Increase Your Discretionary Retirement Spending While You Are Healthy and Active

We’ve
all read the research about the “Go-go, slow-go and no-go” periods of
retirement and decreased real-dollar spending as we age, but contrary to
observed research, most decumulation strategies today don’t anticipate
front-loaded spending in retirement. Instead, most anticipate constant
real dollar spending throughout the entire period of retirement. One of
the reasons for this is that most spending strategies don’t distinguish
between essential spending and discretionary spending and therefore,
treat both types of expenses similarly and assume that the investor will
prefer a more conservative constant real dollar spending approach.As noted in Reason #13 of the Top 20 reasons why I Recommend the Actuarial Approach for Managing Spending and Investing in Retirement
in our March 17, 2026 post, the Actuarial Approach easily accommodates
non-linear (non-constant) spending goals. In this post, we will discuss a
simple way to use the Actuarial Financial Planner to accomplish
front–loaded spending, and we will provide a simple example to
illustrate how you can use the AFP to increase your discretionary
spending while you are still relatively healthy and active.Both
versions of the Actuarial Financial Planner provide separate inputs for
the assumed annual rate of increases in inputted planned expenses.
Instead of defaulting to assuming all your expenses will increase each
year with assumed inflation, you can assume that some expenses (like
medical costs or taxes, for example), increase at a higher rate, and you
can also assume some expenses, like discretionary expenses, increase at
a rate lower than assumed inflation. Assuming discretionary expenses
increase at rate lower than assumed inflation in the future will either
decrease the present value of that inputted spending item or it will
increase the amount of the expense that you can currently afford to
spend. If you assume discretionary spending will not keep up with
inflation and all assumptions are realized in the future, this will mean
that future discretionary spending budgets will decrease in real
dollars from year to year.ExampleLet’s take a look at a simple hypothetical example to illustrate how this works.Bill
is a recently retired 65-year-old male with a Social Security benefit
of $26,400 per annum and accumulated savings of $1,500,000. Using the
3-step process outlined in my Advisor Perspectives article,
Bill develops a lifetime planning period assumption for himself of 29
years. He also uses the default assumptions for discount rates and rates
of inflation (3%) in this year’s AFP.We are going to make the following simplifying assumptions for Bill’s calculations:The value of his home will be sufficient to cover his long-term care costHis Social Security will not be reduced in the futureHe has no other assetsBill has no legacy goalsHe budgets a present value of $25,000 (100% essential) for future unexpected non-recurring expensesHe
has a total of $55,000 per annum of current essential expenses
(including taxes and healthcare costs) that he assumes will increase
with inflation each yearHe wants to cover the present value of his essential expenses with non-risky assets/investmentsTo be conservative, he wants his Funded Status to be about 125%Given
these assumptions and the results from the AFP, Bill determines that he
will need a total of $1,259,352 in non-risky assets to cover the
present value of his essential expenses. Since the present value of his
Social Security benefits is $592,489 under the above assumptions, this
leaves about $660,000 of his accumulated savings to be invested in
non-risky assets and the remaining $840,000 to be invested in risky
assets.Bill wants to begin his retirement with a Funded Status of
about 125%. He wants to be able to transfer money from his risky
portfolio to his non-risky portfolio in the event future experience is
less favorable than assumed. Therefore, he will consider about one-half
of his risky assets of $840,000 ($420,000) to be available for spending
on discretionary expenses and the other half to serve as a rainy-day
fund, or “buffer assets.”Bill is free to spend the present value
of his discretionary assets of $420,000 in any manner he chooses. He can
front-load his discretionary spending over 1 year, 5 years, 10 years,
etc. In any event, he will still presumably have assets sufficient to
cover his essential spending and a fairly sizeable rainy-day fund unless
future experience (i.e., inflation and/or stock market returns) is
worse than he expects.Let
assume that Bill’s spending budget anticipates some discretionary
spending in every future year of his retirement, but he would still like
to front-load his discretionary spending. The following table shows the
current discretionary spending he can anticipate by varying the rate of
future increases he assumes.Table 1—Bill’s alternative annual
discretionary spending budgets under alternative future increase
assumptions and initial Funded Status target of 125%First Year Discretionary SpendingRate of Assumed Future IncreasePV of annual discretionary spendingFirst Year Expected Dollar Withdrawal from Accumulated SavingsFirst Year % Withdrawal from Accumulated Savings$31,0003% (assumed inflation)$414,775$59,6003.97%$40,0000%$412,263$68,6004.57%$47,000-2%$415,716$75,6005.04%Assuming
Bill’s discretionary spending remains constant in real dollars (the
first row of numbers in the table above), his first-year withdrawal
under the above assumptions would be close to the amount provided by the
4% Rule. Amounts withdrawn shown in the last two rows would be higher
initially and lower in later years, all things being equal.Of
course, another way to increase Bill’s discretionary spending would be
to be less conservative and start with a Funded Status of less than
125%. For example, if Bill were content with starting with a Funded
Status of about 115%, he could free up about another $133,000 of present
value of discretionary spending, in which case, the table above would
look like:Table 2—Bills alternative annual discretionary spending
budget under alternative future increase assumptions and starting
Funded Status target of 115%First Year Discretionary SpendingRate of Assumed Future IncreasePV of annual discretionary spendingFirst Year Expected Dollar Withdrawal from Accumulated SavingsFirst Year % Withdrawal from Accumulated Savings$41,0003%$548,573$69,6004.64%$53,0000%$546,248$81,6005.44%$62,000-2%$548,391$90,6006.04%The
Actuarial Approach anticipates annual determinations of household
assets, liabilities and Funded Status. Therefore, how much a household
can actually spend on essential and discretionary expenses in the future
will depend on the future investment experience and actual spending.
Lowering the assumed rate of future increase in discretionary spending
in this years’ valuation can, however, increase the amount of current
year discretionary spending with the concomitant risk that such spending
may need to be reduced in future years. SummaryWe
believe that it is reasonable to assume that a household’s essential
expenses will increase with inflation in the future and that some
essential expenses may even increase at a higher rate than general
inflation. On the other hand, we believe that it is also reasonable to
assume that future discretionary spending will decrease in real dollars.
Therefore, in order to enjoy your retirement while you are able to, you
may wish to front-load your discretionary expenses by assuming certain
expenses (like travel costs or other non-recurring expenses) will only
be incurred for a limited period and/or you may wish to assume that
other more general discretionary spending will not increase as fast as
your general inflation assumption.