Last week’s column was a timely discussion of how you can find out how much money you need to become financially independent, as well as the way you can check on your progress towards that goal.
Of course, becoming financially independent is one thing. Remaining at that status is entirely another, and certainly deserves some attention.
Here’s how to use a few rules of thumb to increase the chances of your nest egg lasting at least as long as you do.
It depends on what you spend
Once you retire and/or reach financial independence, you will hopefully have some predictable income sources (such as Social Security and/or a pension payment).
You should also have some liquid assets, such as savings, CDs, mutual funds, etc., perhaps both inside and outside of your tax-sheltered retirement accounts.
To figure out what you can spend each month, first add up the balance of the liquid accounts. You then multiply that figure by a percentage point, based on your age and life expectancy.
If you’re in your 60s, you can generally spend about .25% to .50% of your liquid assets each month, along with any Social Security pension payments. In your 70s, you could bump it up to a range of .50% to 1% of your liquid assets each month. By the time you make it your 80s, a range of 1% to 2% per month may be more appropriate.
Finally, if you’re fortunate enough to make it to your 90s, 2% of your fortune is a fair amount to spend each month. Quite frankly, if you make it that far, we hope that whatever you purchase gives you the most enjoyment you can possibly experience.
For example . . .
. . . let’s say we have a couple in their 60s who receive a total of $3,000 per month from Social Security. They’ve been fortunate enough to accumulate $500,000 in savings, CDs, and mutual funds.
They currently could spend their $3,000 in monthly Social Security, along with .25% to .50% of their $500,000 each month ($1,250 to $2,500), totaling $4,250 to $5,500.
In their 70s they might still have $400,000, and can then spend .50% to 1% of that amount each month ($2,000 to $4,000), along with Social Security of $3,000. That would give them a range of $5,000 to $7,000 per month.
By the time they reach their 80s, let’s say their assets have dwindled to $300,000. They then may spend 1% to 2% of that amount each month ($3,000 to $6,000), plus the $3,000 they’re still getting from Social Security.
Adjusting along the way
The elegance of using a percentage of assets to determine the sustainable spending rate is that as the balance rises or falls, so does the allowable spending amount.
Then by bumping up the percentage as you age (and get closer to death, and by definition not needing the money), you can hopefully spend more when your time is more precious than your money.
But there still should be some adjustments. For instance, if you get near the top of the sustainable range in a given month (or go over), it’s best to scale back towards the bottom of the scale for the next few months.
You can also adjust the percentages upward or downward based on your perceived life expectancy; i.e., taking a greater percentage out if you don’t have many years left, or vice versa if you’re heading towards 100.
What about the house?
If you’re persevered this far, you may be curious as to how to figure the value of your home, and any mortgage payments in to the spending equation.
The bad news is that the mortgage payments should generally be included in determining what your allowable spending amount.
But the good news is that once the house is paid for and sold, you can then use any proceeds to add to your liquid assets, therefore increasing what you can spend each month.