The ‘Common Man’ Rule of Retirement Spending

It was easy to live off investment income if you retired in the 1970s and early 1980s. Interest rates were in the high double digits then, and pensions were the norm. Even CDs and Treasury bonds gave you a nice return.

That’s not the case today. Interest rates are nowhere near that — CDs are yielding around 4% — but it's still possible to live off investment interest with the “Common Man” rule of retirement spending.

It's not going to make you rich, but with this approach, your retirement savings pay you regularly, and you don't have to worry about outliving your savings. How’s that for putting your money to work for you?

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“It's for the everyday retiree. The more armchair retiree rather than the one who's going to travel to Europe with the grandkids,” said Steve Parrish, professor of Practice, Retirement Planning at The American College of Financial Services.

“This is more for conservative people who don’t have a lot of big expenses in retirement and are not comfortable with heavy-duty investing. They can live off the interest and leave the rest to the kids.”

If you're looking for a safe way to withdraw money in retirement and still have some left over to grow and leave behind, read on to learn how the “Common Man” rule of retirement spending works.

The 'Common Man' rule: Rely on secure investment interest in retirement

With this approach to retirement spending, you take your 401(k) balance or other retirement savings and put them in conservative investments or savings accounts that generate income and grow.

At the same time, they're safe enough that you won’t risk losing your shirt in the stock market.

Here are some types of conservative investment accounts you might consider:

• CDs
• Stable stocks that pay dividends
• Dividend-paying mutual funds
• Dividend-paying ETFs
• Bonds
• QLACs (qualified longevity annuity contract) and other annuities

The idea is to generate recurring cash that, combined with Social Security, a part-time job or other income, would be enough to get by and thrive. The principal grows, albeit modestly. You aren't chasing high-flying dividend stocks with this approach.

If you're making withdrawals from a traditional 401(k), you'll need to be at least age 59½ to avoid fees, and you'll have to plan for taxes. (Withdrawals from a traditional 401(k) are taxed at your ordinary income rate.)

The downsides of the 'Common Man' approach

You get peace of mind and a reliable monthly income with this approach to spending, but it comes at a cost: inflation, interest rate volatility and a possible lack of liquidity.

“The principle is much more secure, but on the other hand, it doesn’t have that inflation factor. Part of the assets aren’t growing to keep up with inflation,” said Peter Eckerline, a managing director of RBC Wealth Management. Plus, you lose the opportunity cost of the money not compounding and growing in the markets.

This strategy is also more challenging when the Federal Reserve is cutting interest rates. The central bank cut rates twice this year and might do so once more in 2025.

When interest rates are falling, Parrish said you might want to have longer-term CDs and bonds that mature in a few years.

It's also a good idea to avoid locking up your money in investments that aren’t easy to liquidate or have fees and penalties. Some alternative assets and income annuities, for example, are difficult to pull money out of.

It's a little complicated … at first

All good things require a little work, and that’s true of the “Common Man” rule of retirement spending.

Living on interest from your investments is one thing; getting paid each month (or receiving a paycheck equivalent in retirement) is another. If you’re wondering how that happens, you’re not alone.

If you’re getting paid dividends from a mutual fund, ETF or stock, most will pay you on a schedule, typically every month, quarter or year. You can set it up to be paid automatically and directly into a bank account, or you can receive a check. Bonds, CDs and other interest payments are paid directly into your account according to a schedule or mailed to you via check.

Arranging all payments to come automatically and regularly will take some work up front, but once it's set up, it's done; you must be willing to make the arrangements yourself or get help. That’s where a trusted financial adviser might come in.

Giving up the investment growth can be worth it

We spend our working years focused on saving, but give little thought to how we’ll spend our money. For people who are conservative in nature, don’t want to spend a lot and are hesitant to put it all in the markets, living off the interest can be an option.

That peace of mind does come at a cost. You give up potential growth, and if the Fed keeps cutting interest rates and you don’t stay on top of it, you could potentially lose gains.

However, with some careful planning and strategizing, putting your money to work — so you don’t have to worry — might be the right approach for you.

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