When I take on new clients there are certain rules that I ask you follow. One of the most important rules is: As soon as you retire, each month you take an income check from your retirement and investment accounts: whether you need it or not.
Here’s a quick example:
Mr. and Mrs. Smith retire with $500,000 in savings. We determine that by utilizing a diversified portfolio of stocks and bonds (with at least half of the money in stocks), it would allow them to withdraw $25,000 a year from their savings. Looking over 200 years of economic history, this is a sustainable and reasonable withdrawal amount.
Now, do Mr. and Mrs. Smith dip into their account whenever they need some money, making sure they don’t go over the $25,000? No.
Do Mr. and Mrs. Smith take all $25,000 at once at the beginning of the year? No.
There is definitely a psychology to retirement spending and I’ve learned, over the past 17 years, that neither of these approaches works particularly well.
If you only dip into your account when you “need to” most people find it to be a painful experience. Remember, you are children of depression era parents. To many of you, withdrawing money from your retirement savings can conjure up thoughts like, “I hope this isn’t a mistake, I hope I don’t run out of money. This just feels so irresponsible. This money doesn’t even really belong to me, it belongs to retirement.”
What about taking the $25,000 all at once? While this is a better option than above, I’ve found that, generally speaking, human beings live their financial lives on a monthly basis. Most, if not all of your bills are due monthly. You’ve been getting paid monthly or bi-weekly your entire life. It can be difficult to budget a $25,000 lump sum to last the entire year.
So after years of in-the-trenches financial planning experience, I’ve determined the best strategy, by far, is to receive income checks on a monthly basis. So in the example above, Mr. and Mrs. Smith take their $25,000 over 12 months (or $2083/mo).
This not only allows you to know exactly how much money you can spend in any given month, it also takes away the pain of withdrawing money from your retirement savings “as needed.” For whatever reason,when human beings see their checking account growing as the investment income checks roll in each month, they treat that money differently than if it was still in their retirement savings accounts.
Think about this for a second. If you had $500,000 in your retirement savings and that account grew to $525,000 during the year, you might say to yourself, “Oh, that’s nice. At least the money is growing.” And then you go about your day and probably not think much about it.
But if that $25,000 ended up in your checking account, you might say, “Wow! This is awesome. Instead of me working, my money is working for me. It’s like I’m getting a ‘paycheck’ for doing nothing! How am I going to spend my money to make my retirement more awesome.”
As you can see, these are radically different experiences of exactly the same investment results.
And don’t forget, the central tenet of the Retirement Revolution is you need to spend the money you receive. You are not going to end up like the majority of Americans who are dying with significantly more money than they’ve ever had before in their lives. (source)
You are going to live an empowered and fulfilling retirement armed with the knowledge that you are spending exactly the right balance between too little and too much.
So if, as you are receiving your monthly investment income check, you find yourself saying, “I had better stick this money in the bank and save as much as I can. I sure don’t want to outlive my money.” Stop! Spend. The. Money. I’m not telling you to become materialistic. I’m not telling you to buy stuff you don’t really want or need. I’m telling you to live your life with a sense of opportunity and openness to reinventing yourself during your retired years.
So get those checks rolling in, spend the money, and find comfort in the fact that you have plan in place that has stood the test of time.
The return of principal for bond funds and for funds with significant underlying bond holdings is not guaranteed. Fund shares are subject to the same interest rate, inflation and credit risks associated with the underlying bond holdings.
The value of fixed-income securities may be affected by changing interest rates and changes in credit ratings of the securities.
Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. Indexes are unmanaged portfolios and individuals cannot invest directly in an index. Actual results will vary.
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