Mastering Retirement Spending: The 'Me-First' Rule Explained

Transitioning into retirement brings the challenge of managing finances without the cushion of a regular paycheck.

Market fluctuations can further intensify concerns about depleting savings prematurely.

To address these anxieties, many retirees are adopting the "me-first" or "flooring" rule—a strategy designed to secure essential expenses with guaranteed income sources.

Nick Nefouse, global head of retirement solutions at BlackRock, emphasizes the importance of this approach, stating, "With the exception of the very wealthy, flooring helps everyone. It gives you peace of mind when the market goes down 20%."

By ensuring that basic needs are covered, retirees can navigate market volatility with greater confidence.

Understanding the 'Me-First' Rule

The core objective of the me-first rule is to establish a stable financial foundation by covering essential monthly expenses through reliable income streams.

These essentials typically encompass housing, healthcare, insurance, transportation, food, and clothing.

Nancy Gates, lead educator and financial coach at Boldin, clarifies, "This is not for travel and Netflix."

By securing a consistent income for these necessities, retirees can mitigate the emotional stress associated with market downturns and avoid hasty investment decisions.

Implementing Guaranteed Income Streams

To effectively apply the flooring method, retirees should ensure that their essential expenses are met through guaranteed income sources.

Social Security benefits serve as a primary component of this income.

Additional sources may include pensions, annuities, or bond ladder strategies.

Steve Parrish, professor of practice in retirement planning at The American College of Financial Services, notes, "Money from a 401(k) can be rolled over, deposited in a savings or brokerage account, or annuitized."

He highlights options like immediate income annuities and deferred income annuities, which provide monthly payouts over a specified period.

Parrish also mentions the use of bond ladders, where bonds mature at different intervals to offer a steady income stream.

When considering annuities, it's crucial to conduct thorough research or consult a trusted financial adviser, as these products often come with complex terms and potential penalties for early withdrawal.

Evaluating the Flooring Approach

While the flooring method offers benefits like peace of mind and consistent income, it's essential to be aware of potential drawbacks.

Investment fees associated with annuities can be substantial, including administrative costs and commissions that may impact overall payouts.

Additionally, many guaranteed income products lack inflation protection, potentially diminishing purchasing power over time.

Parrish cautions, "Most of the investments behind flooring do not grow with inflation. You get a single premium annuity, it just pays you out monthly, it doesn’t have a cost-of-living raise."

This could lead to a decline in the standard of living during periods of high inflation.

Steps for Successful Implementation

For those considering the me-first rule, the following steps can guide the process:

1. **Assess Essential Expenses**: Calculate all necessary monthly costs, including housing, healthcare, insurance, transportation, food, and clothing.

2. **Determine Guaranteed Income**: Evaluate how much of these expenses are covered by Social Security and any pensions.

3. **Bridge the Gap**: For any shortfall, consider options like annuities or bond ladders to generate additional guaranteed income.

4. **Consult a Financial Adviser**: Seek professional guidance to tailor a strategy that aligns with individual circumstances and goals.

Parrish emphasizes the importance of this approach, stating, "You are basically flooring your essential expenses in retirement. Let's make sure you're safe first, and that's what flooring does."

By prioritizing essential expenses and securing them with guaranteed income, retirees can enjoy a more stable and stress-free retirement.