To make matters worse, the current conventional wisdom, such as the 4% rule or spending your required minimum drawdown, would suggest you should pare back spending in an economy like we're having now. But that's easier said than done when your money will buy less with inflation at 8.5%, and many retirees are feeling ready to travel and socialize after years of pandemic isolation.
In finance, any strategy that forces you to cut spending at the worst possible time is considered a failure. Yet for some reason millions of retirees are advised to follow a strategy that does exactly that. So if you want to do better and don’t want to buy an annuity with your savings, you need to be more strategic.
Divide your spending into wants and needs. Finance your needs (housing costs, food) with stable, inflation-protected income like Social Security or inflation-adjusted bonds. Then finance your wants based on how your risky assets are performing (a good investment choice would be cheap, well-diversified stock funds) and balance those decisions with your personal situation. If this is the year you feel you really need to take a vacation with your grandkids, so be it. You can at least rest assured that while you splurge, you've got your needs financed with low-risk assets, so you know you’ll be OK in the future.
Defined contribution plans like your 401(k) have taken a lot of flak over the years, but they're the main reason many retirees will be better off compared with previous generations. That means that boomers enter retirement richer than previous generations but burdened with a very complex risk problem: how to spend that money. So if you want to fret about your retirement, fret about that—in times like these, the problem is harder to solve than ever.
Allison Schrager is a Bloomberg Opinion columnist. She is a senior fellow at the Manhattan Institute and author of An Economist Walks Into a Brothel: And Other Unexpected Places to Understand Risk.