Managing Risks for Retirement Spending

Retirement is about more than just building up savings—it’s also about figuring out how to spend those savings in a way that lasts. One common approach is to use a fixed or “safe” withdrawal strategy, like the “4% rule,” where you spend a set percentage of your portfolio each year. But life doesn’t move in a straight line, and neither does the market. That’s why it’s important to regularly revisit your financial plan to determine whether adjustments to your spending might be needed.

One of the key tools we use to support this kind of planning is a Monte Carlo simulation. While the name might sound complex, it’s essentially a probability analysis that tests thousands of possible market outcomes using different return assumptions, based on the risk level of your portfolio. It doesn’t try to predict exactly what will happen, but instead gives us a sense of how likely your plan is to succeed given a wide range of potential future scenarios.

For example, how does your plan hold up if markets are strong early in retirement? Or what if returns are weak in the first decade? A probability analysis will help us explore these possibilities and understand the level of risk in your current spending strategy. If things are going well and your plan looks more secure than expected, your spending range might increase. If your portfolio hits a rough patch, you’ll know when to ease back.

This kind of analysis isn’t a one-time event. It works best when it’s done regularly as your financial picture changes. Market performance, changes in spending needs, longevity, and unexpected life events can all shift the odds. The risk of living longer than expected and outliving your money is just as real as market volatility; it needs to be factored into your financial planning. Running updated simulations periodically can help you make informed decisions about whether your spending is still sustainable, or whether a slight increase or reduction might be appropriate.

Inflation is another factor that can have a major impact. It’s not just the average inflation rate that matters, but when the inflation occurs. If high inflation happens early in retirement, it permanently increases your cost of living. Even if inflation eases later, the higher base spending still compounds, potentially requiring hundreds of thousands more in total withdrawals. This is why we pay close attention not only to investment returns, but to real (inflation-adjusted) returns, especially in the early years of retirement.

For example, two retirees facing the same average inflation over 30 years may have very different outcomes if one sees an inflation spike in the first decade. This chart shows how inflation timing impacts total retirement withdrawals when the average inflation rate over 30 years is the same:

(Chart A)

(Chart B)

(For illustrative purposes only)

Scenario A requires about $8.11 million in total spending over 30 years as opposed to $6.84 million in total spending in Scenario B. In both cases, the average inflation rate over 30 years is 3.33%. However, the difference in total spending is dramatic - approximately $1.27 million, which is entirely due to the timing of inflation.

High inflation early in retirement can permanently affect your purchasing power. The same is true for poor investment returns. A strong retirement plan goes beyond averages and adapts over time to reflect changing conditions, keeping you on course.

A dynamic spending approach takes the guesswork and worries out of day-to-day decision-making. You’re not just reacting to every market dip or news headline. You have a defined spending range that updates as needed based on your individual financial circumstances. You’re working within a flexible, responsive structure that helps you stay on course, no matter how the markets behave. Retirement planning is not a set-it-and-forget-it scenario. Keeping your plan updated and responsive to changes in both markets and your life is what gives you the best chance of enjoying your retirement with confidence.

If you would like to create a picture of your financial future, contact us to schedule a complimentary consultation and discuss how it works. Our planning professionals take the time to understand your unique circumstances and goals, asking thoughtful questions to uncover what matters most to you. We will develop a personal plan and test it against different market scenarios to help you make informed decisions about your finances.

This commentary is for informational and educational purposes only. Opinions are subject to change. Please consult with tax, legal, and financial advisors, as your circumstances may be unique. Some laws and interpretations are subject to change. 

Carnegie Investment Counsel (“Carnegie”) is a registered investment adviser with the Securities and Exchange Commission. Registration as an investment adviser does not imply a certain level of skill or training. For a more detailed discussion about Carnegie’s investment advisory services and fees, please view our Form ADV and Form CRS by visiting: https://adviserinfo.sec.gov/firm/summary/150488.

You may also visit our website at: https://www.carnegieinvest.com