Retirement Spending: How to Make the Most of Your Savings

You’ve spent decades saving for retirement. You’ve contributed to your 401(k), invested consistently, and watched your savings grow. Now, as retirement approaches, you might assume the hardest part is behind you.

But saving for retirement and actually retiring require two very different skill sets.

One man learned just how different those two things can be, despite accumulating a fortune most people only dream of.

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The Man Who Saved $8 Million but Struggled to Stop Working

Ronald Read wasn’t a wealthy businessman or a high-paid executive. He worked at a gas station in Vermont for roughly 25 years and later spent 17 years as a janitor at J.C. Penney.

Yet when he died in 2014 at age 92, he left behind an estate worth nearly $8 million.

His wealth surprised nearly everyone, including family members and close friends.

Read built his fortune through disciplined saving, patient investing, and an incredibly frugal lifestyle. He avoided unnecessary expenses, drove an older car, and reportedly parked blocks away from his destination to avoid paying a parking meter.

He even retired from his gas station job, only to return to work about a year later.

By traditional standards, Read did almost everything right when it came to accumulating wealth. His patience and financial discipline helped him build an extraordinary portfolio. And his savings ultimately benefited others. He left millions to a local hospital and library.

Still, his story raises an interesting question.

What’s the point of building wealth if you never feel comfortable using it?

There’s nothing inherently wrong with living frugally or choosing to work during retirement. For some people, those choices bring genuine fulfillment.

However, Read’s story illustrates a challenge many retirees face.

After spending decades focused on saving, switching to a retirement spending mindset doesn’t always come naturally.

That’s why building wealth is only half the equation. You also need a strategy for using it.

Why Retirement Spending Requires a Different Strategy

During your working years, building retirement savings generally comes down to three things:

  • How much you save: Consistently setting aside a portion of your income.
  • How long you invest: Giving compound growth time to work in your favor.
  • How you behave: Staying disciplined through market volatility rather than making emotional investment decisions.

These principles help build wealth over time. However, the priorities shift as you approach retirement.

About five years before retirement, it’s worth taking a closer look at three different questions:

  1. How will you protect your income during market downturns?
  2. Which investment accounts should you withdraw from first?
  3. How much can you comfortably spend without jeopardizing your financial future?

Answering these questions can help turn a portfolio you’ve spent years building into a retirement income strategy.

Let’s look at each one.

1. Protect Your Retirement Spending From Market Downturns

Market volatility affects investors differently once they retire.

During your working years, a market downturn can create an opportunity to purchase investments at lower prices. You also have employment income to cover your living expenses, which may allow you to leave your portfolio invested.

Retirement changes that dynamic.

When your investments become a primary source of income, a market decline can create an additional challenge. You may need to sell investments at a loss to cover everyday expenses.

This introduces a risk known as sequence of returns risk.

Why the Timing of Market Returns Matters

Sequence of returns risk refers to the impact that market performance can have on your portfolio when you’re withdrawing money.

For example, imagine retiring just before a significant market decline.

Your investments lose value, but your mortgage, groceries, travel plans, and other expenses don’t disappear. If you continue withdrawing the same amount, you may need to sell more shares to generate the income you need.

Those withdrawals leave fewer assets invested to participate in a potential market recovery.

Over time, this can affect how long your retirement savings last, even if the market eventually rebounds.

How a Cash Buffer Can Help

One way to manage this risk involves maintaining a portion of your retirement portfolio in cash or cash-like investments.

Rather than selling stocks during a downturn, you may be able to draw income from these reserves.

This approach can give your longer-term investments additional time to recover while you continue meeting your spending needs.

Of course, holding too much cash introduces its own risks, including inflation and reduced long-term growth potential.

The goal isn’t to move everything into cash. Instead, consider building a retirement income strategy that balances near-term spending needs with long-term investment growth.

A cash buffer can serve a different purpose in retirement than it did during your working years. Rather than simply sitting on the sidelines, it can help support your spending strategy during periods of market uncertainty.

2. Choose Which Retirement Accounts to Withdraw From Strategically

When you’re saving for retirement, much of your attention goes toward deciding where to invest your money.

Once you retire, another question becomes important: Which accounts should you withdraw from first?

The answer can affect your taxes, future investment growth, and potentially how long your money lasts.

Most retirees have some combination of three account types.

Tax-Deferred Accounts

Traditional 401(k)s and IRAs generally allow contributions to grow tax-deferred.

However, withdrawals typically count as ordinary taxable income. These accounts may also become subject to required minimum distributions (RMDs) later in retirement.

Taxable Brokerage Accounts

Brokerage accounts hold investments purchased with after-tax money.

When you sell investments for a profit, you may owe capital gains taxes. The amount depends on factors such as your holding period, taxable income, and the gains you’ve realized.

Roth Accounts

Qualified withdrawals from Roth IRAs and Roth 401(k)s are generally tax-free.

These accounts offer valuable flexibility because qualified withdrawals don’t increase your taxable income. Designated Roth accounts in employer-sponsored retirement plans and Roth IRAs generally have no lifetime required minimum distributions for the original owner.

Why Withdrawal Order Matters

A traditional retirement withdrawal strategy might involve spending down one type of account before moving to another.

While that approach may work in some circumstances, it doesn’t always produce the most tax-efficient outcome.

Instead, consider a coordinated strategy that evaluates your income and taxes each year.

For example, you might withdraw enough from a traditional IRA to use part of your available tax bracket, then supplement that income with withdrawals from a taxable brokerage account.

In some situations, taking money from a Roth account could help prevent additional taxable income.

Other income sources also influence the decision, including:

Your withdrawal strategy should account for how these sources interact, rather than treating each account independently.

The objective isn’t simply deciding which account to empty first. It’s coordinating withdrawals to meet your income needs while managing taxes over the course of retirement.

A thoughtful approach can help preserve flexibility and potentially reduce unnecessary taxes.

3. Create a Retirement Spending Plan That Lets You Enjoy Your Money

For decades, you’ve trained yourself to save. You may have avoided unnecessary purchases, increased retirement contributions whenever possible, and prioritized building a larger investment portfolio.

Those habits helped you prepare for retirement. But what happens when it’s finally time to spend?

For many retirees, this transition proves surprisingly difficult.

After spending so many years accumulating wealth, withdrawing money can feel uncomfortable. Even people with substantial savings may worry that every purchase brings them closer to running out.

As a result, some retirees spend less than they could comfortably afford.

Retirement Spending Isn’t the Same Every Year

One common mistake involves assuming you’ll spend the same amount throughout retirement.

In reality, your lifestyle and expenses will likely change over time.

Early retirement often brings more opportunities for travel, hobbies, and experiences. You may finally have the time and flexibility to do things you’ve been putting off.

As you get older, spending on certain activities may decline. However, health care and other needs can become more expensive later in life.

A retirement spending plan should reflect these possibilities rather than relying on a fixed annual amount.

Know What You Can Afford to Spend

A retirement spending plan goes beyond setting a monthly budget. It helps you understand how your savings, income sources, taxes, and investment strategy work together to support your lifestyle.

More importantly, it allows you to evaluate different scenarios.

What happens if the market declines during your first year of retirement? Could you afford an expensive vacation? What if health care costs rise faster than expected?

By exploring these possibilities before they happen, you can make more informed spending decisions.

That doesn’t mean you’ll eliminate every financial uncertainty.

However, having a strategy can make it easier to distinguish between expenses you can comfortably afford and decisions that might require adjustments.

The purpose of retirement planning isn’t just to prevent you from running out of money. It’s also to help you feel comfortable spending the money you’ve worked so hard to save.

After all, building wealth is only part of the equation. Knowing when and how to enjoy it matters, too.

The Retirement Spending Mindset: From Saving to Living

Saving for retirement requires discipline, patience, and consistency.

Spending in retirement requires a different kind of discipline.

You need to balance enjoying life today with protecting your financial future. That means understanding when to draw from your investments, how to handle market volatility, and what your portfolio can realistically support.

It’s a delicate balance.

Spend too aggressively, and you could put unnecessary pressure on your savings. Spend too conservatively, and you may miss opportunities to enjoy the retirement you’ve spent decades preparing for.

Neither extreme is ideal.

The goal is to create a retirement spending strategy that gives your money a purpose while accounting for the years ahead.

Your Retirement Strategy Should Evolve With You

The strategies that helped you accumulate wealth aren’t necessarily the ones that will serve you best in retirement.

As you approach this next chapter, your focus should shift toward protecting your retirement income, managing taxes, and creating a spending plan that reflects the life you want to live.

That transition doesn’t need to happen overnight. Ideally, you’ll begin evaluating these decisions several years before you stop working.

Most importantly, remember why you started saving in the first place.

You didn’t spend decades building retirement savings just to watch the account balances grow. You saved so you could use that money to support the life you want.

At Bonfire Financial, we believe a retirement plan should coordinate your investments, income, taxes, and spending decisions rather than treating each one separately.

Our Bonfire Method helps bring these pieces together into a comprehensive retirement strategy.

If you’re approaching retirement and wondering how to turn your savings into a sustainable income plan, we’d be happy to help you explore your options.