Permission to Spend
For many investors, the 4% rule is treated as if it were a permanent spending formula: withdraw 4% of your portfolio in the first year of retirement, adjust that dollar amount for inflation each year and keep going. That framework can be useful as a stress test, but it usually does not reflect how people actually spend in retirement.
In real life, retirement spending is rarely flat. Early retirement often includes more travel, entertainment, and lifestyle spending, while later years may bring a natural decline in discretionary expenses. The result is that a rigid spending rule can cause many households to underspend in the years when they are healthiest, most active and best positioned to enjoy their money.
Matching Income to Needs
We always start with needs – the core, recurring expenses that must be covered regardless of market conditions. We call this Lifestyle Cash Flow. When essential expenses are matched to predictable income, your standard of living does not depend entirely on market performance. That clarity can reduce anxiety and make the rest of the portfolio easier to manage – with greater flexibility and purpose.
But the gains in the stock market since the Great Recession have left many investors in a very different position: they have accumulated more wealth than they could ever possibly spend. Since 2010,with SPY which is an ETF that represents the stocks of the Standard and Poor’s 500, has grown over 14% per year for the past 16 years. The results in historical stock market returns is unprecedented.
Excess Wealth
I don’t think anyone would ever say, “I have too much money.” At each annual review, we always stress-test the Cash Flow statement to determine the amount of income required to do all the things you want to do against the backdrop of investable assets and income. Many have found themselves in the enviable position with more money than they could possibly spend.
Permission to Spend Comes From Planning
I think it is a good time to think about spending. We all have friends that are medically unable to do the things they once hoped to do during retirement. The mindset that helped create the wealth is the same mindset that makes it difficult to spend it. After years of disciplined savings, spending can feel unnatural. This is why I bring in a set of questions into our annual reviews, “What have you always wanted to do but never gave yourself permission to spend money on it?” “What have you been putting off that you need to get done?”
I have permission to share one recent experience with a client. After multiple back surgeries he has significant mobility issues and the thought of getting to, through, and out of an airport is just challenging. He was going but not looking forward to process of getting there. It is not a money issue but the punishment of travel was discomforting. His daughter lives in Denver and she was getting married in July. He was sharing with us how much he wanted to be there but dreading the trip. I asked him, “Have you ever considered chartering a private plane?” Never in a million years did he ever think there would be enough money for such a “frivolous” expense. After a lot of research, he found a charter that would get him to Denver and back for $44,000, which was less than 1% of the net worth he could never spend. He booked it.
The convenience car picked him up and drove him to the tarmac where he was helped on to the private plane that brought him to Denver. His daughter drove the car on the tarmac to pick him up at the plane. He was able to walk her down the aisle and present the hand of marriage to her new husband. The daddy-daughter dance was more of a shuffle but he was there. He was there on the most important day of his daughter’s life.
The real value of a retirement is not simply accumulating and preserving wealth. It is creating the confidence to use wealth in ways that matters most.
Permission to spend should not come from a rule of thumb alone. It should come from a desire to make every moment and memory count both today and tomorrow.