Thinking about spending in retirement used to be something retirees didn’t have to do. Many workers had the benefit of an annuitized pension to handle the bulk of their annual retirement expenses, while Social Security and personal savings could help fill any gaps in their budget.

Nowadays, pensions are becoming rarer and rarer, meaning retirees are more responsible than ever when it comes to saving for their retirement. Add to that the fact that as life expectancies continue to grow, you’ll not only be responsible for a greater portion of your retirement savings, you’ll also be responsible for making those savings last for a longer period of time.

Our generation has a greater burden when it comes to saving. There are several risks that could threaten your lifestyle later in retirement. Social Security benefits could be reduced or the taxation of benefits could increase in the future to keep the program solvent, while rising inflation could reduce your spending power later in retirement.

Add it all up and it becomes clear that managing your spending in retirement is critical to increasing the chances your savings will last as long as you do.

This leads us to an important question: Am I spending too much in retirement?

Finding the answer can be complex.

Evaluating whether you’re spending too much in retirement depends on your appropriate withdrawal rate—and this will likely change over time. What we can say for certain is that spending too much early on could torpedo the longevity of your nest egg. For instance, let’s assume there’s a married couple, Bob and Jane, who are both age 65 and are going to retire in the next month. They are planning to withdraw 8% annually, adjusted for inflation, while assuming the rest of their savings will grow at a hypothetical 6% a year. In this instance, their savings would run out before they reach age 80. Considering that the average 65 year-old lives until about age 85 and one in four 65 year-olds reach age 90, Bob and Jane may only have Social Security and pension income to provide for the latter stages of their retirement.

If 8% is too high of a withdrawal rate, then what number should be used as a baseline? The general rule is that a 4% withdrawal rate is thought to be safe, meaning that your assets should be able to sustain 30 years of income in retirement.

However, it’s possible that even a 4% withdrawal may be too high. If you retire in the midst of a bear market, for example, you’ll likely be forced to sell low, perhaps even having to sell some of your investments for a loss. This can cause a swift decline in your nest egg that can be hard to recoup, potentially causing you to permanently reduce your standard of living in retirement. In a related vein, a portfolio void of equities may not be able to generate the types of returns needed to preserve your savings throughout retirement.

It’s also possible that you’ll have the flexibility to withdraw more than 4% annually. A well-diversified portfolio has the potential to deliver greater long-term returns, allowing you greater security from a slightly higher withdrawal rate. Similarly, mitigating your taxes in retirement by having diverse sources of income can help you keep more of your money, thereby allowing you the opportunity to increase your withdrawal rate.

It’s also important to consider your time horizon. Initially, a 4% withdrawal rate was perceived to be safe based on a 30-year retirement. If you strive to retire in your 50s, there’s a good chance your retirement could last longer than 30 years, meaning a 4% withdrawal rate could be too high. Alternatively, if you wind up retiring in your 70s, it’s likely your retirement will be shorter than 30 years, giving you the ability to enjoy a higher withdrawal rate in retirement.

Will you be spending too much in retirement? No one knows with any certainty; after all, no one has a crystal ball to predict how long each of our retirements will last. Instead, work with a trusted financial advisor to help you develop a long-term spending plan that’s tailored to meet your retirement goals and helps ensure you’re withdrawing your money in a tax-efficient manner every year. That will provide the best indication whether you’re spending too much during your golden years.

This article originally appeared on June 14, 2015 in the St. Paul Pioneer Press. You may view the article here.

Bruce Helmer

Bruce Helmer

Co-Founder, Financial Advisor and Author, Speaker and Host of the "Your Money" Radio Show

Series 7 & 63 Securities Registrations,1 Series 66 Advisory Registration, † Insurance License Bruce has been in the financial services industry since 1983 and is one of the founders of Wealth Enhancement Group. Since 1997, he has hosted the “Your Money” radio show, a weekly program that focuses on delivering financial advice in a straightforward, jargon-free manner. Bruce also hosts with the "Mid-Morning" crew on WCCO-TV each Tuesday morning to...Read More