Retirement brings unique circumstances to a person’s life. It’s likely the first time you’ll truly appreciate not setting the work-time alarm clock, as the days of stressful deadlines are past. Retirement is a life-changing event for most people, akin to the shock of starting that first job. I can remember that sobering moment in my life, too. To this day, I still have chills when I think back to my first day of work. I recall waking up at 6 am thinking “You have got to be kidding me. I have 40 more years of this?” Although back then I would never have believed I’d be able to get up, have already worked out, and been getting ready for work before 6 am.
One of the hardest things to get use to in retirement is that there is no regular paycheck every month. Instead, most people subsidize their living from their life savings. I’ve written about some methodology behind how we approach this in past blogs. Today, however, I’d like to talk about “frequency.” I believe there should be a plan to when money is sent home from accounts (be they savings, investments, etc.).
As always, I will preface this by saying there is no wrong frequency. In the end, it’s all about how to best manage your finances. However, clients frequently ask me about getting a single check for the year, a check every month, or some other frequency. Normally, I either recommend to people we can send money home monthly (since you are used to it) or we can send money home semi-annually (every six months).
Every Six Months.
To be honest, I prefer the six-month (semi-annual) method.
I recognize this breaks the mold of a monthly paycheck to which we are accustomed. What I’ve found, however, is that our expenses aren’t linear. For some months, we have holiday presents and vacations. In other months we are spending very little. This makes it hard to get a handle on a monthly fixed budget. So, sending a big check home allows for month-to-month irregularities to average themselves out.
The next reason I like the six-month cadence is market uncertainty. Most often, it’s easier to know you have the next six months of living expenses sitting in cash reserves. From our perspective, it gives us an entire half year to manage your portfolio to prepare for your next six-month installment. From our client’s perspective, they seem to worry less about market volatility. This is a win for all, as it allows markets to play themselves out rather than making a kneejerk decision.
Lastly, it allows for easier re-calibration. As I previously mentioned, budgeting is a tricky thing for most. If we send home $50,000 for the next six months, we get to see if our clients call in four months, eight months, or some other variable timetable. This is critical data for us as financial planners. If we find your cadence is every four months that automatically informs us about your spending habits. This allows for a dialogue between us; was this a one-off or do we need to re-calibrate your model? Is this increased spending habit sustainable?
Enjoy those retirement dollars.
On the other end of the spectrum, it’s very common for that $50,000 to last eight, nine, even twelve months. What’s the problem there? This is a good thing, right?
In some ways, sure, it’s a very good thing. If we agreed that $50,000 was sustainable every six months and you only need it every twelve months, your plan should work twice as well. Although true, there is a big old BUT! Generally, it means you staying too conservative and not enjoying your golden years. This is where financial planning can get tough. It’s always a delicate balance. I want my clients to enjoy their money and life to the fullest. It pains me to see someone too afraid to spend and enjoy the fruits of their labor out of fear there won’t be enough.
I can sympathize, as I am conservative in both my own finances and my advice to clients. However, losing my father young provides another voice on my shoulder. It says enjoy life to the fullest! That’s why I like the six-month schedule, as it doesn’t get too stringent on your planning. It allows for a bird’s eye view to see how things are trending and gives us the ability to adjust where necessary.
What are your thoughts?
Whether you agree with my logic or you prefer to go a different way, that’s totally up to you. When given the choice, I almost always suggest the six-month pace. And, I think the advice works; no one has run out of money on me yet!