In One Chart: Why retirees should loosen their purse strings and embrace the ‘YOLO!’

For retirees paralyzed by the prospect of running out of money before they cross the great divide, Tony Isola of Ritholtz Wealth Management has one word:

‘YOLO!’

Of course, if you’re of retirement age, you probably have no clue what that acronym even means. Well, we’re here to help: YOLO is the millennial version of “carpe diem!” and it stands for “you only live once!”

Isola, flying in the face of all those “retirement crisis” headlines, says, in reality, we need more YOLO’ers these days.

“Newsflash! Many retirees are not spending ENOUGH in retirement,” he said. “We see this on a daily basis. Many clients constantly focus on the threat of running out of money rather than enjoying the fruits of decades of saving and sacrifice.”

He’s not talking about being reckless, and the advice clearly doesn’t suit everyone. But assuming you’ve taken advantage of sticking to a retirement plan and managed to build up a sufficient amount, Isola is all about embracing the golden years.

“While we are certainly not recommending retirees spend like drunken sailors,” he said, “too many have unrealistic expectations about financial Armageddon.”

He specifically took aim at one overly-careful approach financial planners often dole out: Retirees should not withdraw more than 4% of their retirement balances, along with an adjustment for inflation, on annual basis.

This chart shows what that 4% will do to a $1-million nest egg, invested in a 60% stocks/40% fixed income portfolio, over various 30-year periods:

In two out of three of these scenarios, as the chart reveals, retirees finish with more-than-double what they started with, and it’s very rare to have less than the $1 million — if fact, finishing with quintuple their starting wealth is more likely.

That’s what’s referred to as a “consumption gap.”

“Most retirees do not begin to touch their principal until they reach well into their eighties,” Isola wrote. “Leaving your entire principal to heirs means you under consumed your retirement portfolio and needlessly sacrificed a higher quality of life.”

So Isola is telling clients it’s OK to spend a little more at the beginning of retirement because studies show people tend to spend less as they age.

“You may be healthy at 65, but things might change a decade from now. Hiking mountains and traveling long distances to exotic locales might not be possible after hip or knee replacements,” he wrote in his blog post. “Chronic illnesses could care less about your travel plans.”

In other words, YOLO!

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