When people first start thinking about retirement, they often have a monthly dollar amount in mind. They want to be able to withdraw $3,000 or $5,000 or however much each month.
That’s an okay place to start, but it’s almost never the right approach for actually drawing down your retirement savings for two reasons:
1. Your lifestyle will change over time
2. The market will go up and down
On the lifestyle front, a common framework is to think of retirement in three phases: go-go, slow-go, and no-go.
So for lots of people it makes sense to spend more in their first years of retirement while they’re still in good health and are able to travel and do things. Go-go.
Over time, they won’t travel as far or do as many activities and gradually slow down and spend less. Slow-go.
And then as their health and energy declines, they’ll gradually enter the no-go phase, where they mostly stay close to home and have fewer expenses (though health care costs are important to consider).
The takeaway is that withdrawing a fixed monthly amount over all those years doesn’t make sense because your financial needs will change as your lifestyle does over time.
And the second big reason to build in flexibility is that you want to avoid selling investments when the market is down if at all possible.
Now in general, when managing a retirement portfolio, the money you’ll need in the short term won’t be in the stock market anyway.
But the more flexibility you have around withdrawals, the farther your retirement savings will be able to go, rather than rigidly withdrawing the same amount each month regardless of what’s happening in the market.
So, as your financial needs change over time, and the market goes up and down, how much money you withdraw from your retirement account should change too.