Overview of the Retirement Spending Process

Let’s say you’re just about to retire. They’ve thrown you the party, given you the watch, and you’re out the door. You’ve got, say, $1,000,000 saved up. Now what?

(If you’re still in your working years, please don’t tune out. You need to have an idea of what the process will be once you get to retirement. That will then allow you to set a savings target for yourself.)

Now you’ve got to determine—and meet—your standard of living out of your accumulated savings. You’ve got to give yourself an allowance. You’re passed the planning stage; you can no longer determine how much to save out of your salary, because you’ve cut that lifeline. Your only degree of freedom is to bow to reality, and determine how much of a lifestyle to treat yourself to based solely on your available resources. You’re like a teenager who has to get by on the allowance Mom and Dad give you, but you’re also Mom and Dad determining what that allowance is. How do you determine that allowance?

Here’s an overview of the seven main steps in the process of determining your allowance.
Step One. Think about, and make a rough guess at, your personal poverty level, as discussed in January 17’s post. It will help to have a rough sense of this as you go through the remaining steps.
Step Two. Adopt a spending plan, i.e., the methodology you will go through every year to convert your wealth into an annual allowance. For example, in January 13’s post I described one I don’t particularly care for. I will describe others in future posts.
Step Three. Adopt an investment plan, i.e., a suitable allocation of your retirement assets among major asset classes (you know, stocks, bonds, cash). Your investment plan may very well involve a projected change in asset allocation as your projected days on earth shrinks over time. Lots more on this subject in future posts.
Step Four. Adopt appropriate assumptions for all those unknowns. You know, investment returns, inflation, your life expectancy, and the like.
Step Five. Now run those assumptions through your spending plan and investment plan, and out pops your allowance!
Step Six. Now figure out how to get by on your allowance.
Step Seven. Every year, repeat Steps Four, Five and Six.

That’s just an overview. There’s a lot of thought and decision-making that has to go into these steps. In fact, I get tired just thinking about it. I gotta go lie down. More to come in future posts. Lots more.