How to Avoid Being the Richest Person in the Graveyard

For most of their adult lives, our clients are conditioned to save. Save for retirement, save for emergencies, save for college, save for the future. Work hard, invest consistently, exercise financial discipline, and gradually accumulate substantial wealth to support a comfortable retirement. Most retirees spend 30 or 40 years reinforcing these habits centered around accumulation. These decades of good habits form well-worn ruts in the psyche. Over time, most are rewarded with financial independence and freedom to retire on their own terms. Then, literally almost overnight, the objective changes and instead of contributing to the portfolio, the portfolio is expected to contribute to them.

Reliable retirement spending is often portrayed as an extraordinarily complex endeavor. However, after evaluating some income tax factors, at its core, retirement spending comes down to a remarkably simple relationship: the ratio of future spending to current investable assets— that's it. That said, day after day and client meeting after client meeting, we witness an almost universal pattern: the math behind this ratio is rarely the problem. Instead, it is something much more vexing and harder to address: the change in mindset.

When people envision the risks of retirement, they almost invariably focus on one concern: running out of money. Retirement may span three decades, or more, and over that time, markets will invariably ride a roller coaster of returns. Add in the uncertainty of healthcare costs, inflation, and other unknowables, and it’s understandable why retirees are cautious not to jeopardize their financial security. Despite all this, more often than not, the greatest risk facing many of our clients is not premature portfolio depletion.

It's chronic underspending.

Many retirees continue to operate with the same mentality that enabled them to accumulate wealth. Spending feels uncomfortable, even when their resources substantially exceed their needs. Vacations with the kids and grandkids are put off for another year, meaningful bucket-list experiences are deferred, and charitable intentions or financial help to others is targeted for “later in life.” Meanwhile, over a long enough time frame, the portfolio almost always continues to grow well beyond the spending pace. Yet, the retiree's behavior often remains unchanged, which renders the biggest risk of all for many life-long diligent savers missing out on finding fulfillment in the time and the treasure built from a lifetime of discipline.

Usually, the upspoken goal is often this concept of fulfillment, which means putting financial assets to use in a way that aligns with one’s values. Almost always, this means meaningful experiences with loved ones, contributing to people and causes, and freeing up time to enjoy and enhance relationships.

In short, the key is finding that spending sweet spot of a meaningful retirement by striking the balance between overly conservative asset hoarding and frivolous spending to ensure you’re not the richest person in the graveyard.

One of the most valuable roles we play for retired clients is helping them develop confidence around spending and it rarely is a question of affordability. The real question is: "How do I know it's prudent?" This is where clear-eyed and thoughtful planning and analysis becomes indispensable.

The first step is identifying baseline spending needs. Retirees must first develop a clear understanding of the resources required to sustain their desired lifestyle, including housing, healthcare, taxes, travel, insurance and other recurring expenditures. Once that baseline is established, step two is often the process of creating and setting up the recurring transfers as a “retirement paycheck.”

Just as our clients received a paycheck throughout their working years, we can help set up our retirees to receive a monthly transfer from their investment portfolio into their checking account. We are simultaneously reviewing ongoing tax projections (along with our clients’ CPAs) to identify the proper account to pull funds from to minimize the tax burden. In addition, we can coordinate estimated payments, or even tax withholding, directly from those distributions. We stress test these scenarios by modeling severe market declines, below-trend returns, elevated inflation, higher spending levels, increased longevity, and long-term care scenarios. If the plan remains viable across a broad range of adverse conditions, clients can spend with confidence rather than apprehension.

The result is not only a cash-flow solution but a psychological framework that sets spending on autopilot. So, rather than evaluating every expense through the lens of scarcity, retirees gain confidence knowing their spending is supported by a carefully constructed, tax sensitive, and rigorously tested financial plan.

In a very real sense, the retirement paycheck provides something many retirees need: permission to spend. In fact, recent research shows many retirees who have annuities, another form of a paycheck from an insurance company, spend more than those retirees that do not. While we won’t lay out the debate on the advantages and disadvantages of annuities here (please refer to our blog on this topic), the concept is the same. With consistent monthly cash flow, spending becomes more of a habit that does not leave retirees wondering if the rate is sustainable.

Of course, a retirement cash flow plan is not a static proposition. Portfolio values fluctuate, tax laws change, health circumstances shift, family dynamics evolve, and spending patterns fluctuate.

As a result, a retirement spending plan should never be approached as a set-it-and-forget-it exercise. At least annually, it’s critical to revisit the analysis and stress-test the plan against current realities and updated assumptions. The purpose is to continually evaluate whether the relationship between spending and investable assets remains sustainable under a wide range of circumstances. Very often, new retirees start off with an understandably conservative spending pace, and over the years, we find ourselves recommending an increase in spending pace after several of these annual reviews, as many of the doomsday scenarios never came to pass.

The best retirees eventually realize that their benchmark is no longer the S&P 500 or some other mix of market indices. Their benchmark becomes much more personal. Are their assets supporting a dignified retirement? Do they have clarity and confidence about the future? Are they investing time in the relationships that matter most? Are they creating meaningful experiences? Are they supporting the people, institutions, and charitable causes they care deeply about? Do they have genuine peace of mind?

Those are the metrics that matter and the true “return” on the portfolio.

The most successful retirees we've worked with are rarely those who generated the highest investment returns. They're the ones who successfully transformed financial capital into life capital. This is perhaps the most overlooked aspect of retirement planning. The end goal, and purpose, is for the portfolio to support a rewarding life and to ensure the legacy you wish to leave behind. In the end, the goal is not to die with the most money.

After all, the value of wealth is not found in what it can accumulate. It is found in how it can serve for a meaningful retirement to help others. Almost everyone would choose this over being the richest person in the graveyard.