How to Shift from Saving to Spending Your Retirement

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If you've scrimped and saved to build a nest egg that you hope will take you through your retirement, it can be scary to shift your financial plans from saving to spending. The big questions likely weighing on your mind are ones like "will the money last?" and "what if the market is down when I have to sell?"

Those are great questions -- and unfortunately, there are no absolute guarantees in investing other than perhaps that a person offering you a guarantee is likely charging you a lot for it. What you can do, though, is make sure you have a solid plan in place, execute that plan to the best of your abilities, and give yourself the flexibility to make course corrections along the way. With that framework in place, the shift from saving to spending should get a whole lot easier.

Name your money for what you'll use it for
In terms of making your money last, one of the strongest steps you can take is to give every dollar in your portfolio a name and a purpose. By splitting your money into separate buckets based on what you plan to use it for, you can reduce the temptation to overspend, which is key to making sure your money lasts as long as you do.

Your first split should be between truly one-time expenses and ongoing costs. Within both of those areas, prioritize between "Must do", "Would like to do", and "Could Live Without". Take all your costs and goals and assign them to one of those six groupings. The table below has an example, though your priorities may vary based on what you've already accomplished, what your family status is, and what matters most to you in life.

Sample table by the author. 

Within that framework, you need to cover your "Must Do" expenses -- though even there, you have some flexibility as to how much you dedicate to each of your priority items. For instance, you need a place to live, but once your kids are grown, you may decide to trade the family home in for a one- or two-bedroom apartment. That would both free up your equity to help cover your costs of living, and potentially help you live at substantially lower costs vs. the total costs of home ownership.

Every other item is optional, based on your priority calls. That doesn't mean you can't do these things, but it does mean your ability to fund them both takes a backseat to the must do items and depends on what you have left over after paying for those higher priorities.

By prioritizing how you use your money in this fashion, you help yourself in two ways. For one, you have a much better handle on what you can afford to fund from your retirement income. For another, you can decide where you'll cut if your retirement income doesn't work out to your expectations, before you're forced by circumstances to cut your spending. Those two factors can go a long way toward helping you be comfortable with starting to spend the nest egg you've so carefully built.

Sidestep the market's short term pain
The key to avoid having to sell stock when the market is down is to remember that money you expect to spend in the next five years does not belong in stocks. As a retiree, you'll likely need to own stocks to cover your long term costs of living, but for shorter term needs, your money belongs in cash and quality bonds.

One of the best investment tools at your disposal as a retiree is something known as a bond ladder. A bond ladder is a series of bonds bought that mature at regular intervals. For instance, you can start off with six months' worth of living expenses in cash, and have a bond set to mature in six months that will hand you enough money to cover your next six months' worth of living expenses. Add another bond that matures six months later, and so on, until you have bonds maturing for at least the next five years.

As those bonds mature, they turn into cash that then becomes your spending money. You'd use the interest generated by the bonds, the dividends from your stocks, and, if the stock market performs well, the proceeds from selling some of your stocks to replace the long end of the bond ladder. If the stock market isn't cooperating, you have a built-in buffer from the remaining bonds in your ladder. That will make it easier for you wait for a stock market recovery before refilling the long end of your bond ladder.

By relying on a bond ladder to generate your spending cash, you take away the need to sell assets to cover your near-term costs. As long as the issuer remains solvent, those maturing bonds, by their very nature, convert to cash at maturity. The amount of cash and when they convert are key features of the bond contract. Bond contracts are a higher priority payment for issuers than voluntary payments like dividends, which makes them much more likely to get paid as agreed.

Control your money and enjoy your retirement
By naming and prioritizing your costs in advance and investing in a way that keeps your short- to mid-term money away from stocks, you can put yourself in the driver's seat with your retirement finances. That will go a long way toward helping you successfully make the shift from accumulating your retirement nest egg to spending it in your golden years.