J.D. Roth, of Get Rich Slowly, calculated a neat way to figure out how much cash a retiree can safely spend while in retirement, so that their money will last as long as they do.
Here’s J.D.’s advice:
- Determine your current annual spending. If, like me, your spending fluctuates from year to year, calculate a three or five-year average spend. Call this number your current annual spending.
- Determine your safe spending level. You can use whatever method you’d like for this, but for simplicity’s sake, I’d say use the afore-mentioned four-percent rule. Take your entire net worth and multiply this by four percent. If your net worth is $1,000,000, for instance, you’d get a result of $40,000. (If you’re risk averse, either leave home equity out of the equation or multiply your net worth by three percent.) This number is your safe annual spending.
- Compare the numbers. Find the difference between your current annual spending and your safe annual spending. If your current spending is greater than your safe spending, you should probably cut back. But if it your current spending is less than your safe spending, give yourself permission to spend more — if you want.
Here are my answers:
- Right now, I am spending approximately $2,794 a month, which equals to about $33,528 a year. Please note: ALL this money is passive and is a combination of Social Security, Pension and Interest on investments.
- My entire Net Worth right now is about $650,000. If I wanted to gamble it all and follow the 4% rule, I could safely spend about $26,000 a year. If I did not want to risk my equity, I would follow the 3% rule and my safe annual spending would be about $19,500.
- If I compare both calculations against what I am currently spending, it looks like I am spending way too much money in both categories. That’s only if I were spending my own cash in retirement, which I am most definitely NOT! All my income right now is from passive sources, which means I very rarely, if ever, have to touch my capital or my home equity. Barring any great disease or calamity, my Net Worth money should live on and on. Which, BTW, we all know will NEVER happen. Something always comes up!
J.D. Roth’s advice to his readers is to always spend less. Live below your means. While that may sound nice to the human ear, in reality, a person can only live below their means if they are making more money than what they need. For me, since I never earned more than $28,000 a year in my working years, and hubby never earned more than $56,000 in his working years, we both basically lived at our means. Granted, yes, we did squirrel away bits of money here and there in retirement investments (401K) but DH was constantly losing his jobs, through either downsizing, his employers simply went out of business or they relocated. We were always tapping into our retirement accounts to make ends meet. I think a lot of people can identify with that!
Our passive income is infinite. There is no end to it. What DH and I have done in our retirements, is what we have always done: we look at the guaranteed income that is coming in to our lives and we set up our lives to meet the challenge. We’re living and spending about $33,528 a year because that’s the guaranteed amount we can safely expect. We’ve prioritized first what is important to us: housing, food, utilities, vehicles etc. and we make our lives fit into the mold. Once we finalize and set up our necessities, we calculate what money is left over and we utilize that cash towards extras. For us right now, RV travel is an extra. We plan our trips against the available funds we have readily on hand. If we can’t afford it, we don’t go OR we find an alternative destination. Currently, a trip to Rome or Paris is out of the question but thanks to our RV, we can spend three months in Arizona this winter.
I watch our cash flow daily. I stick to our budget every day. Before we leave the house in the morning, I know exactly how much money we can spend that day. Sometimes, we have to wait weeks, even months before we can spend any money on a specific item. Naturally, of course, if it’s an emergency, we have our savings accounts BUT I make it a top priority of mine never to tap into them. That’s NOT a habit I would like to make.
Today, this morning, DH is working on repairing our 17 year old sliding glass door screen. It costs $120 to buy a new one. Or, for $15, he bought the needed parts at Home Depot and is fixing the screen himself. This is a small example of the daily choices he and I both make. Personally, I wouldn’t have it any other way. Any bozo can shell out $120 or better yet, put it on a credit card and buy the new screen door. It takes talent and determination, however, to stick within your boundaries and find an alternative way to make your retirement a successful one.
I don’t know if J.D. Roth has a calculation for that.
Live well and prosper, my friend. Live well and prosper.