Jennifer, a recently retired executive, is a chronic under-spender. She’s been saving diligently for decades and now that she’s financially independent, she’s only skimming the surface of her nest egg. Two years later, she told me why.
From Saver to Spender
For decades, Jennifer invested a portion of every paycheck. During this phase of her life, she didn’t worry about large unexpected expenses or spending too much. She also didn’t stress much about occasional short-term portfolio losses from market volatility. She knew she had a long period of saving and growing her money ahead, and that her future paychecks were a guaranteed way to increase her nest egg balance.
Suddenly, the switch flipped. Some advisor (me) walked her through a system to sustainably spend down the wealth she spent decades building up. For most who outright retire, it’s the moment where their net worth level peaks, and this can be… well, a bit scary. While she may have trusted me, my advice on how much she could spend over her lifetime was linked to expectations about how capital markets will perform over a long period of time – a period where she would no longer be adding a dime.
Suddenly, she was paying attention to how market volatility affected her nest egg. The idea of taking money out every month, regardless of what markets were doing, made her anxious. Meanwhile, she was digesting headlines about how the stock market had reached new highs and, like many people, wondered if a market correction must be around the corner? She needed more than advice – she needed some basic education.
Back to the Initial Plan
For me, when I hear about a plane crash or shark attack, statistics calm me – you know, the ones where the odds of dying while walking down the street are 10,000 times more likely than dying in a plane crash (don’t judge me). As it turned out, statistics and probabilities relaxed Jennifer, too.
We’d discussed the basic ideas why an investor in her situation should generally feel confident spending 4-5% of their nest egg without worrying about running out of money, but she needed to understand the how and why. How bad of a market correction would need to happen before she would have to consider spending reductions? Was there any worst-case scenario that could cause her to outlive her portfolio? For many clients, I revisit these concerns with them several times, often annually, for it to stick.
For Jennifer, we went back to her initial plan to highlight several key assumptions we made. Her plan assumes she’ll live longer than she thinks she will. We reviewed a stress test showing how she’d fare if a drastic economic situation occurred between now and death. We didn’t pull any equity from her home or cabin to help maintain her lifestyle, but agreed some of those assets could be used if she had unusually high long-term care costs. She is, in this advisor’s view, protected from just about any worst-case scenario a reasonable person could imagine.
Jennifer wanted a refresher course, but she mainly just needed time to adjust to a new normal where her portfolio and advisor replaced her employer of three decades. I’m optimistic that when we talk again, she might let me nudge her into spending a bit more each year. If not, I’ll just show her how much wealth will go to her son when she dies. She adores him but doesn’t want to spoil him. If that figure crosses the “too much” threshold, she might get motivated.
Happy planning,
Barrett
