The 'Permission to Spend' Rules of Retirement Spending

Want to spend a little extra money in retirement without the guilt? There are some strategies you can use.

Think of them as permission to spend rules; they are designed to let you splurge a little without throwing your retirement savings plan off track or causing you sleepless nights worrying about outliving your money.

After all, we’ve been conditioned to save as much as possible, so spending in retirement beyond whatever withdrawal rate we committed to, even if we can afford to, can be downright scary.

From just $107.88 $24.99 for Kiplinger Personal Finance

Become a smarter, better informed investor. Subscribe from just $107.88 $24.99, plus get up to 4 Special Issues

CLICK FOR FREE ISSUE

Sign up for Kiplinger’s Free Newsletters

Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.

Profit and prosper with the best of expert advice - straight to your e-mail.

Sign up

“I’ve talked to people who have a lot of money who are living on $4,000 a month,” when they can afford to take those trips and upgrade their homes, says Nancy Gates, lead educator and financial coach at Boldin. They don’t spend out of fear and guilt, she says. Permission to spend rules can “motivate people a little.”

If you have a retirement withdrawal plan in place but can afford to spend a little more, but are afraid to, follow these two rules for a little guilt-free spending.

The 0.01% rule of retirement spending

Popularized by finance blogger, author and Ritholtz Wealth Management COO Nick Maggiulli, the 0.01% rule is designed to eliminate stress about any purchases that are 0.01% or less of your net worth.

Let’s say you are worth $1 million; you can make purchases of $100 or less worry-free, according to the rule. That doesn’t mean you can make ten purchases of $100 per day. It means you have an $100 extra per day to spend. You can use it daily, weekly, monthly or annually.

The rule is based on the assumption that your assets will return around 4% a year, and that’s 0.01% per day. If you spend that portion of your net worth, it won’t take away from what you already have saved.

“The thought is that you can spend up to 0.01% of your net worth each day without significantly impacting your long-term wealth,” said Mindy Yu, senior director of investing at Betterment at Work. “In retirement, the rule can be applied based on the assumption that you can conservatively generate an average annual return of 4%, enough to offset this level of spending over time.”

This rule provides retirees with a quick gut check for day-to-day spending decisions. Thinking about a golfing outing, but don’t think you should spend the extra $500? If you’re net worth is $1 million and you haven’t spent your extra 0.01% for five days, you can do it worry-free.

“Frameworks like the ‘0.01% rule’ are helpful in the sense that they offer a simple way to think about daily spending without fear of overspending,” said Lu. “While there’s plenty of guidance on how to save for retirement, there’s far less clarity on how to spend down those savings in a sustainable way.”

Spend the gains rule

Another approach to guilt-free spending in retirement is the spend the gains rule, says Gates. With this strategy, if your retirement investment portfolio performs better than its projected returns for the year, you can spend that money guilt-free, says Gates. If your portfolio doesn’t outperform, you can’t take anything extra.

“Let’s say your plan built in 6% gains each year and you get an 8% gain in one year. With this rule, you spend that,” she says. “You are rewarded in strong markets, and it’s not permanently impacting your withdrawals.”

Basing it on portfolio growth is another way to approach the spend the gains rule. If you are projecting a portfolio balance of $1 million at the end of the year and it’s $1.5 million instead, you would be able to skim off the top with this rule.

“The portfolio becomes fun money. It's permission to spend,” says Gates. “If the money runs out, you can’t go on vacation, but you can still pay the bills.”

Use these rules for splurges

These permission-to-spend rules are guidelines to help you make those extra purchasing decisions without any stress or guilt. Should you splurge on that trip? Should you make that home improvement? Should you buy that boat? With these rules, you’ll know its ok to spend without jeopardizing your long-term retirement strategy.

But it shouldn’t be the main plan for how you’ll spend your savings when you retire.

“Retirees can use the '0.01% rule' as a quick gut check for day-to-day spending decisions. However, it shouldn’t be the sole factor in determining a sustainable long-term budget in retirement,” says Lu. “Other considerations like investment performance, income sources, market volatility and inflation can all impact how much a retiree can reasonably withdraw over time."

Related content

• Are You a Retirement Millionaire Too Afraid to Spend?
• The 'Me-First' Rule of Retirement Spending
• The 'Die With Zero' Rule of Retirement
• The Rule of $1,000: Is This Retirement Rule Right for You?