Your Investing Life: Spending your savings now that you're retired
May 15, 2014
You've taken the big step and retired. Now you're dealing with the day-to-day balance of living your life and maintaining enough money to feel comfortable while you're doing it. How much can—and should—you spend? Should you keep saving? What about investing? For help in answering these questions, consider these suggestions.
Build your personal cash flow statement
When you're looking to balance saving and spending, it makes sense to take stock of your income and expenditures. One way to approach it is to build a cash flow statement of expenditures and income sources.
To make the process easier, use our worksheets for retirement expenses and retirement income. You can get as elaborate as building a detailed spreadsheet or as simple as writing the information down on a piece of paper. Multiply your monthly expenses and income by 12 to get a full-year picture. Hold off including your investment portfolio for now, or note it as a side item if you like.
"Looking at your spending over the course of a year gives you enough information to predict what you'll likely need for the next year," said Colleen Jaconetti, a retirement expert with Vanguard Investment Strategy Group. "Looking at your income streams will help you decide how much, if anything, you need to draw from your investment portfolio."
Create a "paycheck for your life"
Now that you're retired, it may take a while to get used to the lack of a regular, predictable paycheck. Ms. Jaconetti suggests that you "create a paycheck for your life." (You may want to work with a financial planner to create one.)
Start by directing the following payments into the checking or money market account you use to cover your spending:
- Monthly Social Security or pension payments (or both), if you receive them.
- Any required minimum distributions (RMDs), whether from IRAs once you reach 70½ or from inherited IRAs. You can request that RMD distributions from your Vanguard accounts be paid monthly to whatever taxable account you'd like, including the one you use to pay expenses.
- Interest or capital gains on any taxable investment accounts.
Compare your spending needs against the total amount of your Social Security, pension, other income from a part-time or consulting gig, RMD, and interest/capital gains income. Do they balance? "Many people find they need to tap their retirement portfolios a bit more—and that's okay, provided you do it wisely," said Chuck Riley, a financial planner with Vanguard Advice Services™.
Tap your portfolio strategically to supplement your paycheck
After so many years spent building up your retirement savings, it can be tough to switch gears and start drawing money out of your investments. Taking a look at three key areas can help you determine a withdrawal amount that helps you meet your lifestyle needs while maintaining a cushion that feels comfortable:
- Time horizon—The span of time you have to invest or, in this case, your life expectancy. The longer your time horizon, the less you want to take from your portfolio—at least initially.
- Asset allocation—Your portfolio's mix of stock, bond, and cash holdings. A more conservative mix, with the associated lower expected rate of return, means it's wiser to have a lower withdrawal amount than you would if you had a more aggressive mix. But more risk also increases the possibility that your investments might lose value, which in turn could cause you to run out of savings before you expect.
- Success rate—The percentage of times your portfolio lasts through your entire time horizon. Withdrawing less from your portfolio can raise your success rate. But don't forget to factor in your quality of life.
Levers that influence spending rates
|Lower spending rate||Higher spending rate|
|Asset allocation||More conservative||More aggressive|
|Portfolio success rate||Higher||Lower|
Rather than withdrawing a hard-and-fast percentage each year from your portfolio, "we advocate you take a more dynamic approach. It not only takes market performance into consideration but also tries to manage fluctuations you might need—or want—to make in your annual spending amount," said Ms. Jaconetti.
Vanguard research suggests a more flexible portfolio withdrawal approach that applies a minimum (a floor) and a maximum (a ceiling), based on your time horizon and your previous year's spending. This approach gives you flexibility when you need to tap your portfolio a little more but still maintain some restraints. It also brings some predictability to your portfolio withdrawals while staying sensitive to market performance.
Once you decide on your annual withdrawal amount, you can add to your "paycheck" by setting up a monthly automatic transfer from your chosen portfolio to your spending account. (For more on this issue, check out Answering the retirement income question.)
Find the sweet spot for your spending
You've got a sense of what's going out the door in spending and what's coming in from your various income sources. And you've got a plan to draw on your retirement savings to enhance your retirement paycheck.
Now it's about maintaining a balance. Because you're listing your expenses, you can identify opportunities to economize if needed—and where you have the ability to actually spend a little more. "Flexibility is the key ingredient in a long-term spending plan. The more you can tolerate some short-term fluctuations in spending, the more likely you are to achieve your longer-term investing goals," said Ms. Jaconetti.
Mr. Riley agrees. "A spending plan should be dynamic, not static. And success isn't determined by hitting the exact number of your budget every month or year; there's wiggle room to spend a little more without jeopardizing financial security," he said.
Like most things, you may have to make adjustments to your spending or withdrawal plan over time. But with some regular maintenance, you can find a balance that allows you to enjoy your life and feel more at ease about your ability to do so throughout your lifetime.
- All investing is subject to risk, including the possible loss of the money you invest.
- We recommend that you consult a tax or financial advisor about your individual situation.
- An investment in a money market fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although a money market fund seeks to preserve the value of your investment at $1 per share, it is possible to lose money by investing in such a fund.