That’s the mindset of many investors as they cross the threshold into retired life. After a lifetime of saving, it’s only natural to want to splurge a bit and jump into retirement with healthy joie de vivre. Yet the possibility of running out of money is very real—one that far too many investors find themselves suddenly and unexpectedly facing. There are, however, steps you can take to significantly minimize that risk.
Whether or not your savings will last throughout your retirement hinges on a number of factors, from how long you live to how well the markets perform (particularly during the first few years of retirement). But there’s one determinant that’s almost entirely in your own hands—how much you spend each year. In the same way that aggressively saving for retirement helps build your financial confidence, judiciously spending—especially in the first few years of retirement when the urge to splurge tends to be strongest—can dramatically help to protect and preserve your savings to last a lifetime.
How much can you safely spend each year?
There are no hard and fast rules when it comes to a sustainable rate of retirement spending. Your age at retirement, your risk tolerance and investment allocation, and your desire to leave a legacy for future generations will all impact that rate. Traditionally, financial advisors have recommended spending no more than 4 percent of savings annually using a systematic withdrawal plan.
Age + Investment allocation + Planned inheritance
However, increasing life expectancies (retirements today may last 30 years or longer) and lower interest rates may suggest spending even a smaller percentage of your assets. If that seems unachievable, it can be a helpful exercise to categorize your expenses into essential and discretionary to determine where there may be opportunities to trim. You might also want to consider the opportunity to subsidize retirement income with a second career—finding part-time work related to a passion you’ve always wanted to pursue. Not only can it provide additional income and possibly medical benefits, it can translate into higher Social Security benefits and fewer retirement years that need to be funded by your assets.
Systematic withdrawal plan
Here’s how it works: Each year you draw down a fixed percentage of your portfolio’s assets for income. That percentage is determined by running multiple simulations to find the maximum amount you can withdraw while maintaining a high degree of confidence that you won’t run out of money. In each subsequent year, the amount of income taken is then increased to keep pace with inflation, and the remaining assets are rebalanced to maintain a target allocation. A Truist Premier Banker can help you get started.
Financial planning and consultative support with a Premier Banker, requires $250,000 or more in assets.
