You’ve been saving your whole life for retirement. Money from every paycheck automatically went straight to your 401k. 

You watched as your investments grew slowly, then faster as compound interest took hold. You now have a large portfolio of investments. Stocks. Bonds. Real estate. 

The time has come. You’re financially prepared to enjoy the rewards of your hard work and preparation. You’re ready to start drawing an income from your investments. Or are you? 

Suddenly, you’re scared. 

Saving for retirement was easy after you set it on autopilot. It felt good to accumulate money for the future. 

Taking money out of those accounts now? It’s a completely different game. Something you’ve never done in your life. The exact opposite of the savings muscle that has grown so strong. 

A withdrawing muscle? What’s that?! You’re not sure if you even have one of those. And it’s certainly never been used! 

Switching from asset accumulation mode into decumulation mode might be the biggest transition you’ll ever make in your financial life. It’s a mental hurdle for most people—particularly the most frugal savers, who have been delaying gratification for years and are really good at it. Their brains are wired for it. To stop saving and start spending that pile of money requires a different wiring altogether. 

And some people just can’t handle it. They become even more frugal. Miserly even. They’d rather live a miserable life off their tiny social security payments so they don’t have to touch their nest egg. 

Or they just decide never to retire. Working the rest of their life sounds better than dealing with the fear that their money might not last. 

Does any of this sound like you? 

I can relate. But I overcame the fear and turned it into excitement for the future. It all comes down to preparation. Here’s what worked for me. 

1 Do your research 

When you fear something, learn as much about it as you can.
Knowledge conquers fear.  
—Edmond Burke 

The more you know, the more confident you’ll be about drawing income from your investments. Your anxiety lowers because you understand how the process works. 

You understand the factors, assumptions, and unknowns, and how they affect your future. How conservative or aggressive your plan is relative to others. How others have made it work before you. What the professionals and academics recommend.  The history of the assets you’re invested in. And you understand that your portfolio would have lasted through the worst economic times in the last 100 years. 

Read as much as you can about the topic until your fear has turned to excitement. Just as mine did. 

Here are some great places to start: 

2 Plan early, plan often 

There’s no such thing as starting to plan too early. You need to exercise your brain with the thought that the money you’re setting aside is there to be spent. And the longer you spend thinking and planning for this eventuality the more comfortable you’ll become with actually doing it. 

Like preparing a good steak, you need to marinate in the thought that you’re going to spend your retirement savings one day. Then, when you take that first bite out of savings, it will be good and easy to swallow. Not tough and hard to swallow. 

Here are some questions to plan around. The books and website I listed above can help you think through these also. 

1. How much do I need to retire comfortably? 

This is the cornerstone question to retirement planning, and it’s probably the hardest to answer. There are many variables to consider and too many unknowns. It isn’t an exact science, so you might not arrive at a single answer. It might be more of a range of comfort or a rule of thumb. And it may change as you get closer to retirement. 

It’s OK if your number changes over time, as long as you start narrowing in on a “final” number when you’re a few years out. As far as mental preparation is concerned, you just need to know that you’ve put the thought into it and increased your comfort level by the time you reach retirement. 

I covered this topic in more detail in Getting the Big Things Right in Retirement Planning. 

2. How long do my retirement savings need to last? 

These questions all work together. The earlier you retire, and the longer your life expectancy, the more money you are going to want set aside. To a point. 

drawing income from investments requires planning how long retirement savings need to last

3. What withdrawal rate am I comfortable with? 

The 4% Rule is a good place to start planning. But a longer retirement or a more conservative portfolio may cause you to consider something lower. A more aggressive, yet diversified portfolio—such as the PathwayToFI Descent Portfolio—might allow for a higher withdrawal rate, on the other hand. 

With a low enough withdrawal rate to match your portfolio and your risk tolerance, your money can last forever! 

4. How much do I need social security or other pensions to cover? And when will I start taking the payout? 

This question ties into the next topic. How conservative do you want your plan to be? 

3 Be conservative 

A conservative plan gives you confidence that if the worst-case scenario happens, you’ll still be okay. 

You can be conservative about how much you’ll get in social security and pension payments. And about how much money you need to retire on.  

Are you fortunate enough to have parents with money? Then you can also be conservative by assuming that you won’t receive any inheritance, when in reality you probably will. 

Social Security, pensions, and other annuities 

Will you be counting on social security—or other annuity payments from an employer or insurance company—to cover your base lifestyle? Then your financial success is as much in the hands of the payer as it is in your own ability to manage your savings and investments wisely. 

If you can cover your lifestyle without those payments, then you’re in the driver’s seat. Any payments you receive will be gravy, and will make you feel that much more secure. 

If you’re still decades away from taking social security like me, are you planning for reduced benefits? Social security has been paying out more than it takes in since 2010, and is projected to have a shortfall starting in 2035, according to this guide from CNN. Earlier retirees are likely to be grandfathered in to their benefits. But retirees beyond 2035 should be conservative about the benefit they’ll receive. 

I’m planning to not need social security at all. Yet I expect to receive about 70% of the promised benefit. I consider that pretty conservative. 

Retirement nest egg 

When you estimate how much money you need to retire on, there are many unknowns involved. You may be tempted to use a conservative number for everything: how much you’ll spend, what inflation will be, the return on your portfolio, etc. But that could result in an overly conservative number. Some of these numbers might be worse than expected. But others will be better! 

So instead of adding conservatism on top of conservatism, I’d recommend estimating how much you need as accurately as possible. Then, you can decide to add some conservatism on top of that ‘final’ number. How much you add is up to you. And, of course, the more you add the more confident you should feel that your money will last. 

There’s a downside to being too conservative. It will cause you to work much longer than you have to. Possibly much longer than you want to. So make sure that your own conservatism doesn’t force you to miss out on your early retirement dreams and leave you with millions of dollars that you wish you could have enjoyed! 

I ended up working a couple years past the date that I reached my number. But it had more to do with wanting to be in my latest role for a while than conservatism. It was a dream job for me and a great way to finish out my career. 

My financial plan was to withdraw 3% annually instead of my estimated safe withdrawal rate of 3.25% at the time. That meant that I needed about 8% more money than if I had not been conservative. And that helps me sleep well at night, particularly since I left my job in the middle of a 20% decline in stocks. 

4 Take a test drive 

Another way to build confidence and get used to the idea of living off your own assets is to simulate it. Make it feel like you’re doing it now. 

You may have heard the idea that you should practice living your retirement lifestyle before you actually retire. Do the same things. Spend money the same way. Make sure your expenses are what you thought they’d be. 

You can do something similar with retirement withdrawals. 

I was able to do this naturally because my wife wasn’t ready to leave her job when I did. She continued working part-time. But instead of living on her income, we put most of it in retirement accounts and are drawing income from our real estate and taxable brokerage account. This is exactly where the money would be coming from in full retirement since my plan is to spend everything in the brokerage before touching any of the retirement accounts. 

If not for COVID, we would have simulated retirement withdrawals a different way in 2020. We had fully planned a 3-month leave of absence from work to live and travel in Spain. That all got canceled when Spain locked down, and changed our lives forever. But that “mini-retirement” would have been a mental test of living off our assets with no other income. 

You might want to try one of these simulations yourself before you go all-in. 

5 Have a backup plan 

Life is full of surprises. Some good. Some bad.  

We don’t know what the future holds, so every good retirement plan has a backup plan. 

What will you do if money starts to run out? You won’t just watch the slow train wreck. You’ll take action. 

Is there a part-time job you’d enjoy? Could you contract back to your previous employer for a while? Keeping your professional network and skills up to date is a good idea if you’re willing to rejoin the workforce in a worst-case scenario. 

Maybe you don’t need to go back to work at all, though. 

Your discretionary expenses for restaurants, travel, and new cars are pretty high anyway. They can be cut back and you’ll still enjoy life. You’ll just eat out less, travel closer to home for a few years, and buy used cars instead of new. 

That’s a great thing about having slack in your retirement budget. It gives you flexibility if finances get tight. 

Or maybe you’re living in a high cost of living area and decided to stay in the large family home where you raised your kids. Your backup could be to downsize into a more affordable home in a safe, but less costly area. You can then use the extra money to keep your retirement secure. 

Be creative and find a solution that doesn’t feel like you failed if life goes that way. Then you’ll be able to sleep well at night knowing you have options. And you’ll be happy regardless of how life turns out.  

Summary 

Drawing income from your investments for the first time is a huge mental transition. It can be both exciting and scary as you think about what the future might hold. But the more you’ve thought it through and the more prepared you are, the less fear and anxiety you’ll have.  

This article covered 5 things that you can do to make your transition to retirement income exciting, not fearful. 

  1. Do your research  
  2. Plan early, plan often 
  3. Be conservative 
  4. Take a test drive 
  5. Have a backup plan 

Which of these do you need to get to work on today? 

Start reading, planning, and training your brain now so you can live carefree in retirement! You won’t regret it. 

And don’t forget to sign up for FREE at the bottom of the page to get much more value from PathwayToFI. 

Join me on the Pathway to FI! 

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