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"A foolish consistency is the hobgoblin of little minds…"  —Ralph Waldo Emerson

There is a fatal flaw in most simple retirement models and rules of thumb. For example, the famous "4% rule," which states that you can withdraw 4% from a diversified portfolio, adjusted for inflation every year, and expect it to last for a 30-year retirement. That rule has a number of problems, but for our current discussion, the glaring error is simply this: you are highly unlikely to spend a constant amount every year in retirement.

Most retirement analyses assume you’ll withdraw the same amount from your nest egg every year. It’s the rare financial advisor who will spend hours with clients determining their actual cost of living, and how it is likely to change over the years. So a single number is usually chosen.

That’s accurate enough to get some idea of where you stand for retirement. But once you plan your retirement cash flow in detail, or actually retire, you’ll realize that this cookie-cutter approach to spending just doesn’t cut it.…

Here are just three of the prominent reasons that your retirement expenses and withdrawals will inevitably fluctuate over time:

  1. Pensions or Social Security may not start immediately: If you’re fortunate enough to retire early, then it might be 5, 10 or more years before any sort of pension or Social Security kick in. Even if you aren’t retiring early, you might have to wait on a spouse’s Social Security or some other future income stream. Or perhaps you decide to follow the common advice and delay taking Social Security, in order to increase your total payout. In any of these scenarios, the withdrawals from your nest egg must be larger earlier in retirement, to cover expenses until the pension starts. But then those withdrawals can be lowered, possibly substantially, once you have regularly-occurring income to cover expenses.
  2. Market returns and valuations will fluctuate: Most of us now understand that you can’t plan for retirement using historical stock market averages. That’s because history may not repeat, and — just as critically for retirement cash flows — it may not repeat in the same sequence. Stock valuations are now near all-time highs, so we can’t expect historical real stock returns any time soon. But will those conditions prevail forever? Unlikely. But who knows for certain? So what does that mean for your retirement withdrawals? Common sense and personal experience indicate that most individuals will adjust their spending based on the perceived size and health of their nest egg, which is likely to fluctuate over a decades-long retirement.
  3. Your lifestyle will change over time: Data from the US Bureau of Labor Statistics shows a general drop-off in household expenses starting at age 55. By age 75, expenses are only 60% of what they were for couples in their 50’s. Currently this is true even though the share of health care expenses doubles. For anybody reaching retirement and the empty nest stage of life, this makes intuitive sense. Gone are child and education expenses. Gone are commuting and work-related expenses. Sure, travel and recreation expenses may go up, but that can be offset in whole or part by greater flexibility (you no longer have to visit those prime spots while everyone else is on vacation), and by downsizing in other areas of your life (houses and vehicles, for example).

So those are three strong reasons why your retirement expenses and withdrawals won’t stay constant as many retirement models assume. But, knowing that, what should you do about it?

For starters, realize that if you really want to understand and drive your retirement, you’ll need to use a more sophisticated model. It’s the difference between looking up the mileage between two points on a map to know approximately how long a trip will take, versus actually taking the journey — while navigating all the ensuing starts and stops, twists and turns.

A more sophisticated model can incorporate more realistic estimates for portfolio and annuity performance, based on today’s valuations and interest rates. It can include the present value of future income, so you understand how pension payments in the future impact your current spending. It can include estimates of how you expect expenses to change as you progress from empty nest to early retirement to the later years. And it can even attempt “consumption smoothing” — an optimal spending plan that allows for a consistent lifestyle amid varying income flows over time.

If you don’t want to do the work to create a more sophisticated model of your retirement, or find and pay somebody trustworthy to do it for you, then you could instead take the time-tested approach of applying some large safety factors. For example, you could ignore the BLS statistics above, and assume you’ll keep spending what you spent in your 50’s up into your 80’s and 90’s. That ought to be a conservative assumption. But it does risk leaving some money on the table when you die, with regrets about what that money might have bought.

Another safe and simple approach is to guard your principle, spending only income and dividends. (Or, if you are taking a total return approach, to cut back your lifestyle if it appears your nest egg is shrinking over a sufficiently long enough time period.) There is a lot of appeal to these super-safe approaches, but understand that only a small percent of retirees will have the means to implement them. In today’s economic environment it is very difficult to generate enough income from your investments to cover all your expenses. You will need substantial assets — a tall order for many.

Bottom line: it is unrealistic to expect your investment returns, your income, your expenses, or your withdrawals to be constant over the course of a 30-40 year retirement. Anticipate there will be changes, at least in the first phases of your retirement years, and develop tools for measuring your progress. Avoid a cookie-cutter approach: implement a flexible lifestyle, shun debt and large fixed expenses, add in some part-time work if possible. And you will have the options you need for managing change.

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