Investment “spend-down” help is hard to find

Jeannie – Arizona: I can find a lot of advice about saving for retirement, but very little about how to withdraw those savings now that I am retired. Do you have any guidelines?

Phil Moeller: You’re absolutely right. Most retirement financial advice is focused on how you accumulate assets, not on how you will spend them.

Most retirement financial advice is focused on how you accumulate assets, not on how you will spend them.

There is an old rule of thumb that says you can spend 4 percent of your assets each year and not run out of money before you die. However, since this “rule” was adopted, life spans have become longer and investment markets more volatile. As a result, many experts now put this “spend down” figure at 3.5 percent or even 3 percent.

I am of retirement age myself, and my focus is not so much on my spend-down rate as on my spending patterns.

I try to fund all my necessary spending from Social Security, private pensions and other guaranteed regular payments. These are my “must” spend items.

My discretionary spending comes next. These are my “nice to have” spending items — entertainment, restaurant meals, travel and the like. Ideally, I would have some guaranteed funds to pay for these items. But I also could liquidate some of my nest-egg funds to help pay for discretionary items.

Here, I would use that conservative 3 percent spend-down figure. I wouldn’t liquidate more than this, at least during my 70s. However, this figure can be re-evaluated based on your age, financial needs and how investment markets behave. Don’t forget that if you have tax-preferred retirement accounts, you probably will need to take annual required minimum distribution amounts from these accounts anyway.

My third “bucket” of spending is literally just that — for bucket-list trips and experiences of a lifetime. These funds are only available if spending them will not compromise my necessary and discretionary spending plans.

To execute this strategy, it really helps to have liquid funds that could pay for some surprise expenses and avoid the need to tap your nest-egg investments. If the stock market took a dive, which it does from time to time, this approach protects me from having to sell investments at poor prices. I can just reduce my discretionary spending. This may be no fun, but I will still have a roof over my head and be able to pay bills for food, utilities, health care and other basics.

Finally, I view the equity in my home as a big piggy bank to be broken into only in the event of a major spending need. This most likely would be a medical emergency leading to unexpected spending. And it wouldn’t be unusual for this emergency to involve a loved one other than yourself.

There are a gazillion books out there full of informed advice. And while I’m comfortable with my plan, your situation may differ from mine. So may your attitudes toward investment risk, whether you want to leave money behind for heirs and many other variables. Finally, if you couldn’t tell, I am not a licensed investment adviser, and my remarks should be not be viewed as professional investment advice.