Help Me Retire Podcast - Episode 36

A clever strategy for retirement spending

Show notes:

Living off your investment income in retirement is a dream for many people...

But what if you don’t want to limit yourself to that? What if you can’t afford to keep your principal intact? What if you don’t like the idea of leaving a lot of money behind?

If that’s you... I’ve got a clever strategy to share with you... one inspired by a very unlikely source...

This is the Help Me Retire Podcast… with your host… Mike Brown… Senior Wealth Advisor with Raymond James Financial Services… and head of Brown Family Wealth Advisors…

Mike is the best-selling author of Your Way to True Wealth: How to Make It Happen, Make It Last, and Make It Matter…

He and his team have been helping clients pursue their dreams of financial independence for the past 30 years… and in the Help Me Retire Podcast… he’ll share his best ideas with you…

And now… here’s Mike…

I wrote a book a few years ago... called Your Way to True Wealth... based on my firm belief that it’s possible to replace paycheck income with investment income... have that income increase over time faster than inflation... all the while keeping your nest egg intact...

That idea clicked with a lot of people... and we’re helping hundreds of people do just that every day...

But you know what? Not everyone shares that goal...

Some people want to spend the income their investments produce... AND spend some of the principal each year as well...

Those folks want to maximize the enjoyment of their life’s savings... while making sure they never run out of money...

And that’s the hard part... how do you know how much you can spend each year? How can you spend more each year over time... to stay ahead of inflation? How do you keep from spending too much... too soon... and run out of money at some point?

Well, the good news... is that there is a way to do that... there IS a formula you can use... to spend down your portfolio responsibly over the rest of your life...

And it’s based on a life expectancy table you can get from... the Internal Revenue Service...

Yes... the same table the IRS uses to help retirees calculate required minimum distributions every year... can also be used to help you decide how much money you can withdraw from your nest egg each year... without depleting it...

We’ve adapted that concept into a strategy that can help you decide exactly how much you can afford to spend each year... even in those years when the market’s not cooperating...

Here’s how it works...

First thing you want to have... is a balanced... well-diversified portfolio... a mix of fixed-income investments for income and stability... and equities for higher historical returns...

That kind of investment mix is designed to make your portfolio less volatile... and that’s one of the keys to making this strategy work...

Second thing to understand... is that this idea involves not just your IRAs... where you have to take those RMDs each year based on the IRS tables... but to your entire portfolio...

You’ll decide each year where to take your withdrawals... but the limits you put on those withdrawals... should be based on the value of your total portfolio... IRAs... Roth IRAs... taxable accounts... savings... everything...

And now... the formula...

In the back of IRS Publication 590-B... in the Appendix section.... you’re going to find the official life expectancy tables... the same ones you use to calculate your required distributions once you reach age 73...

There’s one to use if you’re married... and another if you’re single...

So you pull out this table... look up your current age... or ages if you’re married... and you’ll find the denominator to use in the formula...

Take the total value of your investments and savings... and divide it by that denominator... and the answer will tell you what you should be able to spend from your portfolio this year...

And then you’ll make this same calculation every year going forward... with different inputs as you get older...

And your portfolio value will change, too... over the years... as you pull out more and more money to live on... it’s naturally going to decline as you spend it down...

And the denominator will increase every year as you age... allowing you to spend a larger percentage of your portfolio each year...

Here’s a real-life example...

Let’s say you’re 70 years old... and your spouse is 68... and you’re both retired...

You’re not required to take RMDs yet... but you can still use the tables to come up with a good retirement spending guideline...

For ages 70 and 68... the table gives us a denominator of 24.3...

So, if your total portfolio is, say... a million dollars... one-million divided by 24.3 is 41-thousand, 152-dollars and change... which is about 4.1% of your nest egg...

That’s how much you should be able to withdraw from your investments this year... and not worry about spending too much... too fast...

By now... you’ve probably thought of a few questions... so let’s answer them one at a time...

“I retired early,” you say... “can I use the RMD tables as a spending guideline?”

Absolutely. The IRS joint life expectancy tables start at age 20... and the single-life table actually begins at birth...

Just understand that the younger you are... the longer your money has to last... and the lower your annual withdrawal limit is going to be...

Next question... “What happens when the markets go down... and my portfolio goes down with it? Am I going to get a pay cut?”

Great question... and the answer is yes... if you decide to strictly follow the formula... your withdrawal limit might indeed be lower... but you don’t have to stick to the formula necessarily...

The research we’ve done on this strategy... based on the historical annual returns of a balanced portfolio... shows that during down markets... if you’re just able to hold your withdrawals steady until the market recovers... you should be able to increase them later on when the RMD formula tells you it’s okay...

It just might take a little longer to get there... but it increases the likelihood that your money will last...

That’s a lot different from the so-called... four-percent rule... which tells you to give yourself a raise based on inflation EVERY year... regardless of what the market does... no matter what your portfolio looks like in a downturn...

If those down markets come early in your retirement... you might indeed over-spend... and it might take many, many years to catch up... if indeed you ever do...

That’s less likely to happen when you’re able to hold your income steady when times are tough...

Another question you might have thought of... “What if I need to take out a big chunk of my portfolio one year... something unexpected? What do I do then?

We all understand that life... even in retirement... is unpredictable...

And there’s no mathematical formula that’s going to change that... so you take that big withdrawal if you feel you have to... and you go back to the formula the following year...

The new withdrawal amount is going to be smaller than it would be otherwise... but possibly not as much as you think... just do what you have to do... adapt your lifestyle as necessary... and get back on schedule as quickly as you can...

So, here’s why some people like this strategy... basing portfolio withdrawals on life expectancy...

First... it gives you permission to spend your money... and spend it wisely... with more confidence that it’s not going to run out... in other words... it gives you a plan...

Second... it’s adaptable to real life...

The longer you live... the more bear markets you’re going to live through... and you need an approach that doesn’t assume that retirement is going to be the same every year...

And third... a strategy based on life expectancy... increases your ability to spend as you get older... which is when retirees need that extra income to pay for health care...

Let’s recap...

If you decide you want to leave a financial legacy to your family... and focus on living off the income your investments produce... which is more than possible... you can do that... in fact, we’re doing it every day for clients who don’t want to spend down their nest eggs...

But if that’s NOT your priority... a different strategy based on your life expectancy is going to allow you to spend more each year in retirement...

And the key is having the discipline to follow that strategy... to spend down your nest egg responsibly... without running the risk of depleting it...

The RMD method... based on IRS tables... will give you the structure you need to do that... annual guidelines that tell you how much of your portfolio you can afford to pull out every year...

It’s designed to increase your total income... throughout retirement... and if you can keep your withdrawals steady when the markets are down... you’ll stand a better chance of making your money last as long as you need it to...

That’s all for this episode... let us know if you want to explore this strategy further... and we’ll see you next time on the Help Me Retire Podcast...

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Securities offered through Raymond James Financial Services, Inc., member FINRA/SIPC.

Investment advisory services are offered through Raymond James Financial Services Advisors, Inc.  Brown Family Wealth Advisors is not a registered broker/dealer and is independent of Raymond James Financial Services.

Any opinions are those of Mike Brown and Brown Family Wealth Advisors and not necessarily those of Raymond James. This material is being provided for informational purposes only and is not a recommendation. There is no guarantee that these statements or opinions will prove to be correct. Investing involves risk, and you may incur a profit or a loss regardless of the strategy selected. Past performance is not indicative of future results. Prior to making an investment decision, please consult with your financial advisor about your individual situation.