7 Keys to Financial Success - Part 1 - How Much Can You Spend in Retirement?

What is your definition of a successful retirement? Is it leaving a legacy to your kids or grandkids? Is it simply not running out of money? No matter what your definition is, the path to crossing the finish line is remarkably similar. Perhaps the most important one is understanding your cash flow.

Watch Now: 7 Keys to a Successful Retirement: Part 1 –How Much Can You Spend in Retirement?

Timeline

0:00 - Intro
0:58 - Why is cash flow so important?
2:43 - Spending less than what you earn still applies
3:27 - Hard lessons with simple math
5:13 - Helping you answer the big question: How much can I Spend?
7:01 - What causes overspending?
9:14 - Go-go, slow-go, no-go
10:28 - Final Thoughts
11:12 - Outro

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What is Cash Flow

Simply stated, cash flow is what you earn and what you spend—money in and money out. In retirement, you shift from earning a paycheck to depending on Social Security, pensions, and income you can generate from your savings. It’s like transitioning from a steady stream of water to dipping into a well.

Why Cash Flow Matters

We have seen people begin retirement with modest amounts and make it to the finish line. We have seen others begin with over two million dollars and run into trouble. The main difference between their success and failure was how they managed their cash flow.

The biggest challenge with cash flow in retirement has to do with two big unknowns. We don’t know how long we will live. We don’t know what our savings will earn.

A Simple Example

When you are investing, there will be some years when your savings decrease in value. And this is where things get tricky.

To make math easy, let’s say you begin the year with $100,000. You withdraw $8,000 or 8%. Your savings had a difficult year and decreased by 10% or $10,000. Your balance at the end of that year is now $82,000. If you maintain the same income, your withdrawal rate is now well over 9%!

How Can You Determine “How Much” you can spend?

One of the most asked questions we hear is “How much can I spend in retirement?

For years, financial planners have used the 4% rule as a general guideline. History and experience shows this guideline works. But it doesn’t guarantee success. A higher distribution rate doesn’t ensure failure either—though you are relying a lot more on luck to get you to the finish line.

These general rules of thumb may also not fit your lifestyle or plans either. In your early retirement years, you may be more active, do more things and spend more money. As you age, this is likely to change. In fact, research shows that spending in retirement tends to go down as we get older. In some cases, we tend to think in terms of the “go-go, slow-go and no-go” phases of life.

No matter how you approach it, determining “how much” is complicated.

Longevity Risk

Financial planning software can help us model thousands of possibilities very quickly. It helps determine the answer to the “how much” question.

In this illustration, our fictional clients George and Jane start by taking almost 7% from their savings. And our plan shows them running out of money before either of them die. The second chart shows their longevity risk. The yellow bars indicate when the chances of crossing the finish line fall below 82%. The red bars show when those odds fall below 60%.

This chart is a good illustration to show that if they don't change their spending their risk of running out of money is fairly high for our liking!

This is where our tools come in handy. We can calculate "how much" you can spend so you can be confident that you have a good chance of crossing the finish line.

Tips for Managing Cash Flow

How can you take control of your retirement cash flow? Here are a few tips.

Think long-term – We don’t know how long we will need our savings to last, and it is best to plan as if you will live longer than you think.
Needs vs Wants – This is a huge part of managing cash flow. Needs are essential things, food, shelter, and utilities. Wants include travel and hobbies. The key is to prioritize what is important to you, and what you truly value.
Be willing to adjust – Sometimes it makes sense to tighten your belt. We did it when we were working. You may need to do it when you retire too.

Getting Help

If this all seems a bit overwhelming, don’t worry! There are free tools to help you track your spending. And financial planners, like the team at Commonwealth, can help you with the more complex parts.

Final Thoughts

Managing your cash flow effectively can make a huge difference in your retirement. For some it will be the difference between success and failure. We are here to help. Our team of financial advisors has helped thousands of clients cross the finish line successfully.