How MUCH Can You Really Spend in Retirement?

everyone wants to spend as much in retirement as they did when they were working but how much can you really spend in retirement without risking that you run out of money there's an old rule that many people have heard of maybe you have two called the four percent rule the problem is that this rule was developed in a time in the economy that was completely different the reality is that there's a lot of research that suggests the safe withdrawal amount is actually somewhere between three and four percent not only that but have you ever tried anything that was one size fits all how did that fit not really well right retirement planning is the same way most rule of thumb strategies aren't good for many people so we're going to talk about how you can figure out how much you can spend in a year in retirement so that you don't overspend and risk failing your retirement plan and I just want to say welcome to all of the new people watching our show lately I'm Thiago and my team and I are advisors to federal employees so if you're planning retirement or maybe you're already retired then consider subscribing for our weekly videos on how to make a better and strong longer retirement plan and if you're not on our free newsletter you're really missing out we don't really email that often but we send out things that we don't cover here in the videos in fact our team will put a link in the description so you can sign up for that if you're interested alright so let's get into how to figure out how much you can spend the first thing you need to know is that the right number is actually different for everyone check this out this graphic shows three portfolios that all had the same annualized return and all three of these portfolios also had money coming out each year just like in retirement so if they all had the same annualized return how is it that we have three completely different scenarios only one of these plans was sustainable the other was in danger and one of them completely ran out of money altogether how is this possible well one variable that's present here is the order in which the returns were given even though they each had the same annualized return the order of those returns were different this is called sequence of returns risk and it's a major factor that could destroy a retirement plan and the reason it's so damn dangerous is because how can you really know that you're in this situation in this example this family in the orange probably didn't realize that they were in trouble here or even here or maybe here and here they had no clue that their plan was not on track anymore and this is because they still had a pretty good chunk of change right and this brings us to the first lesson about this sometimes your acceptable spending rates have to change you see real retirement planning is making sure that your plan still is on track to help you meet your goals whether that's Financial Independence or traveling more helping the kids whatever your objectives are and often a plan doesn't fail overnight it typically takes years for people to recognize hey wait a minute we're pretty far from where we need to be and often by that point it may actually be too late for you to simply just do a easy course correction there may have to be drastic changes by that point to get your plan back on track so in this scenario maybe one solution could have been to slow down spending just slightly Maybe by something like less than a thousand dollars a month for about a year or so just to allow their plan to get back on its feet if the markets go crazy and they caught it early enough because remember you don't have control over the markets but you do have control over how you use the markets as a tool for your goal so if this family was too aggressive and it put them on this track maybe slightly dialing back the spending may have given their portfolio time to recover now how much is that number what's required these are all things that can be modeled out in financial planning so how does this manifest well let's say they maybe have a loan on their HELOC home equity line of credit for a renovation that they are paying off over time maybe they don't make those payments okay they'll have interest payments that are going to grow that balance but perhaps that's better than a failed retirement plan another way this manifests is perhaps someone is about to do a renovation or put a pool in the backyard maybe if there's a year that's really bad in the markets perhaps you don't do that giant boneless payment all at once maybe you wait one year if by doing that the models show that your plan could be in danger again there's virtually endless possibilities and knobs and levers that we can change in a retirement plan to reset that trajectory back towards success and so obviously we understand that changing a plan like that if you intended on doing something and you have to push it off we understand that's not ideal and sometimes it doesn't have to be this way if you can plan well ahead of time allowing that if you arrive to a situation like this you don't need to make changes because they've already been baked in for instance many of our clients as soon as they come up to retirement they typically want to spend a little bit more in early retirement so perhaps doing more traveling or maybe they have grandkids that they want to splurge on or things like that plus if you think about it the early years of your retirement we call those your Go-Go years because you've got the time now you've got the energy and you've got the finances to just go and do things that are important to you so practically this translates to perhaps this is their retirement plan we have a portion of their plan that is carved out to support this National level of higher spending earlier on so even if the markets aren't really performing very well perhaps there are some Investments that are just still throwing off the income that will support this higher level of spending despite the markets and so then you get to have that peace of mind that says hey you know what I know that the markets aren't doing so well right now but I can see that in our retirement plan it doesn't matter for these next few years because we've got things set up in a way that we can keep doing the traveling that we want to do and allow the markets to recover and we call this living your lives uninterrupted by the Market's temper tantrums and this can be a very freeing feeling to have in retirement clients who work with us want to know that now their money is working for them and supporting them so that they can continue to live their lives without having to worry about it and the cool thing about this is that your spending may actually be higher than four percent for some years of your retirement plan and if your plan was set up and created to take this into consideration it can still be successful because there's balance along the way maybe that means something as simple as moving your Social Security up by an extra year so you get a little bit more maybe in the models it shows that that is enough to be able to offset or maybe it's a different investment allocation in your portfolio there are certain kinds of Investments that are really good for generating that stable cash flow and income that people need in retirement the point is that there really isn't the right number for everyone to be spending in retirement just like the treatment that a doctor will give their patient is going to depend on how they're behaving or reacting to the treatment right and I want to show you exactly how this model is out so that you can see how it all works together if you've not seen me use this before this is the software that we use to plan together with our clients and these blue lines here are projected portfolio values over time and into the future and these toggles over here on the left are changes to the sample retirement plan that we've built into the system so we've got things like what if there's a lower Social Security or a change to your regular living expenses Etc but we're going to focus on this one here at the bottom which would be this retirement plan spending around four thousand dollars a month more than they currently do for the first six years of their retirement and so sometimes this will be extra traveling because somebody wants to do that early in retirement and obviously you can see that there is a pretty big impact but because of how we set up the rest of the plan the projection shows that this sample family is probably going to be okay they have a pretty good chunk of change at the end of their plan and if we look at some other reports we have an 83 percent probability of success on this when we run a Monte Carlo analysis but let's say they're maybe really not comfortable with this well like I mentioned earlier there are things that you can do like maybe using a different investment strategy that pays you more income that can help make this scenario look a little better and so when we turn on this investment strategy now we have a pretty big jump in the projection and there's significant value that's now been added back to this plan and if you've watched this far then we know that you're a loyal fan and we could use your help maybe you've heard already but our goal is to help 300 000 federal employees by 2030 and the only way we're going to be able to do that is if you help share and spread the word about our videos and our articles and so we hope that you'll help us and join us on our next video Until then stay wise and stay wealthy foreign [Music]

Channel: The Fed Corner - Federal Retirement Planning

Views: 4,588

Keywords: the fed corner, tsp, FERS, OPM, Federal Retirement Planning, FERS Planning, FERS Retirement, FEHB, plan my federal retirement, plan your federal retirement, my federal retirement, SES

Id: Q6V5Kg3La6Q

Length: 8min 27sec (507 seconds)

Published: Sat Jul 08 2023