Spending in retirement can be a slippery slope. Gone are the employer paychecks, replaced (perhaps) by a lump sum retirement plan that you have to manage and you need make sure lasts the rest of your life. And balancing the needs and wants of today with the needs and wants of the future is an ongoing tug-of-war for most clients. This is why we are often asked to help weigh in on the following questions:
- “How much can I safely spend from my savings?”
- “If I spend more, out of need or want, what am I jeopardizing?”
While the specific answer to these questions vary from client to client, the basis for our philosophy on spending can be discussed through the analogy of a golden goose laying golden eggs.
Let’s assume you’re recently retired or have just inherited a lump sum of money. You now have access to a gaggle of geese that lay eggs for you to live off of and enjoy. For sake of illustration, let’s say you have 10 geese and you have read that on average, each goose lays 4 eggs a year. Thus, your gaggle of geese can produce 40 eggs a year (which represents a 4% withdrawal rate from your savings, what we at the Haas Financial Group would deem a safe and sustainable withdrawal rate).
If you feel you need to eat more than 40 eggs, you have a tough decision to make. You could:
- Review your budget: You could look at your diet to see how you could restructure your consumption throughout the year to fit 40 eggs.
- Delay consuming and save more first: You could try to acquire more geese by continuing to work instead of starting to eat eggs now.
- Take more investment risk: You could try to figure out a way to have your geese produce more. But there is inherent risk in this. Historically, asking your geese to produce more might prove to be fatal to a goose or two, meaning you will forever forgo the eggs you hoped that goose to produce each year.
- Spend from your principal: You could eat all the eggs and when they are all out, you could consume one of your 10 geese. It may be a good meal, but you would now be down to 9 geese, with only 36 eggs projected to be produced the following year.
In general, it’s not sustainable over long periods of time to be eating your geese every year. Which is why we suggest having a financial plan that helps you consider the other options above. Our goal is to help you align your personal values, vision and wealth by understanding the trade-offs made when deciding whether to eat the eggs or the geese. If you need help managing your geese or projecting your financial future, give us a call. We’re happy to help.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
No strategy assures success or protects against loss.
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