I’m 55 with $2.5 million saved and no debt and would like to increase my monthly spend by $4k – can I afford it?

How much can you safely spend in retirement with $2.5 million in liquid investments? This is a question posted by a Reddit user recently.

The original poster (OP) explained that he is 55 years old with $2.5 million in liquid investments but no debt. He is currently spending around $6,000 per month but would like to go up to $10K per month so he can afford to do more things he’d enjoy including traveling more, living better, and helping his brother.

He wanted to know if he’d be able to afford the extra spending and said he was OK with his net worth going down over time. So, given those parameters, is he OK to increase his expenditures?

How much can you safely spend as a retiree?

While $2.5 million may seem like a lot of money, the reality is that the OP is just 55 years old and he will need these funds to last for the rest of his life. So he must carefully decide on a safe withdrawal rate and can’t just start taking money out because he wants to. 

Experts used to believe it was safe to withdraw 4.00% of your retirement funds in year one and then make adjustments based on inflation, but this was revised recently down to 3.7% because of concerns about longer lifespans and lower projected returns in the future. As a younger retiree, the OP really should err on the side of caution and follow the more conservative withdrawal rate.

With a $2.5 million nest egg, that would mean that he’d be able to withdraw around $92,500 per year. That puts him a little higher than his current $6K in spending, but not nearly to $10,000.

He’d be wise to limit his withdrawals to the recommended amount to avoid risking his nest egg running dry while he’s still depending on his investments to live off. 

What if you want to spend down your retirement funds? 

The poster made clear in his Reddit thread that he was OK with spending down some of his money. However, just because you are comfortable with your portfolio balance going down a bit does not mean that you can exceed a safe withdrawal rate.

The reality is that a 3.7% withdrawal rate will often result in your portfolio balance declining over time. While it may seem like that would keep your account growing since you can likely earn above 4.00% returns in many years, there will also be some years when your account loses money. You’ll still likely have to take funds out of your account during those years, either to live on or because you’re mandated to take Required Minimum Distributions from some retirement accounts. When you take money out during a down year, you lock in your losses and that affects the size of your portfolio going forward. 

Further, the 3.7% rule allows you to increase withdrawals to account for inflation. You can’t predict how much higher future inflation is going to be, so there may be some years when you end up taking a good amount more out of your account than you’d hoped for just to avoid losing buying power. Again, your withdrawals may exceed the returns that you earn. 

While you don’t necessarily have to follow the 3.7% rule, you do need to develop a strategy that preserves your funds. It’s a good idea to work with a financial advisor to help you do that, especially if you hope to be able to spend a little more than the general rules of thumb would allow. Your advisor can help you to set a safe spending level based on your personal circumstances so you protect your financial security in the future.