I love my clients, really I do. And like one gets frustrated with family members, I can get riled up and impatient especially when they don’t seem to be listening. Denial is an amazing thing! Perhaps “John and Joan” believe that if they say it enough times, that they can continue to spend about 40% over their safe withdrawal amount each year and still not outlive their money. In truth, I’m more than frustrated and feeling impatient. I’m concerned and I’m afraid for these clients because of the potential impact of their sticking their heads in the sand.
I’m talking about that time in life when you no longer generate your income (or the bulk of it) through earning it, but instead, through spending your nest egg and those retirement income streams, like social security and pensions, if you are one of the remaining few who receives a pension!
Frankly it is very hard for people to get their heads around this. All these years you have earned the money you lived on, or your spouse earned it if you have one, or your partner, or both of you. The longer you earn money the more likely you are going to be able to maintain your quality of lifestyle and the less likely you are to run out of money before you run out of life. This is a very good thing.
It is not easy to adjust to the notion being on “fixed income”. It feels confining, insecure and un-fun. Denial is a dangerous psychological reaction, however, that can be very costly. So I’d like to offer some guidance. Very basic.
There are two issues here to consider:
- Determining how much money you can spend, total, each year for the rest of your life, and
- Setting up a system for actually receiving your money in a way that makes it easy to manage in real life.
To determine how much money you can spend, here’s what you need to know:
- How much income you receive or will receive from Social Security. (I realize no one has a lot of confidence in the system, so let’s assume you receive social security but that you receive no cost of living increases, just in case.)
- How much, if any, do or will you receive from a pension plan.
- Any other sources of regular, ongoing income? Add that.
- Now, add up the value of all your investments. Don’t count what’s in your checking account, or money earmarked for your kids or grandkids, or at least $10,000 – $50,000 to earmark as your lifetime emergency fund.
- Take 4% of that number. So let’s say you have $500,000 total: including your 401(k), IRA accounts and personal investments. You could spend an estimated 4% of the value of the account every year, so this year you could spend $20,000. (This assumes you have at least 40% of your investments in diversified stocks or mutual funds. Let’s save that discussion for another day.)
- Now add up all these income sources:
- Social Security
- Pension or other sources of income
- 4% of your total investments
This is a very simplified way to estimate your total annual spending.
Here’s where people get confused. This must include your MONTHLY expenses AND those pesky PERIODIC expenses and FUN TO spending. In other words, it’s the bills, the food, the pet, the cars, the house maintenance, the lawn, the flowers, the vacations, the grandchildren, the hair and nails, the golf, the medicines, the entertainment, the out to eat, the darn dishwasher replacement that you didn’t plan and EVERYTHING ELSE!
I know – it sucks. That’s why STEP TWO is to set up a SPENDING SYSTEM to make this manageable. I’ll go into that later in the week. I think I’ve ruined your day enough already but good news is to follow, I promise!
How do you manage to thrive and stay within a sustainable spending amount???
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Holy crap I am in trouble!!
Thank you for writing it so clearly. I wish everybody knew this. I am so glad I started a Retirement Savings Plan (Canada) when I divorced at 35 - I tightened my belt and put something in every year, or almost. It was not always easy, in fact it was never easy. I did not travel and did not have a car – and an old one at that – until I was 40. I am now 64 and I wish I had put more in my Plan – but now it’s too late. I will be OK if I stick to the 4% yearly withdrawal – and as long as I choose the frugal route. I really feel for those – especially women who find themselves at this age without enough.
Thank you for writing it so clearly. I wish everybody knew this. I am so glad I started a Retirement Savings Plan (Canada) when I divorced at 35 - I tightened my belt and put something in every year, or almost. It was not always easy, in fact it was never easy. I did not travel and did not have a car – and an old one at that – until I was 40. I am now 64 and I wish I had put more in my Plan – but now it’s too late. I will be OK if I stick to the 4% yearly withdrawal – and as long as I choose the frugal route. I really feel for those – especially women who find themselves at this age without enough.
I may as well kill myself now….theres no way I’m gonna have enough…I have nothing……theres gonna be a lot of suicides over the next 10-15yrs..me being one….I’m to depressed and afraid to want to continue on……I’m gonna be the one eating cat food…..so why do I wanna stick around for that…..I suffer from depression and anxiety and I don’t have any kids…due to cancer when I was young….never married or was able to stay in a stable relationship…due to be molested and raped when I was younger….I’m 54 now and ready to throw in the towel….I don’t have family to rely on for support…raised in an orphanage and foster homes….so now I’m afraid to death to continue………
yes I’m in counselling….but its not helping much…..my counseller thinks I’m fine…..lol
jazz, I am a counsellor and I don’t think you are fine. I can not begin to understand the life you have had, nor can I tell you everything will get better.
But I can tell you that you could be helping a whole lot of other people if you go back to school to become a counsellor. Or at the very least become a volunteer. I can’t buy an education that has what you have lived and experienced. I can’t say to someone I understand what you have gone through, but you could. You have life experience, knowledge and Wisdom.
You could help so many. Do you volunteer, if not you should. You can be there for those that need someone who understands what they are going through. You could volunteer at a Cancer Center or a Womens Shelter, perhaps you could help with Foster Care Agencies.
There are not enough good folks like you to help! Please get involved, you are so needed!
Jazz,
I hope you share this post with your therapist. I know you feel a sense of hopelessness. I am convinced that women can help women. I think we will see a lot of creative housing options – senior communes! shared housing. I consider you young yet (we are the same age). I hope you will read my other blog – money is only one resource. Lots of folks can’t rely on family for financial support but they create their own community of shared support. It’s hard in the face of depression. Where do you live? I want to make sure you get some connection and assistance. You aren’t alone.
I’ve spent my entire life on a budget, so what you have to say hits home. I don’t have the investments you mention, but I do own my little “hovel”, and the retirement fund from my work is miniscule because I’ve only worked there 6 years and am now being forced to retire with a “promise” to be hired back part time in the fall. If so, I’ll plug along just fine. If not, I’ll be scraping the barrel just to pay household utilities. I keep looking for the “lemonade” in this deal. What I get is time, precious time, to follow creative endeavors that full-time work has held back. I have no choice but to embrace it, enjoy it, hug my grandkids and sit in the sun with a glass of wine. Like the saying, “The best revenge is living well.”
It’s great to have a formula and a straightforward discussion on this matter. I would like to understand where the 4% number comes from. Is this tied to conservative average interest on investments? Other? Does the 4% change with stronger/weaker markets?
Jaian,
The 4% is based on extensive research reflecting how much one can withdraw given the volatility of the markets. It assumes about a 50/50 investment split between fixed investments (like Treasuries, money market, CDs, bonds) and growth investments (diversified stock mutual funds, etc.). It is just a quick way of estimating. Withdrawing 4% a year of the value of your investment portfolio, you are likely to have stable income for your lifetime. There are more dynamic models that financial planners often use to help clients determine how much they can spend in any year, but I wanted to offer something straightforward, as you said, as a way to get a sense of what is possible.
This is why earning even modest income for a longer period of time can make such a difference, or living in a more modest cost community, or finding ways to share expenses – can make such a difference.