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Retirement is an important life milestone that many Americans look forward to reaching. Some people are able to retire quite comfortably while others have to lead a Spartan existence. The first five years of retirement can go a long way to determining how well the rest of a person’s retirement will go.

Maintaining Spending Levels

According to some studies, about half of all retirees can maintain their spending levels during the first five years of retirement. Of course, this means that half cannot. Saving religiously while working is key to retiring in the first group. Most retirees will spend more in the first few years after retirement because they will be healthier and have more opportunity to engage in enjoyable pursuits like travel, golf or tennis. As people age, they will tend to spend less in these areas. However, spending in other areas like medical care can start to spike the older a person gets.

The First Five Years

The first five years of retirement are very important when assessing the likelihood of financial success. In this instance, financial success means having some money left when death hits. The sequence of returns is very important when looking at financial success over the long run. Lower portfolio returns in the first few years of retirement will increase the likelihood that a person will run out of money before they run out of life. On the other hand, a hot stock market early in retirement will usually lead to a higher portfolio value and a bigger margin for error in the future.

Avoid Spending Too Much Principal

Spending down no more than 4% of a portfolio’s value annually is generally viewed as a good rule of thumb when it comes to retirement spending. The famous Trinity Study found that spending 4% of the portfolio value would allow retirees to live for 30 years off of their nest eggs without running out of money. Lower levels of spending could be safer, but it could cause retirees to miss out on enjoying their golden years. Higher levels of spending increase the possibility a retiree could run out of money.

Because of the sequence of returns, the first five years of retirement are key. They should also be the most enjoyable because of better health. However, those who fail to save enough will not have a high standard of living regardless of their health or stock market returns.

David A. Noyes and Co. is a DBA of Sanctuary Securities, Inc., Investment products and services are offered through Sanctuary Securities, Inc.,  Member FINRA and SIPC.