How Much Can I Spend?

Bill Parrott |

The market turmoil and volatility are causing heartache for investors, and rightfully so, especially those in retirement. Losing a paycheck after a lifetime of employment is terrifying, but not having a steady paycheck in a down market is even worse. However, we can't control the market, but we can control our spending, and Americans love to spend money.

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Spending is a crucial ingredient for a successful retirement. Once your assets can cover your annual spending, you can retire, regardless of age. Most people rely on Social Security and personal investments to meet their needs, and a few will benefit from a pension plan. Social Security payments and pension benefits offer fixed payouts, unlike variable consumer spending.

We offer financial planning to help individuals better plan for their golden years, and annual spending is a number we need to complete the process. Yet, few can provide an adequate number because they don't track their expenses, and it is the one variable required to answer the question about retirement. If you tell me how much money you spend, I can tell you if you're ready to retire.

By now, you have probably heard of the 4% rule. I won't delve into the research, but the study found that you should not run out of money if you withdraw 4% of your assets each year. The good news is that now you can buy a 30-Year United States Treasury Bond yielding 4%. So, if you retire today, you can guarantee a 30-year fixed payout of 4%! If your account balance is $1 million, you can lock in an annual payment of $40,000. If your annual expenses are $100,000, you need $2.5 million in assets. The math is simple: Multiply your expenses by 25 to arrive at your asset level.

  • Your Expenses: $_________________
  • Multiply your expenses by 25 to arrive at your required asset level.
  • Assets Needed: $_________________

If your assets are sufficient to cover your expenses, you can retire. Congratulations! If not, you need to reduce your spending or increase your assets.

How long will your assets last? Another beneficial calculation is to divide your assets by your expenses to see how long your money will last. For example, if your assets are $1 million, and you spend $100,000 per year, your money will last ten years. If you reduce your spending to $50,000, it can last for twenty years. This practical calculation will shine a light on your financial situation.

  • Your Assets: $__________________
  • Your Expenses: $________________
  • Divide your assets by your expenses.
  • Asset longevity (Years): __________

Spending is the primary level, but what if you don't want to reduce your expenses? What if you love your lifestyle and don't want to cut anything from your budget? You need to increase your revenue if you don't want to reduce your spending. Can you work part-time, drive an Uber, teach a class, or turn a hobby into a career? Another strategy is to turn non-income-producing assets like commodities or cryptocurrencies into cash-flow-generating investments.

The stock market will recover, the economy will rebound, and geo-political tension will ease, but your expenses will last forever.

Too many people spend money they haven't earned to buy things they don't want, to impress people they don't like. ~ Will Rogers

November 12, 2022

Bill Parrott, CFP®, is the President and CEO of Parrott Wealth Management in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose. Our firm does not have an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level. PWM's custodian is TD Ameritrade, and our annual fee starts at .5% of your assets and drops depending on the level of your assets.

Note: Investments are not guaranteed and do involve risk. Your returns may differ from those posted in this blog. PWM is not a tax advisor, nor do we give tax advice. Please consult your tax advisor for items that are specific to your situation. Options involve risk and aren't suitable for every investor.