From Saver to Spender: How to Give Yourself Permission to Enjoy Retirement
Would you prefer $100 cash or a $100 gift card to your favorite restaurant? My wife and I wrestled with this exact question the other night while planning gifts for the upcoming holidays. If we give $100, will the money be spent at the restaurant, or will they forgo the memorable dining experience in favor of investing the money? If we give them the gift certificate, we know it will go towards a memorable evening at their favorite restaurant. Which one would you choose?
The Hardest Part of Retirement isn’t the Math
Given my profession, I couldn’t help but draw a connection to this and the conversations I routinely have with people nearing retirement or in retirement. People save for 40+ years of their life before transitioning to spending in retirement. This is a 180-degree change in behavior that can leave many experiencing guilt, fear and anxiety around spending. Would you prefer to receive a gift card along with a letter stating you have to spend the money enjoying your life and it will guarantee you will not run out? Or would you prefer a pile of money with no specific instructions? I’m willing to bet the gift card sounds appealing.
How Much Should You Spend?
The 4% rule or safe withdrawal rate gets brought up a lot. The formula states that you can spend 4% of your assets annually for 30 years, and have money left over; in worst case scenarios reaching zero. But what does that have to do with your personal retirement? Forget the 4% rule for a second. The deeper question isn’t “How much can I safely withdraw?” It’s “How do I give myself permission to spend what I’ve already determined is safe?” That’s where the salary + bonus idea comes in.
Your New Retirement Job: Determine Your Desired Salary + Bonus
In your working years, you evaluated total compensation by the salary and bonus offered. Retirement planning can be viewed the same way. Start with your total compensation requirement and then break it down between salary and bonus. Salary will need to cover ordinary living expenses and your bonus will cover expenses that are more discretionary in nature.
Living expenses are the expenses that impact the quality of your daily living and are unique to everyone. Going out for a daily coffee may be considered necessary for some and excess for others. Any future income from the job will need to provide at least enough income to cover these living expenses. These cash flows can be considered your salary requirement. Note that living expenses do not include expenses above and beyond daily living like the extra vacation or sports car you may have always wanted.
Establishing Your Bonus
Retirement is a great time to get out, experience new things and make memories. This is the exciting time you waited for and it is not cheap. So how should you go about funding this? Enter your bonus from your new “job.” Like a bonus, this amount is likely to be received but not guaranteed. Thankfully, extra vacations can be put off for a year or two during bear markets. A simple rule many people employ: Each January, look at the prior year’s portfolio growth. If it’s positive, take half of the gain as that year’s bonus and spend it guilt-free on travel, family, or whatever lights you up. If the market is down, skip the bonus or take a smaller one. You’ve still got your salary covering the essentials. That single mechanic has helped many spend money guilt and worry free.
Higher Salary or Higher Bonus?
The higher your salary is, the less reliance you have on a big year-end bonus. The lower your salary is, the more reliance you place on your year-end bonus. Would you prefer a higher salary and more certainty? Or are you fine with less certainty and a higher year-end bonus? The answer depends on each person, but one perk of the high salary is the certainty it provides in achieving goals. Being mad at the stock market for your missed vacation is a great way to ruin a summer.
How to Create Your Salary and Bonus.
How do you create a salary? Referencing the Elevate Income Plan below, the income items are what we will use. This includes Social Security, Real Estate, Pensions and Annuities. It doesn’t matter where the dollars come from, just that they show up reliably every month.
Your bonus will come from the higher risk or more variable portion of your portfolio. If you have a higher salary, there will be less reliance on this. If you have a lower salary, there will be greater reliance on this. If your vacation is important to you, include it in your salary or ensure it is covered with lower risk investments within your bonus.
How do we create the bonus? The bucket strategy is a common way to separate your assets by risk. That trip you can’t live without? That should be covered with your salary or the low-risk bucket. This includes investments like cash, CDs, short-term treasuries and money market Securities. The goal is to earn a little while avoiding rescheduling your trip because of market fluctuations. The buckets and associated investment categories are shown in the nearby graphic.
As you can see, more volatile assets go in the longer timeframe buckets. This provides more time for them to bounce back in a down market. This also creates much less focus on what the market is doing because you will not be subject to the outcome for 10+ years. The longer-term buckets also act as your inflation hedge.
Give Yourself Permission to Spend
Your salary is now established and your job is to spend it as intended. Recycling the funds back into an investment portfolio is counterproductive. You are at the stage of enjoying what you earned and you know through planning that you will have enough income.
You spent 40 years being rewarded for not spending money. Retirement is the first time in your life you finally get rewarded for spending it. That flip is weird. It feels irresponsible until you realize it’s literally what the plan was designed for. So, spend the salary. Take the bonus when it comes. The money has finished its job. Now let it do the only thing left, help you live a richer life.
Hopefully, this article will benefit you, a friend or family member.
Thank you for taking the time to read this planning commentary. I pray it helps you or someone you care about.
Kyle Lottman, CFA, CMT, CPA
Wealth Management Advisor
Elevate Capital Advisors
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