You're Probably Hoarding Too Much: Why You Can Spend More in Retirement Than You Think

Most people don’t want to die with regrets, but many people are hoarding too much in retirement. This article will explain how you can avoid this.

Before starting, it is worth mentioning that I have helped countless people (usually expats and high-net-worth individuals) with their retirement planning, and have written about the subject for various media organizations.

One of the biggest worries my clients have is “will I outlive my money”. It isn’t an irrational worry. Inflation is a real thing, and having too much money in cash will make running out a possibility.

Yet too many people are too conservative with retirement withdrawals because of this worry, and so withdraw less than they could have done if they would have known all the facts.

The two primary reasons for this are:

1. Some people are just sitting in cash. They don’t know how to generate a safe return in retirement for their money, so they understand that they should only withdraw 2%–3% because inflation is eroding their savings.
2. Plenty of people have read about the 4% rule of retirement.

What’s the four percent rule of retirement and why is it misleading?

The 4% rule is based on academic evidence that you can withdraw 4% of your total retirement portfolio in your first year of retirement, and then adjust that amount for inflation after that.

For example, if you have a million Euros when you retire, you can withdraw 40,000 Euros in year one, and then 40,800 Euros in year two if inflation is 2%.

If you do this, you shouldn’t run out of money after thirty years of retirement. This is a good rule of thumb, and I have mentioned it on several occasions myself, including in my published book.

However, we do have to remember that there are three stages of retirement if you retire in your 60s or 70s:

• Stage one. You, hopefully, have your health, and are eager to do things you couldn’t do before. That means you are traveling, going to meals, or doing other things you might like to do.
• Stage two. Due to ill health or not having the same motivation to go through hassles like airport security numerous times a year, you don’t do as much.
• Stage three. You spend hardly anything apart from healthcare.

Stage one is much more expensive than stage two in every country, and is more expensive than stage three in the majority of countries — the US and a few other countries are the exception.

What is more, being broke in stage three isn’t as serious as the previous stages if you live in a country which pays for your old age care if you don’t have the funds available yourself.

What does this mean? In the real world, it means that you can potentially withdraw 5%, 5.5%, or even 6% in stage one, and then subsequently reduce your withdrawal rate after that.

If stage one lasts longer than you expected and your portfolio has done better than expected, you might be able to maintain such a withdrawal rate for longer than you expect as well.

Of course, you do need help in terms of what assets to invest in. It isn’t safe to be 100% in cash or 100% in the stock market as a retiree. Advisory firms such as our own can help you find the right mix of assets to lower your risks whilst also creating income.

However, the point remains: if you retire at a very young age, a 4% or even 3% withdrawal rate is prudent, but it often makes sense to spend much more money in the early years of retirement if you retire at a conventional retirement age, and then reduce it when your spending needs are likely to be lower.

If you don’t do that, you will likely easily outlive your portfolio because you will have more money in your 80s than you expected, and you likely won’t be able to spend as much as in your 60s or 70s!

The second reason for low withdrawal rates

The second reason for low withdrawal rates is quite simple — in a low-interest rate environment it is not possible to withdraw much money if you are relying on cash.

If you are getting 2%–3% from the bank, inflation is running at 2%–4%, and you are withdrawing 3.5% a year, you don’t have to be a math genius to work out that you might run out!

That is especially the case if there is also an inflation shock in the middle, which recently happened after COVID-19 and the 2022 Ukraine–Russia war.

The solution for this is simple. It is possible to get higher returns from a mixed portfolio without risking your retirement.

Being too risk-averse or too adventurous ironically makes the risks higher than having your eggs in different baskets in retirement.

An investment firm like ours can also speak to you in simple English about how you can get higher returns without taking on too much risk.

There is no one-sized-fits-all approach

I am not saying that everybody wants to spend it all before they die. Plenty of people I know, including clients and associates, want to create multi-generational wealth, want to give money away upon death, or just want their kids to inherit something once they die.

Merely, if that isn’t your objective and you want to spend more whilst you are living, you can plan and probably spend more in retirement.