A question a lot of retirees ask us is how much they can safely withdraw from their accounts during their retirement years. It’s an important piece of information to know, but in recent years, this long-running bull market has caused some of us to become overly confident in our spending. In light of this global pandemic and some market volatility, now may be a good time to reestablish healthier spending habits and find a more conservative, sustainable withdrawal rate.
The key thing that you want to look at in terms of how you are doing is your portfolio spending rate. With portfolio balances enlarged, some retirees have gotten a bit loose on the spending front. They’ve seen their portfolios nicely growing and have been taking out a little bit more than they otherwise would.
This is an area where a financial advisor can be a great help in terms of putting a little bit of science around whatever withdrawals system you’re using. This is done through both software as well as a written plan to look at estimated expenses and the income that you’ll be generating.
What you’ll notice is that there’s a gap between your estimated expenses and projected income, so it’s important to fill that gap.
For example: You’re going to need $2,000 a month out of your retirement nest egg to meet living expenses. What we usually do at Aul Financial Group at our review meetings is ask how much you have in checking and savings. For this example, you say $25,000. Three months later, we get back together and you didn’t take any withdrawals from your account. I’m going to expect that you’re going to be $6,000 less than the extra $2,000 a month. Suddenly, you now have $22K instead of $25K. Are you really spending that $2,000 each month, or should we adjust your expenses?
Let’s also look at it this example from the opposite side. If you took $6,000 out of your portfolio, the $2,000 that we had planned — we went ahead and set up the deal to give you $2,000 a month, and we come back and you’ve got $20,000. Are we spending an extra $1,000-plus per month, or was this a one-time hit? I see people are shocked that when we put a plan together and it says your planned expenses are something like $6,500 per month. And then all of a sudden, we just raised it by $500. How much of a difference that makes in somebody’s plan because that $500 a month with future inflation can affect your retirement. Figuring out the right balance between saving and spending may seem like a daunting task, but it doesn’t have to be! Aul Financial Group is here to help you make a custom financial strategy so you can enjoy your retirement years. Schedule a meeting with us today to learn how!