Recently published research from BlackRock confirmed earlier research from the Society of Actuaries that retirees tend, on average, to spend just about their income each year, where income is defined as income streams from sources such as Social Security and employer provided pensions plus interest, dividends and capital appreciation on their investment portfolios. According to the research, “The vast majority haven't been spending their retirement savings—leaving nest eggs mostly untouched and living on ready sources of income instead.” This post will discuss this “maintain your principal” (MYP) strategy as another “data point” to be used in determining your spending budget setting strategy.
The MYP strategy has been around ever since people started to retire and wondered how they should deploy their accumulated savings. The strategy can work reasonably well if you don’t need to rely too heavily on portfolio income for essential expenses and/or if interest and dividend payments generated by your portfolio are reasonably adequate and stable. In the recent low-interest rate environment, it has been difficult for some retirees to make this strategy work well. The Blackrock research appears to find, however, that many retirees have adjusted their spending to implement this strategy, even during the recent low-interest rate environment.
We at How Much Can I Afford to Spend don’t tell you how much you should spend each year. That is your decision to make. We do give you tools to use to provide you with additional “data points” that can supplement other data points available to you to help you make your spending decisions. Further, even if you use our recommended Actuarial Budget Benchmark (ABB) to develop your annual spending budget, there is no requirement to actually spend that amount each year. For example, you may feel more comfortable spending less than your ABB.
We are strong advocates of retirement planning that meets your specific financial goals. If one of your primary goals is to maintain or grow your accumulated savings, then the MYP strategy may be more appealing to you than a spending strategy that reduces your accumulated savings over time to fund your goals for higher levels of spending.
As we have said many times in this website, we encourage you to annually calculate your ABB and compare it with whatever you are currently doing to develop your spending budget. If the MYP strategy isn’t consistent with your long-term spending goals, you owe it to yourself to examine alternative strategies that may be.
