As most retirees will tell you, one of the most important preparations you can make for a fulfilling, low-stress retirement is getting clarity on your retirement income and expenses. In our article, “10 Things to Do before You Retire,” our list included a brief discussion of setting up a retirement budget that takes into consideration your various sources of income, including Social Security, any pensions to which you’re entitled, and your projected income stream from investments and savings. And the second half of that task is carefully estimating your anticipated expenses, including healthcare, living expenses, travel, and costs for any other activities and needs you anticipate. All of this is foundational to being able to embrace and enjoy your retirement lifestyle.
But is there a way to put in place some guidelines or “guardrails” that can help you ensure that your retirement spending doesn’t outstrip your sources of income over time? After all, most retirees list “outliving my money” as a key concern as they approach and enter retirement, and the best way to avoid that is to make sure that your income projections balance out with your expected expenses over time.
Dynamic Adjustments to Retirement Income
We all know that expenses aren’t the same year to year, or even month to month. They go up and down in tandem with the circumstances of life. If you live in a colder climate, your heating bills are higher during the winter, and if you live farther south, your bills are probably higher in the summer, when the air conditioning is running nonstop. During the holidays, you may spend more on groceries and entertainment as you receive family and friends. You may even go through a period of higher healthcare costs when an injury or disease requires you to pay more deductibles and copays than normal.
But in the same way, your retirement income is dynamic. For one thing, those collecting Social Security can typically look forward to some sort of cost-of-living adjustment (COLA) in years when inflation is elevated (for example, the 2026 Social Security COLA is announced at +2.8%), and some pensions also allow for periodic cost-of-living increases. Beyond these sources, your withdrawal rate from savings, investment, and retirement accounts can also move up and down, depending on various market and portfolio factors.
For example, in years when financial markets are on the upswing, your investments are likely to be increasing in value. So, depending on the percentage your plan stipulates for withdrawals (many retirees follow the “4% rule,” though this can vary), you may be able to increase your withdrawal percentage a bit in years with rising markets, and nudge it lower in years when asset values are declining. By doing this, it is possible to maintain your income at a sustainable level while still enjoying periodic “raises” when market conditions permit. This flexible, “guardrail” approach allows you to avoid overspending when markets are less favorable, but it also permits you to avoid underspending (and potentially missing out on opportunities you would otherwise enjoy) during periods when the markets are rising. The end result is a sustainable spending plan that takes into consideration portfolio volatility and your projected income needs.
An Example of How Spending Guardrails Work
Let’s say that generally, your retirement spending plan calls for withdrawing 4% of your total portfolio value yearly. If you have a $1 million dollar portfolio, that means you’re pulling $40,000 dollars each year, on average, from your holdings to support your retirement lifestyle. Now, let’s assume that in a given year, your holdings increase in value by 7.5% (the average increase in the S&P 500 for the last 30 years, net of inflation). You might opt to withdraw a bit more than 4% that year. But suppose that the very next year, the market falls by 5%. In that case, you might choose to reduce your withdrawal percentage. By adjusting your withdrawals to keep them within the “guardrails” of the changes in your portfolio value, you can course-correct, resting in the assurance that your spending plan is remaining within the appropriate boundaries for your lifestyle needs over time.
Some Cautions
For those whose retirement budgets are so tight that even a relatively small monthly variance causes problems, this flexible approach may not be appropriate. Also, the “guardrail” approach requires that your spending plan is realistic, in consideration of your resources. In other words, if you have a $1 million dollar portfolio but you want to spend $200,000 per year, it doesn’t take a math whiz to figure out that you’re going to run out of money sooner than you want.
Making a Plan for Your Retirement Spending
Creating a flexible, sustainable plan for retirement spending is greatly enhanced by the assistance and advice of a fiduciary, professional financial advisor. Your advisor can work with you to assess all your sources of income, project your expenses, and develop a sustainable, flexible spending model that can allow you a less stressful, more carefree retirement lifestyle.
At Mathis Wealth Management, we provide individualized guidance for retirees and those preparing for retirement, always delivered with the client’s best interests foremost. Get in touch with us today to see how we can help you make a plan for a satisfying, confident retirement.
