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.
Example
Let’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 cost
- His Social Security will not be reduced in the future
- He has no other assets
- Bill has no legacy goals
- He budgets a present value of $25,000 (100% essential) for future unexpected non-recurring expenses
- He 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 year
- He wants to cover the present value of his essential expenses with non-risky assets/investments
- To 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 Spending | Rate of Assumed Future Increase | PV of annual discretionary spending | First Year Expected Dollar Withdrawal from Accumulated Savings | First Year % Withdrawal from Accumulated Savings |
$31,000 | 3% (assumed inflation) | $414,775 | $59,600 | 3.97% |
$40,000 | 0% | $412,263 | $68,600 | 4.57% |
$47,000 | -2% | $415,716 | $75,600 | 5.04% |
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 Spending | Rate of Assumed Future Increase | PV of annual discretionary spending | First Year Expected Dollar Withdrawal from Accumulated Savings | First Year % Withdrawal from Accumulated Savings |
$41,000 | 3% | $548,573 | $69,600 | 4.64% |
$53,000 | 0% | $546,248 | $81,600 | 5.44% |
$62,000 | -2% | $548,391 | $90,600 | 6.04% |
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.
Summary
We 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.
