Retirees: You Might Be Able to Spend MORE Money, Ep #191

I read an article in Barron's entitled, “Retirees Aren’t Spending Enough of Their Nest Eggs. Here’s Why.” Why are people not spending enough? Should retirees be spending more? How do you figure out how much you can spend? In this episode of Best in Wealth, I talk about sequence of return risk, the Bengen Rule, and how you can live your best life in retirement—by spending more. [bctt tweet="Retirees: You might be able to spend MORE in retirement. Learn how in this episode of the Best in Wealth Podcast! #wealth #retirement #investing #PersonalFinance #FinancialPlanning #RetirementPlanning #WealthManagement" username=""] Outline of This Episode [1:26] Making financial decisions in the context of your life [5:32] You probably will not spend enough in retirement [8:34] Understanding the sequence of return risk [12:48] What happens when you follow the Bengen Rule [16:48] How to live your best life in retirement [23:23] Why everything comes down to planning You probably will not spend enough in retirement That statement seems odd, right? Don’t most people overspend? The truth is that you can probably spend more in retirement than you are going to. A couple came to Fortress Planning Group a few weeks ago. Their financial advisor had developed a financial plan and told them they had a 90% probability of being able to retire in three years. They walked through the plan. The advisor shared what things would look like at the end of their plan—if the wife lived until 94 and the husband lived until 92. He estimated they would have millions of dollars left. He told them that’s what made the plan 90% probable. The couple looked at each other and said, “I think we want to retire much earlier—why not today?” Their advisor quickly told them their probability of success would decrease significantly. They came to me for a second opinion. Understanding the sequence of return risk It is usually my goal to help clients avoid overspending. Most people nearing retirement are concerned they will not make it through retirement. That is why advisors need to explain the potential downsides of sequence of return risk to permanently reduce a client’s safe spending rates for the remainder of their retirement. What does that mean? If my couple has millions of dollars left, why are they not taking out more now? Why don’t they take out 7%? If their average return is around 9%, why can  they not take out 9%? Because of sequence of return risk. Let’s say you have $1 million. You want to leave your kids money when you die but they do not need millions. So you are going to take out 7% per year. Let’s say year one is a bad year and your portfolio decreases 25%. That’s $250,000 you’re losing on paper. At the end of year one, you’re left with $680,000. Year two was also poor. Your portfolio is down another 15%, and at the end of year two, you are left with $480,000—less than HALF of what you started with. The stock market goes on a bull run for several years but you are still withdrawing $70,000 every year. Because it is only at $480,000, you are suddenly taking out 14.5% of your portfolio to get $70,000 to live on. Because of sequence of return risk, you never get back to where you need to be. Your portfolio ends up running out of money. This is a real risk that cannot be discounted. But people are dying with millions in their portfolios. So can they spend more? Yes, probably… [bctt tweet="How does the sequence of return risk impact what you can withdraw from your retirement accounts annually? Learn all about it in this episode of Best in Wealth! #wealth #retirement #investing #PersonalFinance #FinancialPlanning #RetirementPlanning #WealthManagement" username=""] What happens when you...