decides on a percentage of their portfolio to withdraw each year. For example, if an investor has a $1 million portfolio and decides to withdraw 4% each year, they would withdraw $40,000 in their first year of retirement, $40,000 in their second year, and so on (when not adjusting for portfolio growth).
The advantage of this strategy is that it is more responsive to market performance. If the markets perform well, the investor can withdraw more money each year. If the markets perform poorly, the investor can withdraw less money. This can help to protect the portfolio from being depleted too quickly.
The disadvantage of this strategy is that it can lead to more spending volatility. In some years, the investor may be able to withdraw more money than they need. In other years, they may have to withdraw less money than they need. This can make it difficult to budget and plan for the future.
Percentage of portfolio with ceiling and floor
This strategy is a hybrid of the dollar amount grown by inflation strategy and the percentage of portfolio strategy. Under this strategy, the investor decides on a percentage of their portfolio to withdraw each year, but they also set a ceiling and a floor on their spending. For example, an investor may decide to withdraw 4% of their portfolio each year, with a ceiling of 5% and a floor of 2.5%. This means that if the markets perform well, the investor can withdraw up to 5% of their portfolio each year. If the markets perform poorly, the investor can withdraw as little as 2.5% of their portfolio each year.
The advantage of this strategy is that it provides a balance between spending stability and flexibility. The investor knows that they will be able to withdraw at least a certain amount of money each year, but they also have the flexibility to withdraw more money if the markets perform well.
Research by Vanguard Group has shown that using this strategy can greatly reduce your chances of running out of assets and improve your total life time spending for most scenarios.
The disadvantage of this strategy is that it is more complex than the other two strategies. The investor must carefully consider their risk tolerance and spending needs when setting the ceiling and floor.
Once plans go from the accumulation phase of retirement planning into the distribution phase, Purpose Build uses the Percentage of Portfolio with Ceiling and Floor strategy to ensure that retirement spending is not too high and to determine if there is room for additional spending or gifting options.
Choosing a retirement spending strategy
The best retirement spending strategy for you will depend on your individual circumstances. There is no one-size-fits-all answer. Some factors to consider include:
- Your risk tolerance
- Your spending needs
- Your expected retirement income
- Your investment horizon
If you are not sure which strategy is right for you, it is a good idea to speak with a financial advisor. They can help you to assess your individual circumstances and develop a plan that meets your needs.
And remember, finding your purpose is a journey, not a destination. It’s something that you’ll continue to discover throughout your life. But it’s a journey that’s worth taking. So don’t be afraid to start exploring today. Purpose Built Financial Services can help you along the way.
Frequently Asked Questions
What Are the Best Retirement Spending Strategies?
Explore various retirement spending strategies, such as inflation-adjusted dollar amounts, Retirement Spending Stages, and portfolio percentages, to find the one that best suits your financial goals.
How Does Purpose Built Approach Retirement Spending?
Purpose Built Financial Services uses a unique approach that combines Retirement Spending Stages and Portfolio Percentages with Ceiling and Floor to offer personalized retirement planning.
What Are the Advantages and Disadvantages of Different Retirement Spending Strategies?
Each retirement spending strategy has its own set of pros and cons. It’s essential to understand these to make an informed decision that aligns with your individual financial needs and risk tolerance.
How Can I Manage Risk in My Retirement Spending?
Balancing risk and reward is crucial in retirement spending. Strategies like setting a spending ceiling and floor can help you manage risk effectively without depleting your retirement savings.
Should I Consult a Financial Advisor for Retirement Planning?
If you’re unsure about which retirement spending strategy is right for you, consulting a financial advisor can provide valuable insights and help you develop a tailored plan.
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