MML# 085: The $2.3 Million Retirement That Works Better Than the $3 Million One

If you've opened your statements recently, you already know what I'm going to say. Things look good.

The S&P 500 is up roughly 129% since the low in October 2022 according to Carson Investment Research. Almost four years of climbing, with record highs stacking up through this summer.

A year ago people asked me how much further the run could go, and they're still asking today.

Fair question. I don't know, and I'd be a little skeptical of anyone who tells you they do.

Why I stopped guessing

Believe me, I know nobody wants to hear a financial advisor admit he can't see around the corner. You want that certainty.

But certainty doesn't exist in investing. I've seen advisors chase it anyway. During the Covid pandemic, plenty of them moved large portions of client money into cash because they were afraid of what was coming. The markets rebounded fast and those clients sat on the sidelines watching it happen.

No one has a crystal ball.

I decided a long time ago that wouldn't be me. I'd rather hold a client's hand through a rough stretch than be in the business of making market calls.

So when someone asks me when this run ends, I give them the honest answer. I have no idea. What I can do is build you a plan that doesn't need me to know.

Your spending won't hold steady anyway

Let's take a step back and reframe this from a spending perspective:

Traditional retirement analysis assumes you'll spend the same amount, adjusted for inflation, every year for 30 years.

Morningstar research from David Blanchett found that real spending follows more of a smile shape. Higher in the early active years, lower through the middle stretch, then climbing again later as health costs pick up.

That doesn't mean retirees ask for less money from one year to the next. Their spending still goes up. It just doesn't rise in lockstep with inflation, so relative to the cost of everything around them, they're quietly spending less each year.

I see this consistently in my practice. Even through the recent high-inflation years, most of my retirees took bumps to their withdrawals well below the actual inflation rate. Nobody made them. They just didn't need the money.

Chances are you won't be booking expensive trips at 85 or replacing the car every three years.

What flexibility looks like with real numbers

Let's say you retire with $2.5 million and plan to withdraw $120,000 a year.

If the market keeps treating you well and the portfolio grows to $3.1 million, you may raise that withdrawal to around $132,000.

If it goes the other direction and you're sitting at $2.1 million, you might trim to about $108,000.

That's roughly $1,000 a month, and it isn't the kind of change that reshapes your life. It might mean pushing the kitchen renovation out a year, or one trip instead of two.

In my practice this gets called dynamic spending, or spending guardrails. The mechanics can get more precise inside an actual plan, and I've rounded these numbers to keep them clean. The overall principle of it is the most important part.

Being willing to flex your spending 10% in a bad stretch is what lets you start with a higher withdrawal rate in the first place. You get to spend more of your money, because you built in the room to adjust.

Again, the 10% is just an example. Your numbers may be different.

Confidence beats precision

The attorney with $2.3 million who's comfortable adjusting along the way will almost always have a better retirement (better = higher spending in this context) than the one with $3 million who's terrified to touch any of it.

I've sat with both. The second one is harder to watch.

For many years you've mastered the art of making decisions with incomplete information and changing course when the facts changed. That's the same skill this takes. You already have it.

Where I'd start

Go back to those statements.

Then ask what would happen if your spending had to drop 10% for the next two years. What would you actually give up?

Most people find the answer is smaller than they feared. And that comforting truth is worth more than any market forecast you'll read this year.

That's it for this week. Thanks for reading.

Cheers, David