‘Retirement spending is not pass-fail,’ advisor says. How to reframe your strategy to reduce stress

PHOENIX — Retirement security is a concern for many older Americans and outliving savings is often their biggest fear.

To that point, some 58% of savers and retirees worry about running out of money, according to recent research from Cerulli Associates.

But “retirement spending is not pass-fail,” said certified financial planner Justin Fitzpatrick, co-founder of Income Lab, a retirement planning software company.

Your retirement spending isn’t static, meaning there’s room for adjustments over time, depending on your needs and goals, he said, speaking at the Financial Planning Association’s annual conference on Wednesday.

It’s “really disquieting” to go from working with a steady paycheck to retirement with income uncertainty, which can lead to paralysis, Fitzpatrick said. Here’s what retirees need to consider.

Financial advisors often rely on “probability of success” scores as clients approach retirement — based on a so-called Monte Carlo simulation which shows a range of possible outcomes.

However, Fitzpatrick sees retirement expenses as “a series of small liabilities,” and many of these costs can be flexible. For example, you may opt for the brewpub over a steakhouse or skip a vacation, he said.

“These are not necessarily the things you would prefer ahead of time, but they’re different from financial ruin,” Fitzpatrick said.

Total financial ruin is “almost impossible” because individual liabilities can be small and spending generally happens slowly enough to make “minor and temporary adjustments” over time, he said.

Fitzpatrick suggests using “risk-based guardrails,” or predefined guidelines, to increase or decrease retirement spending. The strategy uses planning software and considers longevity, future cash flows and income changes, along with other factors.

“You find a spending level that is reasonable,” and when the risk of doing nothing gets too high, you need to start spending less, he said. However, this requires monitoring and updating the plan regularly.

“An advisor can be that spending GPS along the way and let you know when an adjustment makes sense,” Fitzpatrick added.