Are You Overspending in Retirement? How to Align Your Spending with Your Values
How do you know if you’re overspending in retirement? At Truepoint, we typically start with a Monte Carlo Analysis—a simulation that runs 1,000 scenarios to estimate the likelihood that your current spending can be sustained throughout retirement without making adjustments. The result is a “success rate” or “confidence level”—typically displayed as a percentage. But what does this number really mean, and what constitutes a “good” result?
Beyond the School Grading System
Many of our clients initially interpret these percentages like school grades, where 85% equals a B and anything below 70% is failing. This comparison can be misleading and unnecessarily concerning. A Monte Carlo success rate isn’t a grade on your financial performance—it’s a tool for understanding uncertainty and making informed decisions.
A Better Framework: Probability of Maintaining Your Current Lifestyle
Instead of thinking about grades, consider your Monte Carlo result as an answer to this question: “What is the likelihood I can maintain my current lifestyle without needing to make adjustments?”
- 85% confidence level: In 85% of simulated futures, your plan succeeds without modifications.
- 50% confidence level: In half of potential futures, you might need to adjust your approach.
Finding Your Comfort Zone
At Truepoint, we typically recommend confidence levels starting between 75-85%. From there, we work to find your personal confidence level by engaging in discussions based on:
- Your specific financial goals
- Your personal tolerance for uncertainty
- Your flexibility to make adjustments if needed
Monte Carlo Example:
As you consider if you’re overspending in retirement, imagine the following scenarios. Let’s start by saying your Monte Carlo results show a 50% likelihood of success—meaning in half of potential futures, you might need to adjust your approach.
Scenario 1 – The Flexible Spender
You break down your spending into essential and discretionary expenses and determine that your essential expenses have a 90% likelihood of success, while the rest is for discretionary bucket list items. You’re flexible with spending, unbothered by market dips, and not focused on leaving a legacy.
Your advisor may take a ‘wait and see’ approach, building and monitoring a thoughtful cash flow plan that allows you to enjoy the here and now while ensuring elasticity for future adjustments.
Scenario 2 – The Legacy Builder
You break down your spending into essential and discretionary expenses and determine that your essential expenses have a 50% likelihood of success. In this scenario, you own two homes with high upkeep costs, and leaving a meaningful legacy—like passing on the family beach house—is a top priority. As a result, you can’t easily cut back during downturns, and you tend to watch the markets closely, which causes stress.
For you, a 50% likelihood of success could be a sign that your spending patterns don’t align with your risk tolerance or legacy goals. Your advisor may come alongside you to help prioritize, strategize, and bring clarity to the trade-offs needed to get back on course.
So, Are You Overspending in Retirement? The Answer is Personal To You.
Your personal Monte Carlo target is just that – personal. It is uniquely based on your financial goals, tolerance for uncertainty, and flexibility in spending. It is the starting point to develop your plan of action. At Truepoint, we combine deep financial expertise with a personalized approach. By aligning the numbers with your unique vision, we help you spend with confidence—today and into the future.
