We often get so caught up in the numbers that we forget what retirement truly means – a chance to live life fully, without the constraints of a paycheck-to-paycheck mindset. For those of you who are already at or near traditional retirement this one is for you.
The 4% rule has long been a standard, suggesting that retirees can withdraw 4% of their initial portfolio annually, adjusted for inflation, with reasonable confidence their money will last 30 years. While this rule offers a comforting simplicity, life rarely follows such a neat template. A retiree couple’s first five years of retirement could have included their daughter's destination wedding, a long-dreamed-of New Zealand cruise and trek and unexpected home renovations after a storm. Spending often looks more like a heart monitor than a straight line – peaks of joyful expenditure followed by valleys of modest living. This is the beautiful mess of real retirement and living. Your spending won't follow a steady inflation-adjusted path because life doesn't. Some years you'll spend more, celebrating milestone anniversaries or welcoming grandchildren. Other years might be quieter, filled with simple pleasures that cost little but mean everything.
But here's what really gets me though: too many retirees hold back during their most vibrant early retirement years, paralyzed by market fears and rigid adherence to "safe" withdrawal rates. They postpone dreams, waiting for more "certainty" that never comes. Just a hint, there is no thing such as the Certainty Button we can push! Meanwhile, their health and energy – the true currencies of retirement – slowly decline. We don’t live on a spreadsheet and academic models, we live in the real world and for those nerds out there - our sample size is N=1.
What's even more eye-opening is this: research shows that in two-thirds of 30-year scenarios, retirees following the 4% rule end up with more than double their initial wealth. Let that sink in. Most retirees aren't spending enough, leaving behind far more than they started with. While legacy planning has its place, I doubt many of us saved diligently for decades just to double our money after we are gone. In fact, the 4% rule is a great place to start when it comes to trying to set a target savings during your working years.
This isn't about throwing caution to the wind. Instead, it's about building a more personalized approach to retirement spending that aligns with your life's priorities. Let’s actually build a systematic approach that answers the real goal of retirement spending as it connects to being able to live the best you can in that chapter of your life. What if you could build a plan that would build up to a set amount of savings that you know that you could spend without worry? What if you could get to a point that you have a Fun Fund that you can spend however, whenever you want without stressing out about outliving your savings?
Take together all of your investable assets into a single bucket to come up with your total baseline (i.e. savings accounts, brokerage, 401(k), IRAs). This is the starting point that each step is going to systematically slice pieces off of as you work through the process and give every dollar a job in your investment portfolio along the way. Make sure to recognize that your investment portfolio, now that you are retired is meant to be spent; you deferred your spending when you were younger so that you can pay yourself now that you are retired, right?
First, build out a baseline of expenses for your Lifestyle Income Floor. This is the amount in four key areas: Housing, Healthcare, Food, and Transportation that you’ll need for as long as you (and spouse) will live comfortably. Think about it this way, these four things you’ll need from retirement all the way through. To give you confidence that these will be covered forever, you want to build this income floor with sources of guaranteed income: think things like Social Security, strong pension plans, and yes, even annuities (think simple, cheap, and highly effective SPIAs). Set aside what additional funds from your nest egg you need to fill any gaps you have.
Next, build flexibility into your plan. We know that things happen and we can’t be perfect in looking into the future. That’s where a Sleep Well At Night Buffer comes in. Think of this as a super emergency fund, a set-aside amount of funds that can help fill in gaps if the unexpected happens along the way.
Now we need to consider the inevitable realities of living longer, it often comes with additional expenses especially medical, but can even cover money set aside for making your life easier before medical, like having some help around the house. This is your Aging Set-Aside. Think about setting aside a number of year’s worth of long-term care as a starting point.
The next step is to set-aside any funds that you may want for a Guaranteed Inheritance for those you want to, people or organizations. This is may or may not be important to you, but if it is slice off another piece of the pie to invest for that purpose.
After all of this, finally, what is left of your starting bucket is your Fun Fund. This represents the amount of money that you can spend for the fun stuff as you want, when you want. Because you’ve already taken care of all of the other stuff, including your 100 year old self. Now you’ve given yourself a License to Spend your very own money in your best golden years. It's about finding that sweet spot between prudence and living fully.
Of course, there’s a lot of details in the “how” to build this kind of plan. Yes, it’s more complicated than take figure out 4% of your portfolio in year 1 of your retirement and then spend that same amount through the rest of your life. But with this kind of mindset and framework it can free you up to spend and make the life you want.
Your retirement story shouldn't be about restriction and worry. It should be about making thoughtful choices that balance security with living meaningfully. After all, the whole point of financial planning isn't to die with the biggest portfolio – it's to live your best life along the way. Remember, every dollar you don't spend in retirement represents a moment unlived, an experience unclaimed, a dream deferred. While prudence has its place, so does joy. The real risk in retirement isn't running out of money – it's running out of life before you've truly lived.
If you want a bit more details and even start building your own Fun Fund with this kind of framework with an example take a look here and download our whitepaper, Retire Smart: Spend with Confidence.