The “me first” rule that may prevent you from running out of money in retirement

Most people look forward to retirement, but having enough money to fund those years is a crucial component of how enjoyable the time will be. Many retirement planning strategies can help ensure your golden years are comfortable, depending on your personal goals and circumstances. The “me first” approach is one of them. Is this right for you?

What is the “me first” rule?

The “me first” strategy prioritizes which living expenses to pay. Think about food and a roof over your head. Health care and insurance are the list, along with transportation costs.

The “me first” rule dictates that you save, or if you’re already in your retirement years, have enough to cover these costs before you give up cash for discretionary spending. The total income that you can reasonably count on should be enough to cover these expenses when you reach those years or if you are already in them. This total income is often referred to as the “floor.”

The good news is that you can include your Social Security benefits in the income bucket along with other reliable sources, such as pensions and annuities. The bad news is that you shouldn’t include investments that can fluctuate with the market and economy, such as individual retirement accounts (IRAs) and 401(k)s.

“Retirees can invest and spend more flexibly with remaining assets once they set a minimum, knowing that their fundamentals are safe,” said Emmanuel Demoillière, a financial services specialist at New York Life Insurance Company. “I often guide clients through retirement spending strategies, and the ‘me first’ rule, sometimes called the floor approach, is a practical framework for ensuring income for life.”

How to calculate your floor

The “me first” rule begins with carefully calculating or forecasting both your guaranteed income and your retirement expenses, depending on whether you plan to retire or are already there. It’s basically a matter of simple calculations, but you need to keep a few things in mind.

Only include mandatory expenses that must be paid: costs of anything you cannot reasonably live without day to day. Determine how much you will need each month, then multiply the number by 12 to determine how much you will need annually. Now do the same with your steady and reliable sources of income.

Ideally, your total income will exceed the expenses you have to pay, but your goal is for the two totals to at least match. You may consider other opportunities to earn money with a difference if you are lucky enough to have an income that exceeds your expenses.

“Retirees can invest and spend more flexibly with remaining assets once the minimum is set, knowing that their fundamentals are safe,” DeMoliere said.

Be sure to review your selections regularly, such as once a year. If you are currently retired and unable to comfortably make ends meet, what else have you been spending on that is not included in the list of mandatory expenses? What are you currently spending on if you’re not retired yet and could invest or save instead? “Keep discretionary investments separate from growth and lifestyle choices,” Desmouliere said.

Pros and cons of putting yourself first

There is no foolproof strategy, and you are sure to encounter some obstacles along the way. The “me first” rule has advantages and disadvantages.

Advantages

A “me first” approach is likely to work well if security is very important to you. It takes a lot of worry about the retirement budgeting process. You’ll have a good idea if you can take that vacation or visit your kids over the holidays without skipping a mortgage payment.

Disadvantages

“Using annuities or bonds for the minimum may reduce liquidity and growth potential,” DeMoliere said. “The plan can appear too conservative for retirees who have a higher risk tolerance or strong investment preferences.”

Then there is inflation. The cost of living will rise by the time you retire. You may want to factor this factor into your projected retirement budget or leave room for increases in your current budget if you’ve already stopped working.

“Me first” alternatives.

Your expenses in retirement don’t have to be planned or paid according to one predetermined path. You can add other strategies or make a switch if Me-Firsting isn’t quite right for you. Here are some strategies to consider:

• 4% rule: Start by adding up all your investments. In your first year of retirement, withdraw 4% of the total. Every year after that, withdraw the same amount, adjusted for inflation.
• Bucket strategy: Sort your retirement savings into separate buckets (categories) based on time frames: short-term, medium-term, and long-term. Place both your savings and investments in the most appropriate group to finance your needs during that period. You can put bonds and certificates of deposit (CDs) in the short-term pool because you can easily access cash from them. Your 401(k) will fall into the long-term category.

Bottom line

The “me first” rule may suit you better if you are disciplined. You might consider downsizing or adopting a side hustle for a little extra income. It’s always a good idea to check with a financial advisor before launching any retirement spending plan. Make sure your plan is something you can comfortably live with.