The Showcase Magazine - Articles

Investments & Planning 2017

Help Retirement Savings Last Longer with Flexible Spending Strategies

A key question most pre-retirees wrestle with in deciding when to transition into retirement is, “How do I know if my retirement savings will last through my lifetime? “An important first step in answering this question is to get a good handle on what your expenses will look like in retirement.

You may be familiar with one rule-of-thumb that suggests your expenses in retirement will be approximately 80% of your pre-retirement expenses. This may be a good starting point, but as you begin to think more seriously about retiring, it’s important to get more precise in planning your budget and expenses. You can ask your Financial Advisor to provide you with a budget worksheet, or there are sample worksheets available online. You can also create your own list. The most important thing is to be thorough in your analysis of your current and projected expenses.

Once your list is complete, bucket your expenses into two main categories – essential (i.e. mortgage, food, medical expenses, etc.) and discretionary (i.e. travel, charitable contributions, entertainment, etc.). This will help you determine what percentage of your entire expenses you could either eliminate or delay if you were faced with an unexpected large expenditure or your investment portfolio experienced a meaningful decline. This is referred to as your adaptable or flexible spending percentage.

You can help mitigate the risk of depleting your assets too early in your retirement by adapting your spending. Reducing how much you are withdrawing from your portfolio in difficult market periods to help preserve the value of your assets that could potentially rebound when the market recovers is generally referred to as adaptable or flexible spending. Implementing adaptable spending strategies involves revisiting your essential and non-essential expenses, adjusting your discretionary spending, and delaying major purchases.

On the flip side, adaptable spending allows you to increase your spending when market returns are strong. This strategy helps extend how long your savings might last as well as increase the total income generated over time.

The hypothetical example below illustrates the power of adaptable spending. Both the Smiths and the Joneses have a $1.5 million initial portfolio. They plan to take annual income of $60,000 from their portfolio and are withdrawing 4.0% annually to fund their retirement spending needs. The only difference between these two couples is the flexibility of their spending — while the Jones have 30% spending flexibility, the Smiths’ is only 10%.

When these couples were faced with unexpected expenses over the years, their spending flexibility required them to react differently. The Jones’ higher percentage of spending flexibility enabled them to reduce their discretionary spending whenever needed by postponing trips and not eating out. But because the Smiths had less spending flexibility, they were forced to liquidate more of their savings during a down market. As a result, the amount of savings left in their portfolio couldn’t make up the difference even when the market recovered later.

As illustrated in the graph below, the Jones’ portfolio generated nearly $250,000 more than the Smiths’ in income over the course of their 30-year retirement that can be attributed exclusively to spending flexibility.

This article was written by Wells Fargo Advisors and provided courtesy of Richard Zangara, Senior Vice President in Warren. Richard can be reached at 908-542-0348. Visit Richards’s website at

Wells Fargo Advisors, LLC, Member SIPC, is a registered broker-dealer and a separate non-bank affiliate of Wells Fargo & Company.