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How to Spend More in Retirement
Summary
This article provides advice on how to spend more in retirement without increasing the risk of running out of money. It explains how the 4% rule can be increased to a 5.5% rule with the Flexible Spending Strategy, which involves adjusting discretionary spending based on the state of the stock market. This strategy allows for greater spending in good years and less spending in bad years. The article provides examples of how this strategy would work and how it can benefit retirees who want to spend more or save less.
Q&As
What is the Flexible Spending Strategy and how does it allow you to spend more in retirement?
The Flexible Spending Strategy is a strategy that cuts spending when entering a correction or bear market. This allows you to spend more in good years, as you are spending less in bad years.
What tradeoffs come with using the Flexible Spending Strategy?
The tradeoffs with using the Flexible Spending Strategy are that you have to completely cut your discretionary spending during all years following a bear market, and there could be some stretches of time where you are living a very restricted lifestyle in retirement.
What is sequence of return risk and how does it impact retirees?
Sequence of return risk is the concept that you want to withdraw less money when your portfolio is down because every extra dollar you withdraw during a major decline doesn’t have the chance to recover.
What percentage of your spending should be discretionary in order to use the Flexible Spending Strategy?
30% of your spending should be discretionary in order to use the Flexible Spending Strategy.
What are the implications of the Flexible Spending Strategy for retirement?
The implications of the Flexible Spending Strategy for retirement are that you can either spend more in retirement or save less for retirement. This is because the Flexible Spending Strategy allows you to withdraw more in retirement (at least in most years) by withdrawing less in the bad years.
AI Comments
👍 This article provides a great insight into how you can use flexible spending to become more financially secure in your retirement.
👎 This article is overly complicated and does not provide a clear explanation as to how to use the Flexible Spending Strategy in practice.
AI Discussion
Me: It's about how to spend more in retirement without increasing your risk of going broke. It talks about the 4% rule and how you can be more flexible with your spending to retire earlier.
Friend: Interesting. What are the implications of this article?
Me: Well, it means that you can either save less for retirement or spend more in retirement. This is possible because of the flexible spending strategy which reduces your spending when the market is down, thus allowing you to spend more in good years. It also means that you have to be more mindful of when you're taking withdrawals from your portfolio since you need to account for sequence of return risk.
Action items
- Calculate your expected discretionary spending in retirement and use the table in the article to determine the withdrawal rate that will give you the probability of not running out of money that you feel comfortable with.
- Research sequence of return risk and how it impacts retirees to understand why the Flexible Spending Strategy works.
- Consider the tradeoffs of the Flexible Spending Strategy and decide if it is the right strategy for you.
Technical terms
- 4% Rule
- A retirement spending rule that suggests withdrawing 4% of your portfolio each year and adjusting it for inflation on a go-forward basis.
- Flexible Spending Strategy
- A strategy that cuts spending when entering a correction or bear market.
- Discretionary Spending
- Spending on things that are nice to have, but not necessary for you in retirement.
- Sequence of Return Risk
- The risk that you will withdraw money after a major decline, which prevents the money from experiencing a recovery.