One of the most common questions people ask as they approach retirement is surprisingly simple:
“How much can I afford to spend each year without running out of money?”
The answer isn’t as simple as taking a percentage of your investment account and hoping it works.
Retirement income planning involves looking at your entire financial picture—including your investments, Social Security, pensions, taxes, spending needs, and how long your money may need to last.
Retirement Changes the Way You Think About Your Money
During your working years, your investments are primarily helping you accumulate wealth. In retirement, your portfolio has a different job: helping provide income while still maintaining enough growth to keep pace with inflation and support your future needs.
That creates a balancing act.
Withdraw too much, and you may put your long-term financial security at risk. Withdraw too little, and you may unnecessarily limit the lifestyle you’ve worked hard to achieve.
There Isn’t One Right Withdrawal Rate
You may have heard that retirees can safely withdraw 4% of their portfolio each year. While rules of thumb can be useful starting points, retirement planning shouldn’t be reduced to a single number.
Your appropriate spending level depends on factors such as:
- How much you have saved
- Your expected Social Security or pension income
- Your investment strategy
- Your tax situation
- Your expected spending
- Your health and longevity
- How much you want to leave to your family or charity
- How much flexibility you have in your spending
A retiree with $1 million in investments and substantial Social Security income may have a very different spending capacity than someone with the same $1 million but little other income.
Don’t Forget About Bad Markets
The timing of investment returns matters once you’re taking withdrawals.
A significant market decline early in retirement can have a much greater impact when you’re simultaneously withdrawing money from your portfolio. This is one reason retirement planning should consider not only how much you withdraw, but where the money comes from and how your portfolio is positioned.
Having a plan for both good markets and difficult ones can help you avoid making emotional decisions when markets become uncertain.
Your Retirement Plan Should Be Flexible
The goal isn’t necessarily to find one perfect withdrawal number and stick with it forever.
A good retirement income plan should be revisited as your circumstances change.
Your spending, investment returns, taxes, Social Security decisions, and personal goals can all change over time. Your retirement plan should be able to change with them.
Retirement isn’t simply about having enough money. It’s about having a plan for how to use the money you’ve accumulated.
At CMC Wealth Management, we help clients approaching and living in retirement evaluate their investments, income sources, spending needs, and long-term goals so they can make informed decisions about their financial future.
The right retirement plan isn’t about spending as little as possible. It’s about spending with confidence.