I spend a lot of time talking with people who have retired early or are otherwise financially independent. From a purely anecdotal point of view, I'd say most of these folks are well-adjusted. They work to maintain balance in life, and especially with their personal finances.
That said, I've noticed that a lot of retirees — early retired or otherwise — struggle to know how much they should spend. I believe this dilemma exists for a couple of reasons:
- First is the life expectancy problem. You don't know how long you're going to live. If you did know the precise date of your death (or even the year of your death), retirement planning would be much easier. You'd be able to say, “Okay, I have ten years left and $300,000 in the bank. Based on that, I should be able to spend $30,000 per year.” But you don't know when you're going to die, so a lot of retirement planning becomes guesswork.
- Second is the question of what your money is for? Do you want to leave a legacy for your children (or somebody else)? Do you want to maintain a chunk of change for possible end-of-life medical issues? Or do you want to use your wealth to live life to the fullest while you can? In my case, my ideal would be to die broke. If I could spend my very last penny on the last day of my life, that'd be perfect.
The general response to these two problems is to follow what has been dubbed the four-percent rule. Generally speaking, it’s safe to withdraw 4% from your portfolio every year without risk of running out of money. (There are a lot of caveats to this guideline. To learn more, follow that link to my Money Boss article — or wait for that story to migrate to Get Rich Slowly in a few days!)
The AAII Journal — the monthly magazine from the American Association of Individual Investors — has published two articles in recent months about the problem of spending in retirement. Let's look at what they have to say. [Read more…]