Debunking the Retirement Myths: the 3 Pillars of Spending*

The Retire Method Scenario Modelling is based on the following 3 pillars:

1. Investment asset Preservation & Growth which beats inflation, without utilizing the capital itself
2. Sustainable Spending from Income generated by Investment Asset
3. Creative Life Planning

Conventional retirement plan or calculator is built on the assumption that you incrementally withdraw your annual expenses during your retirement years, in tandem with inflation rate, to, so-called, sustain your retirement lifestyle.

This is absolute nonsense. Nobody lives this way, and we don’t have to retire to know this.

In real life, whether we are retired or not, we adjust our spending based on the success or failure of our careers and the income generated by our job/business.

Why should retirement be any different?

If you retirement nest egg got hammered by negative investment return during the first few years of retirement, are you going to still increase your annual expenses withdrawal that few years?

Of course not, that would be foolish.

You would reduce your spending based on adverse circumstances in the first few critical years at the onset of your retirement. It is a prudent, common sense thing to do, but it is not included in conventional retirement planning because it is difficult to model.

The point is, increasing withdrawals in tandem with inflation cannot be applied blindly.

Similarly, do retirees really spend more in living expenses (excluding medical expenses) each year as they get older?

Actually, the opposite is the case.

It is likely that retirees reduce spending as they age. They spend more in the early years of retirement, perhaps with all the travelling, etc when the health is still strong (touch wood!), and then reduce spending as their energy and health decline with age.

Another thing is about the magic of compounding returns, but the truth is, that it is less relevant post retirement compared to 10-20 years pre retirement. Retirement time horizon is usually relatively short, so spending and saving plays a bigger role. The issue is how much can be saved and reinvested, and how little you can be happy spending. It takes many years for a 5% increase in investment return to demonstrate its value, and then again, potential higher return translates to higher risk – something you want to keep in check during retirement.

Also, it is a flawed recommendation to be not growing our investment assets (example, bond funds) if you have like 20-30 years to go in retirement.

Flexible spending opens up so many possibilities not modeled in conventional retirement.