Imagine getting on an airplane for a dream vacation that you’ve been saving and planning for your entire life. Just as you’re settling into your seat, there’s an announcement from the captain:
“Ladies and gentlemen, we’ve completed our pre-flight check, but I didn’t worry about the required fuel this time. If we end up being short, hopefully we will catch a tailwind that will get us to our destination. Should be fine.”
Would you stay on that flight, or would you join the crowd hustling towards the exits?
If your retirement plan is that dream destination, then your investment assets and the income produced from them are the fuel. One of the most common questions we get from our clients at Keen Wealth is, “Do I have enough money to retire?” And the answer is, that depends. It takes more fuel to fly from Kansas City to Orlando than it does to St Louis. So where do you want to go? Are you properly fueled?
On today’s show, we discuss how a smart spending plan and disciplined withdrawal limits will keep your retirement tank from running dry.
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Insights from Today’s Podcast on Spending Plans and Withdrawal Rates in Retirement
Here are some important points on retirement spending plans:
1. The old retirement and 4% withdrawal.
You may have heard that experts peg a 4% withdrawal rate as a “safe” annual withdrawal rate for your retirement spending plan. But that’s a figure that’s stuck around since the 1990s, and assumes that your spending will increase for inflation at a linear rate as you age. Our research providers at Keen Wealth tell us that, in fact, most retiree spending can actually level out or even decrease over time before the potential spike for things like health care and long-term care. Which makes sense, considering how much retirement has changed recently. Lots of new retirees stay active, so they might spend more in early retirement to pursue hobbies, take vacations, or relocate. And as they settle down later in life, that spending settles down too, including lowered expenses like automobile and life insurance. In fact, JP Morgan estimates that spending decreases by 30% as its clients age from sixty to eighty.
2. The new retirement and a sustainable spending plan.
The old 4% figure can still be a helpful guideline, but at Keen Wealth, we believe the best way to ensure that our clients have enough money for retirement is to make a sustainable spending plan. If our clients plan to withdraw more money early in retirement to fund travel, purchases, etc., we want to know how long they plan to keep withdrawing at a higher level, especially if the rate exceeds 5% of their investment assets. We also try to structure the spending plan so that higher spending from investments levels off or decreases once the client decides to take Social Security. In addition to increasing the probability that a client won’t run out of money, this also reduces the impact that investment volatility will have on the client’s retirement finances going forward.
3. Planning for volatility.
Notice I said a spending plan “reduces the impact” of volatility, not “eliminates” volatility.
I’ve had a lot of folks walk into my office with a 30-year spending plan for their assets mapped out on a spreadsheet based on what they think is a conservative 5% or 6% withdrawal rate.
I also have people say to me, “The market has returned 10% over time, I want to spend 10%.”
Both of these plans have the same flaw: they assume a linear rate of return. And as powerful an investment as the market is, investing just doesn’t work like that. For sure, there will be times that you have to make it through turbulence to get back to the blue sky.
That’s why at Keen Wealth, we believe in diversifying your portfolio, establishing parameters for rebalancing, and keeping part of your investments conservative so they’re available during volatile times. If you’re in a long-term relationship, make sure that both you and your partner or spouse understand that all investing involves risk, and how your spending plan is designed to deal with that inherent volatility.
4. Keeping some fuel in reserve.
Like all pilots, when I’m designing a flight plan, I include contingency fuel – the amount of fuel required to compensate for unforeseen factors. The same principle applies to the spending plans we make for our clients at Keen Wealth. As we’ve said over and over again on this podcast, we believe in the U.S., we believe in the power of the great companies here in the U.S. and around the world and the wealth that can be created by investing with a disciplined long-term plan. But as fiduciary advisors who put our clients’ interests front and center, we are precluded from making investment plans that are so aggressive that we can’t react when the market corrects, or when we hit a really rough patch like in 2008-09. We don’t time our clients’ investments or their spending plans to the market, and we always try to make sure there’s enough fuel in the tank to get our retirees where they want to go.
Bill Keen on Spending Plans in Retirement …
“Don’t try to wing your spending and withdrawals in retirement. Talk to a fiduciary advisor and get a solid spending plan in place.”
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Bill Keen is a CHARTERED RETIREMENT PLANNING COUNSELOR℠ and independent financial advisor with more than 24 years of industry experience. As the founder and CEO of Keen Wealth Advisors, a registered investment advisory firm, he specializes in providing personalized retirement planning designed to help people thrive before and during their retirement years. With a passion for educating others, Bill regularly blogs about retirement planning, hosts the podcast Keen on Retirement, and has contributed to U.S. News and World Report, Reuters, Wall Street Journal’s Market Watch, Yahoo Finance, and other publications. Based in Overland Park, Kansas, Bill and his team work with clients throughout the greater Kansas City area and across the nation. To learn more, connect with him on LinkedIn or visit www.keenwealthadvisors.com.
Keen Wealth Advisors is a Registered Investment Adviser. Nothing within this commentary constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Keen Wealth Advisors manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed here. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.