How Much Can You Spend Safely in Retirement?
Many people dream of achieving financial independence and retiring early. However, the question of how much money you can safely withdraw from your investment portfolio can be daunting. This becomes even more challenging when you’re in your 30s or 40s and facing a potentially long retirement horizon. So, what is the best approach to determining your safe spending level?
The Usual Way to Determine How Much You Can “Safely” Spend
In traditional retirement planning, the “4% rule” is often used as a guideline. This rule suggests that you can withdraw 4% of your portfolio in the first year of retirement and adjust the amount for inflation in subsequent years without running out of money over a 30-year period. However, for longer retirement horizons, adjustments need to be made to the safe withdrawal rate.
Our Clients Are Spending Much More. Is It Still “Safe”?
Some individuals in their 30s and 40s are withdrawing more than the traditional safe withdrawal rates. While this may not be sustainable in the long run, there are unique factors to consider when retiring early, such as the ability to return to work if needed. This flexibility allows for a different approach to retirement spending.
A Different Mental Framework for Being Financially Independent When You’re Young
Having significant wealth at a young age allows for a different perspective on retirement and spending. Rather than focusing solely on safe withdrawal rates, individuals can consider their ability to generate income through work if necessary. This can lead to a more customized approach to retirement planning.
Ask Yourself These Questions Instead
When making financial decisions about spending in retirement, consider these questions:
- How important is it that you never have to work again?
- If you went back to work, how quickly could you earn enough to cover this spending?
- Describe the kind of life you will have after making this expenditure.
- What gives you a sense of purpose or meaning in your life, and how does this spending contribute to that?
- Imagine your life five or ten years from now if you didn’t make this expenditure. How would it be different?
Conclusion
Ultimately, the question of how much you can safely spend in retirement is not solely determined by withdrawal rates. Young retirees have the advantage of flexibility and can adapt their financial strategies based on their unique circumstances. By considering the broader impacts of their spending decisions and the potential for generating income through work, individuals can create a more personalized approach to retirement planning.
Frequently Asked Questions
Is it safe to withdraw more than the traditional safe withdrawal rate?
While exceeding the traditional safe withdrawal rate may not be sustainable in the long term, individuals retiring early have the flexibility to adjust their financial strategies based on their unique circumstances, such as the ability to generate income through work if needed.
How can I determine the amount of money I can safely spend in retirement?
Instead of solely relying on withdrawal rates, consider factors such as your ability to return to work for meaningful income, the impact of your spending decisions on your quality of life, and your sense of purpose and meaning in retirement. By asking yourself these questions, you can create a more customized approach to retirement planning.
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Disclaimer: This article is provided for educational, general information, and illustration purposes only. Nothing contained in the material constitutes tax advice, a recommendation for the purchase or sale of any security, or investment advisory services. We encourage you to consult a financial planner, accountant, and/or legal counsel for advice specific to your situation. Reproduction of this material is prohibited without written permission from Flow Financial Planning, LLC, and all rights are reserved. Read the full Disclaimer.