The greatest financial danger in retirement isn’t always the stock market. It’s the constant, nagging fear of running out of money. This anxiety causes many people to underspend and worry, even when their finances are sound.
Here are eight ways to replace that worry with lasting security.
1. Determine your spending baseline
Worry often starts with the vague question, “Am I spending too much?”
Instead of operating on gut feeling, work with an advisor to determine your personal sustainable withdrawal rate (often between 3% and 5%). Once you know your lifestyle is covered by a responsible withdrawal rate, you can stop guessing and start living confidently.
2. Make adjustments when needed
Many retirees treat their spending plan like an all-or-nothing system. This rigidity creates panic during market downturns.
Instead, adopt a dynamic spending strategy. Slightly reduce or delay discretionary spending in poor market years. By reducing your withdrawal rate by just 10% when your portfolio is down, you dramatically reduce the risk of permanent capital depletion, allowing the assets time to recover.
3. Realize your spending will naturally decline
The high level of discretionary spending you need at age 65 will likely not be the same at age 85, especially once you have long-term care coverage (see No. 7).
Expenses for travel, hobbies, dining out, and maintaining multiple homes typically decrease as you age. Knowing that your major risk (long-term care) is insured, you can trust that your remaining costs will naturally ease over the next two decades. Your money is working harder when you’re younger and enjoying it most, and your needs will taper off as your capital naturally draws down.
4. Create a recession buffer (the ’anti-panic’ fund)
The greatest tactical threat to longevity is experiencing a large market crash early in retirement and having to sell depressed assets to pay for basics such as groceries. To protect yourself,
maintain a six- to 12-month cash cushion outside of the market.
This “recession buffer” allows your growth assets (equities) to sit untouched and recover during a market downturn, preventing you from locking in losses. This separation between your living money and your long-term growth money is the most direct way to eliminate panic during volatility.
5. Buy out the risk of surprise taxes
Future, unknown tax rates and large required minimum distributions from traditional retirement accounts are a major source of financial uncertainty.
What can you do? Eliminate the tax uncertainty by creating a tax-free bucket.
