My Rules to Manage Spending in Retirement

I wrote this back in 2017 but forgot to post it.  Most of the points are still relevant so I am posting it now.  We're still following the principles, though the percentages may have changed some.

I am not a big fan of budgeting.   Here are a some rules that we used to control our spending while were saving for retirement.

• Pay yourself first - When I first started working, I would pay all my bills and expenses first and whatever was left at the end of the month was my savings.   Except for my first month of working, I was pretty good at having something left at the end of the month.   Later, I realized a better approach would be to take out my savings first, and the pay my bills and spend on expenses afterwards.
• Buy only what we need -  Marketer are adept at getting consumer to buy stuff.  The challenge to sort the needs from the wants.   Do I really need a smart phone, cable TV, a large screen TV or a luxury car?  The answer is probably not.  Not buying these can reduce spending by hundreds of dollars one time or every month.  A related rule to this is to live below our means.
• Spend only cash - Using only cash is an easy way to limit spending.  Once the cash runs out, the spending stops

By using these rules, it was easier to control spending to better meet savings goals.

However, now that we've both been retired almost ten years, I've concluded we need a different set of spending rules.  We have been living primarily on our retirement savings, so the above spending rules prior to retirement many need to be adjusted.  For us, this is important, since we don't have pensions and are not eligible for Social Security yet.

Here's what we've been doing on an experimentation basis:

• Use an allowance - We've been giving ourselves a monthly allowance that covers our living expenses, except for paying taxes (income and property) and health insurance.  I estimated the amount based on our pre-retirement spending pattern This has seemed to work well for most of the time, even when we have a large expenditure such as a new appliance or a vacation.  This worked well in a low inflation environment, which we may not have in the upcoming years.
• Use a percentage  -  When I add the taxes and insurance in, we are withdrawing about 4% of our  current retirement savings each year.    It was closer to 6% during the great recession in 2009, but our investments have grown since the bottom.  So we use a percentage to allocate our allowance each year.   Also, we may need to adjust the percentage in years where the market declines or advance significantly.
• Keep 3-5 year cushion in cash/cash equivalents - That way if the market decline significantly, we can avoid selling investments for a few years while continuing to make the same withdrawal. This will allow the investments to recover instead of selling them when they are down.

This has worked so far.  So we are going to continue this approach of giving ourselves a 4% allowance.  An adjustment we may make is to increase our withdrawal slightly after a good investment year and either increase our spending that year, or set it aside for additional spending in a future year.  Another adjustment may be giving ourselves a raise periodically, especially after several years of good return.

Finally, we'll need to get used to spending down some principal as we balance withdrawals with mostly earnings and part principal.  This will be a toughest adjustment for us to get used to  since our pre-retirement goal was to always maintain or grow our principal.

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This is not financial, retirement or spending advice. Please consult a professional advisor.

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