The Goldilocks Strategy To Safely Spend Your Retirement Savings

Retirees who rely significantly on their IRAs and 401k accounts to pay for their living expenses face a serious challenge: How do they carefully invest and draw down their retirement savings to spend on living expenses, with the goal that they don’t outlive their money and recognizing that they might live a long time?

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Here’s the dilemma: Spend too much, and you might run out of money in your 80s or 90s. But if you’re overly cautious with your spending, then you might not spend as much as you could have. Of course, you won’t know if you’ve successfully addressed this dilemma until you “finish your retirement” (i.e., “pass away”).

There’s been evidence recently that many retirees fall into the “spend too little” group for a variety of reasons. The top reason on the list is that they want to prevent being broke in their later years. While that might be financially prudent, it’s unfortunate that they aren’t enjoying retirement as much as they could.

The Goldilocks strategy

To address this dilemma, you’ll want to build a portfolio of monthly retirement paychecks that are designed to last the rest of your life, no matter how long you live. Then, if you spend no more than your monthly paychecks, you can feel confident that you won’t outlive your money.

Your portfolio of retirement paychecks will consist of guaranteed lifetime paychecks—Social Security, pensions, income annuities, and tenure payments from reverse mortgages—and variable paychecks from investing your savings with a careful withdrawal plan.

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As you transition into retirement, you’ll want to estimate your total retirement income from all your retirement paychecks. Then you’ll have a target for managing your regular living expenses. It’s a good idea to build a healthy margin between the total amount of your retirement paychecks and your regular living expenses to prepare for the surprises that are inevitable over the course of a long retirement.

Most retirees need to reduce their living expenses

If you’re like most retirees, you’ll have much less regular income in retirement compared to your working years. As a result, you’ll need to look for ways to reduce your living expenses. The sooner you face this reality, the better your long-term financial security will be. Too often retirees put off making tough decisions about cutting back until they reach a financial crisis in their later years, when their options might be more limited.

Here are a handful of time-tested ways to help manage and balance your retirement spending:

• For most retirees, housing remains their largest living expense. By downsizing, you have the potential for win-win strategies that can reduce your spending while finding a home that might better suit your needs in retirement.
• Transportation is another large expense for most retirees. Ideas to save money include relying on public transportation and driving cars “into the ground”—or, at least, not purchasing a new car until it’s absolutely necessary. Couples can also consider owning one car instead of two.
• Medical bills can be another large expense for retirees. You’ll want to carefully analyze whether a Medicare Advantage plan works better for your budget or if traditional Medicare with a Medicare Supplement plan would be a better choice for you.
• Look for ways to share significant expenses with close family and friends, such as car pooling, buying food in bulk to divvy up, and even housing.
• Working part time in your 60s and 70s can really help pad your income, particularly if you have a small margin between your total retirement income and your living expenses.

Some retirees may want to travel more in the early years of their retirement without jeopardizing their long-term financial security. To meet this goal, you can set aside a “travel fun bucket” from your savings that generates your retirement paychecks. Then, with your remaining savings, you can balance your regular spending and retirement paychecks.

Don’t be discouraged about the amount of time it could take to implement the Goldilocks strategy when you retire. Consider this: You might spend even more time worrying whether you’re spending too much or too little, or possibly fixing a mess in the future that you’ve made by spending too much. You’ll be better off addressing these tough financial decisions as you transition into retirement. And if you’ve already retired, think about putting yourself on the right track now.