By W Financial Advisors • Wealth Wednesday Brief • 3–5 min read
SCENARIO
Helen was three years into retirement and, by every measure, doing fine. Her portfolio hadn't grown, but it hadn't shrunk dramatically either. She was spending what she'd planned to spend. Her advisor had told her the plan looked solid.
But Helen had a nagging feeling she couldn't shake. "How do I actually know if I'm on track?" she asked at their annual review. "Not in theory, but in reality. How would I know if something was going wrong before it was too late to fix it?"
It was one of the most important questions she could have asked.
THE CONCEPT
The concept of a "safe" spending rate is often presented as a static answer: a number you calculate at retirement and then execute. In reality, retirement income planning is a dynamic process. The variables that determine whether your spending is sustainable change throughout retirement: your portfolio balance changes, your spending needs evolve, healthcare costs shift, tax laws are updated, and life expectancy assumptions adjust.
A spending rate that was well within bounds at age 65 may warrant a second look at 75, either because the portfolio has grown and more spending is warranted, or because returns were below expectations and a modest adjustment would meaningfully improve long-term outcomes. The goal isn't to find a permanent answer; it's to build a process for recognizing when the answer needs to change.
EXAMPLE
Michael retired at 65 with $1.4 million, and a spending rate of 4.2%, slightly above the traditional guideline, but his advisor had stress-tested the plan, and it appeared sustainable given his Social Security income, his modest spending flexibility, and a reasonable 30-year projection.
At his 5-year review, the picture looked different. A combination of below-average early returns (a common hazard known as sequence of returns risk) and slightly higher-than-planned healthcare spending had brought his portfolio down to $1.25 million. His current spending rate, recalculated against the new balance, had risen to just under 5%.
His advisor ran a revised projection. The plan was still viable, but only if Michael was willing to make a modest spending adjustment of about $4,000 per year. Because they caught it at year five, the adjustment was manageable. Had they waited until year ten, the adjustment needed might have been twice as large.
STRATEGY
Staying on track in retirement involves a few key practices:
- Annual projection updates. At least once a year, update your retirement income projection with your actual portfolio balance, actual spending, and revised assumptions for return, inflation, and longevity. This transforms your plan from a historical document into a living tool.
- Guardrails or thresholds. Some advisors use a "guardrails" approach: define an upper threshold (if spending drops below X% of the current portfolio, you can consider spending more) and a lower threshold (if spending rises above Y%, consider a modest reduction). These predetermined decision rules remove emotion from what can otherwise be a reactive process.
- Flexibility as a planning asset. Retirees who have some discretionary spending (travel, gifts, home improvements) have a natural buffer. A $5,000 reduction in discretionary spending during a difficult market year is far less painful than a $5,000 cut to essentials.
- Regular conversations with your advisor. Don't wait for something to feel wrong. A scheduled annual review that explicitly addresses "are we still on track" is more valuable than any ad hoc check-in prompted by anxiety.
COMMON MISTAKE
The most common mistake is treating the retirement income plan as a document rather than a process. Many retirees complete a thorough planning exercise before retirement, file the plan, and essentially trust that it will remain valid indefinitely, checking in only when something feels wrong.
By then, the gap between the plan and reality may have widened considerably. Market returns don't unfold smoothly, spending rarely matches projections exactly, and life introduces surprises. The plan that was right at 65 may need meaningful adjustment by 72, but only if someone is actually looking.
KEY TAKEAWAY
Being on track in retirement is not a state you achieve once; it is a condition you monitor continuously. Regular reviews that update your projections with real numbers are the most reliable way to catch drift before it becomes a problem.
This article is for informational and educational purposes only and should not be construed as personalized investment, tax, or financial advice. All examples are hypothetical and for illustrative purposes only. Please consult a qualified financial professional regarding your individual situation. Investment strategies, including withdrawal strategies, involve risk and may result in loss of principal. There is no guarantee that any planning strategy will be successful. Financial projections are based on assumptions that may not reflect actual market conditions or outcomes. W Financial Advisors is an independent registered investment adviser.
Every situation is different. If you would like to think through how this applies to your plan, we are here to help.
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