When it comes to retirement, the financial planning industry has traditionally focused on how much income one can safely draw annually from retirement savings. I’ve long thought this approach was not optimal. To me, using a “safe withdrawal rate” strategy meant that a retiree was likely to have excess funds at death. Viewed differently, this means the retiree could have been enjoying a higher standard of living during retirement. It is also unrealistic to think that a retiree would not adjust their withdrawal rate if their investment portfolio was down due to a bear market. Conversely, if investments performed very well, it’s unrealistic to think a retiree would not want to increase their income over and above the inflation rate.
Instead, the focus should initially be on spending. How much do you need for “essential expenses”? Where possible, most should have a plan in place to generate dependable income to cover those expenses. Social Security is the answer for most, often by delaying claiming for the highest earner in a household.
Next, “discretionary expenses” like travel, dining, and other entertainment may best be covered largely by income generated by riskier assets, like stocks. This way, if you are willing to reduce discretionary spending when your investments are down, you can take on more risk – which is likely to pay off over the long term.
To me, the goal for most should be to unleash spending so retirement can be enjoyed with less stress and worry. Focusing first on your spending requirements and then embracing flexibility to make adjustments along the way are great ways to accomplish this goal.
Thanks for reading.
Decoding the Successful Retirement Journey: Vol.2, No.2
