Transitioning from Saving to Spending at RE

[Senator]

I have been squirreling away money as fast as I can, and have been for quite a while. Maxing out 401K and HSA, Roth and/or Traditional IRA, saving after tax money in an investment account, working a few odd side gigs to even make an extra few dollars to save. I even pick up pennies religiously… Heads or tails up.

At some point, I will start to withdraw my funds, and/or live on what I bring in through my rentals. I still have the notion I should be “saving for a rainy day”, and not spending all I am allocated or bring in through some retirement planner.

I will not have a pension (~14K) until I am 65, and plan on Social Security at 70 ($30K). Both of these combined will barely be enough to live on.

If you have a large pension, I can see spending it all. It will (probably) always be there.

What do you do when you have a set withdrawal rate or amount? Do you spend it all? Do you spend most, but leave a little bit back, just in case?

 

[prototype]

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What do you do when you have a set withdrawal rate or amount? Do you spend it all? Do you spend most, but leave a little bit back, just in case?

My recco is don't spend it all if you don't have to/need to. Best to be a little conservative IMHO.

I'm only at 3.5 years or so since I retired and have also thought about this. Similar (though I imagine the number are bit different), I have a SWR from my nest egg, along with a non-COLA'ed pension that I am collecting now, and then I'll get SS at some point (haven't hit 62 yet and haven't decided when to start collecting).

Anyway my thoughts/plan on your question is that there will be years that I don't spend all of my yearly budget (e.g. medical expenses lower than planned, home maintenance lower, vacation deals...whatever). These years I certainly won't spend just to spend because I'm pretty sure there will be years that will have unexpected expenses and I'll draw more than my SWR.

What I am doing for now just a few years into ER is recomputing what I can safely withdraw (e.g. 2%, 3% whatever) and go by that. The markets (and low inflation) have been good since I ER'ed in 2011, but the bears market and/or higher inflation/interest rates could could anytime and I will probably need to tighten my belt a bit when that happens.

 

[athena53]

My plan is to keep the withdrawal rate between 2 and 3% and we should be able to manage that. That will go down substantially when I start drawing SS, but I'm 61 and hope to wait till I'm 70. I retired 3 months ago and we're living off my final paycheck (which included 1.5 extra months plus unused vacation time plus some $$ for 1.5 months of COBRA), plus DH's SS and my small pension ($937/month!). I figure we'll need another $20K before the end of the year and there's already that much in cash in our brokerage accounts.

From there I'm going to cash $20K increments as we need it, making sure to stay below 3% in total. I've already changed our accounts so that dividends and interest are not reinvested. As we get closer to the end of the year and mutual funds announce their capital gain distributions I may elect not to invest some of those, depending on the magnitude and how I feel about the quality of the fund. My reasoning is that capital gain distributions are the equivalent of a forced sale; you're stuck with the taxes on them anyway, so why reinvest it and then have to sell something else to raise cash?

My checking account is kept in Excel and I actually have a ton of columns for various things and I transfer amounts from the general "living expenses" column to the other columns twice a month, as if I were getting a paycheck, because I'm used to budgeting that way. It's probably too much detail for most people.

 

[sengsational]

I'm only 6 months into ER at 55 and the decision was made easier for me by the ACA. My actual expenses are much lower than what I'm "allowed" to spend (based on various retirement calculators). If I spent the full amount I'm "allowed" to spend , I'd deplete my rather low percentage of after-tax funds and be suddenly have to pull hard from tax sheltered accounts. That would knock me out of getting the ACA subsidy. I expect the laws surrounding the ACA will change, but I'm doing what I can now, while the laws are favorable, to keep income in check. That might even mean taking out a HELOC after I've sold all my after tax stuff. Maybe I can squeek-by another year that way, if the laws haven't changed by then.

 

[Lsbcal]

...(snip)...
What do you do when you have a set withdrawal rate or amount? Do you spend it all? Do you spend most, but leave a little bit back, just in case?

If you set the withdrawal rate based on sound conservative principles, then why hold back? I would hold back only if:
1) There was a sudden dramatic dive (like fall of 2008) in equities. Not just a 5% decline but something far worse together with exceedingly bad economic news (not news like the Ukraine issues or the usual political squabbles). Usually the bad stock times come when the economy falls and the Fed has been tightening for quite some time.

2) I just didn't need to spend quite so much. We took some vacations this year and bought some house stuff. If it isn't all spent, I won't force the spending.

 

[mickeyd]

Do you spend it all?

Spend whatever it takes to live as you wish. Manage your stash. LBYM...forever.

 

[walkinwood]

Why not retire earlier when your conservative SWR meets your needs?

 

[OAG]

RE - very early. Been fully retired for about 25 years. Have also "saved" for most of that time. Not easy (for me) to change the mindset to no longer save.

 

[Senator]

Why not retire earlier when your conservative SWR meets your needs?

Great point, but since I am a conservative person in spending, I want to make doubly sure. I am thinking I will have at least 2x as much as I need in a worse case, even 4x as much I need in a average world.

It's just hard to let go of easy money...

 

[Koolau]

I understand Senator's reluctance to get into the "stash". It was a huge task to amass it. Much thought went into the decisions that made such a stash possible. Now, that I'm "using it", it makes me uneasy each time I take a withdrawal. It's doubly difficult for me since a good portion is in tax deferred accounts. Not only am I drawing down the stash, but I know I'll pay taxes on much of it. Bummer!

Still, we have to remember that we put the stash together to USE in the future. In my case, the future is NOW. Just stay with the plan (whatever draw rate made you comfortable when planning) and enjoy the fruits of your l@bor. But keep a few backup plans in your hip pocket, just in case, heh, heh. YMMV

 

[Lsbcal]

Taking SS at 64 (DW took it at 62) reduced the anxiety of spending for me. That and the stock market come back.

So for those planning on taking SS later in life, I would say to make sure you don't miss out on enjoying your 60's. You can easily plan to spend a bit more of the stash until you take SS. FireCalc helps in planning this.

BUT AGAIN ... for some this is psychologically almost impossible. They can see it on paper but putting it into practice is anxiety producing.

 

[Animorph]

If you have conservatively planned, have some margin to your safe withdrawal amount, and have Plans B, C, and D ready to go, then spend away. While I'm happy to leave any extra to my kids, we didn't work all that time just so we could amass a bulging portfolio.

On the other hand, I still hate paying the cable TV bill, and keep looking for acceptable ways to reduce it. No need to just throw your money away either.

 

[W2R]

What do you do when you have a set withdrawal rate or amount? Do you spend it all? Do you spend most, but leave a little bit back, just in case?

I retired in November, 2009. I withdraw the entire year's withdrawal amount during the first week in January, because it makes it easier for me to see how I am doing as the year progresses. I don't rollover any leftover money to the next year; it goes back to Vanguard.

During each year, I have spent between 61% - 96% of my withdrawal amount for that year. A lot depends on what unexpected expenses come up. If I start having a lot of expensive, unexpected stuff happening, then I tend to put off discretionary "fun" purchases for a while until I get back on track.

It's like having a paycheck from work; some years it is harder to stay on track than others but you try to live within your means.

 

[Mulligan]

Great point, but since I am a conservative person in spending, I want to make doubly sure. I am thinking I will have at least 2x as much as I need in a worse case, even 4x as much I need in a average world.



It's just hard to let go of easy money...

Senator, you strike me as being a candidate for "I have worked so hard to accumulate this nest egg, I don't want to spend it now." My Dad is almost 80 and he is like that. He still worries about increasing his nest egg (money he doesn't need) instead of spending it. Hopefully that will not happen to you. I think that would be the hardest part of converting to ER would be for someone who is doing it without a pension.


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[mickeyd]

During my entire adult life I have disliked purchasing ice and getting a haircut. Why you ask? Ice will soon melt and hair will continue to grow. I have no control over either. (I guess)

When I no longer care about the cost of ice and a haircut, I will be close to death. That's somewhat comforting to me.

 

[aja8888]

During my entire adult life I have disliked purchasing ice and getting a haircut. Why you ask? Ice will soon melt and hair will continue to grow. I have no control over either. (I guess)

When I no longer care about the cost of ice and a haircut, I will be close to death. That's somewhat comforting to me.

Marry a hairdresser and live up north. I did both, but not at the same time. I pay for ice and don't have a pension (except SS).

 

[Senator]

r "I have worked so hard to accumulate this nest egg, I don't want to spend it now."

LOL, that's me. I am slowing making the mental transformation though.... maybe after the first year, it will be easier.

 

[Mulligan]

LOL, that's me. I am slowing making the mental transformation though.... maybe after the first year, it will be easier.

The people who have retired during the past 4 years have benefited psychologically from a rising market, so their portfolio has grown, even though they have a spend down rate. I'm hoping the same thing happens for you Senator. That would definitely ease your mind into the ER process.


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[pb4uski]

I have been lucky in that since I retired at the end of 2011 my nestegg is 20% higher than when I retired despite spending ~3% a year.

If we had correction and I had to dip into "principal" that would be fine. I figure that the reason that I saved it was to spend it when I stopped working, not to hoard it.

 

[38Chevy454]

I joke that the most successful person is the one that dies the day he runs out of money. It is just kind of hard to predict that last day....

I am still working and in the saving mode, but do see this issue of the transition to be one that I will need some adjustment. I do know that I have no desire to leave a big chunk of money for the "38Chevy454 Memorial Library"

 

[daylatedollarshort]

The other side of saving more is lowering expenses and figuring out how to live well for less money. Every $10K you can cut from your fixed, baseline expenses means needing $500K less funding over a 50 year retirement.

If you can keep your O-MAGI below 400% of FPL, you would qualify for ACA subsidies. Many bloggers seem to reasonably achieve $5K - $10K in travel value per year with credit card hacks, which is nontaxable income and would not raise O-MAGI. If you are paying state and federal income taxes now, can you find ways to get that to zero, at least pre-RMDs? Would an HSA health plan allow you to realize more income without impacting your O-MAGI or raising your taxes?

 

[NW-Bound]

It's not easy to spend from your stash when you have been saving and watching it grow for decades. But I am slowly learning to "let it go", particularly since having a serious illness and been recovering from it. Life's short and you cannot take it with you.

When I include the future SS in the plan, FIRECalc said I can spend into the 6 figure now. I am nowhere near it. Even with the recent unexpected $20K expenses on home upgrade and maintenance, I am still below the 3.5% WR I allow myself.

Still, it is hard to watch myself transferring tens of $K from brokerage accounts into the checking account every so often. And this during a market bull run. Imagine how painful it is going to be when the market drops.

I am telling you, once a scrooge, always a scrooge.

... Many bloggers seem to reasonably achieve $5K - $10K in travel value per year with credit card hacks...

I should find a way to get my wife to spend time on this. She likes to look for bargains in travel, but is falling behind the curve.

 

[2B]

My plan is to cover my base spending requirements for a "nice, comfortable lifestyle." That includes staying in our retirement home, having normal expenses covered with a bit extra but not too much extra. Then, 5% of the remaining beginning year balance is available for any spending desired. The purpose is to allow nice traveling opportunities and the ability to spend on the grandkids.

Based on current asset levels, it will probably be more than I want to spend (or be willing to spend). After saving for many decades, it's still important to get "value" for the spending.

 

[jebmke]

I joke that the most successful person is the one that dies the day he runs out of money. It is just kind of hard to predict that last day....

Nembutol

 

[ejman]

Taking SS at 64 (DW took it at 62) reduced the anxiety of spending for me. That and the stock market come back.

So for those planning on taking SS later in life, I would say to make sure you don't miss out on enjoying your 60's. You can easily plan to spend a bit more of the stash until you take SS. FireCalc helps in planning this.

BUT AGAIN ... for some this is psychologically almost impossible. They can see it on paper but putting it into practice is anxiety producing.

Indeed, that's exactly why I started SS at 62. My natural tendency when there are no regular "paychecks" coming in is to simply rein in the spending to the max (after all had a lifetime of training doing just that). It is also why I'm not converting my IRA to Roth. I know that with my psychological make up once that money is in a Roth it is never coming out in my lifetime so converting would in effect result in a lower standard of living for me.

I figure since I will be forced to take RMD's it will be like a paycheck and then I will spend whatever is leftover after Uncle Sam and Uncle Kitzhaber get done with it.