Latest / The Financial Freedom Podcast with Fexingo: Quitting Your Job, Living Off Investments, Independence / How Early Retirees Handle Sequence Risk with a Flexible Spending Floor
Transcript
- Lucas: So Luna, we've talked a lot about the 4 percent rule and guardrails, but there's one tactic I keep circling back to that doesn't get nearly enough airtime: the flexible spending floor. Luna: A floor? You mean like a minimum you'll always withdraw, no matter what the market does? Lucas: Exactly. And it's not just a hard line in the sand. The version I find most practical is a spending floor that's a percentage of your portfolio, with a hard floor underneath so you never dip below covering your true fixed costs. Luna: So it's like guardrails but with a safety net, right? Lucas: Right. Guardrails typically cap your withdrawal rate between, say, 4 and 5 percent. But a floor is more about the dollar amount. You set a dollar amount that covers your non-negotiables—housing, groceries, insurance—and then you let the rest float with the market. Luna: That sounds almost too simple. What's the catch? Lucas: The catch is that if you set the floor too high, you defeat the purpose. If your floor is 80 percent of your pre-retirement spending, you're not really flexible. The floor has to be genuinely lean. Luna: Makes sense. So how do you actually figure out what your floor should be? Lucas: Start with your fixed expenses. Not your target lifestyle—just the stuff you can't avoid. For a couple retiring in their forties, that might be forty thousand dollars a year. Then you set your withdrawal rate on top of that. Luna: And the flexible part is the extra on top? Lucas: Yeah. So you might have a portfolio of one point two million dollars, and you say, I'll take 4 percent of that each year, but never less than forty thousand. So in a good year, your withdrawal is forty-eight thousand. In a bad year, if the portfolio drops, your 4 percent might only be thirty-eight thousand, so you use the floor and take forty. Luna: That's actually really clear. And it handles sequence risk because you're not cutting spending to the bone in a downturn. Lucas: Precisely. And here's the key: the floor is not a fixed amount forever. You reassess it periodically—say every five years—to see if your fixed costs have changed. Inflation, health care, whatever. Luna: So it's flexible in both directions? You can raise your floor if you need to? Lucas: Absolutely. But you have to be careful. If you raise the floor too much, you're back to a rigid withdrawal strategy. The floor is meant to be a safety net, not your primary spending plan. Luna: I think I get it. So let's talk about a real example. Have you seen the story of the couple who retired in 2008 with a similar setup? Lucas: Oh, yeah, I've got a great case study. A couple I read about, they retired in 2008 with a portfolio of one point five million dollars. Their fixed expenses were fifty thousand a year. They set their withdrawal rate at 4 percent, which gave them sixty thousand in the first year. But they had a floor of fifty thousand. Luna: So in 2009, when the market crashed, their portfolio dropped to about one point one million. Four percent of that is only forty-four thousand. Lucas: Right. So they used the floor and took fifty thousand. That's a six-thousand-dollar cut from their planned sixty, but it's above the floor. And it allowed them to ride out the recovery without selling equities at the bottom. Luna: And what happened in the following years? Lucas: By 2012, their portfolio was back to one point four million. Four percent of that is fifty-six thousand, so they were back above the floor. And they had never dipped below their fixed costs. The floor essentially bought them time. Luna: That's a really tangible outcome. I've also seen some research that suggests a floor can reduce the risk of running out of money by a significant margin. Lucas: There's a study from early retirement.org that modeled a floor at 75 percent of your starting withdrawal, and it boosted the success rate from 90 to 97 percent over a 60-year horizon. That's a huge difference for something so simple. Luna: And it's not just about the math. It's about the psychology. Knowing you'll never have to cut below your necessities gives you peace of mind, which is worth a lot. Lucas: Exactly. And that's why I think this strategy is underrated. Most people either fixate on the 4 percent rule or go full variable, but the floor is a middle path. Luna: So how would someone actually implement this? Like, what's the step-by-step? Lucas: First, calculate your fixed annual expenses. Be honest about what's non-negotiable. Second, set your initial withdrawal rate—let's say 4 percent of your portfolio. Third, define your floor as a dollar amount, usually 25 to 30 percent below your target withdrawal. Luna: So if your target withdrawal is fifty thousand, your floor might be thirty-five to forty thousand. Lucas: Right. Then each year, you withdraw the greater of 4 percent or your floor. But you also need to track whether your floor is still appropriate. If your fixed costs go up, you adjust the floor, but don't do it in the middle of a downturn. Luna: And what about taxes? Does the floor affect withdrawal order or anything like that? Lucas: Good question. The floor doesn't change your withdrawal order—you're still tapping taxable accounts first, then tax-deferred, then Roth. But it might affect how much you need to keep in cash. Because if you're using the floor in a bad year, you want to have that cash set aside so you don't have to sell stocks at a loss. Luna: So you're basically keeping a cash buffer of, say, two years of floor expenses. Lucas: Exactly. And that's a classic sequence-risk mitigation. You're not just relying on a withdrawal rule; you're also planning for the worst-case scenario. Luna: I love that. It's like you're building a bridge over the sequence risk canyon. Lucas: That's a great way to put it. And you know, the more we talk about this, the more I think it's a strategy that deserves a lot more attention. It's simple, it's practical, and it gives you a lot of control. Luna: And it's a perfect example of why we love doing this show. We get to dig into these ideas and share them with people who are actually planning their futures. Lucas: Speaking of which, if our conversations have helped you think about your own retirement plan, maybe you've considered supporting the show. A couple of dollars a month is genuinely what keeps these going. You can find us at buy me a coffee dot com slash fexingo, if you've gotten something out of them. Luna: Yeah, it really does make a difference. Even just the cost of a coffee helps us keep the lights on and the episodes ad-free. Lucas: But no pressure, truly. We're just grateful you're listening. Now, back to the floor—there's one more nuance I want to share. Luna: What's that? Lucas: The floor doesn't have to be a single number. You can have a two-tiered floor: one for essential expenses, and a higher one that includes discretionary basics like travel or dining out. Luna: So in a bad year, you cut the travel but keep the essentials. Lucas: Exactly. And that gives you even more flexibility. You might have a floor of forty thousand for essentials, and a secondary floor of fifty thousand for what I call 'lifestyle basics.' If the market is down, you drop to forty. If it's up, you can spend up to fifty-five or sixty. Luna: That's really clever. It's like a dial, not a switch. Lucas: And it aligns with how people actually spend. You don't go from full travel mode to zero travel overnight. Having those tiers eases the transition. Luna: So what's the biggest mistake someone could make with a floor? Lucas: Setting it too high. If your floor is equal to your target withdrawal, you're not really flexible. You're just back to a fixed withdrawal. The floor has to be a genuine safety net, not a comfort blanket. Luna: That's a great takeaway. So, to recap: calculate your fixed expenses, set a floor at 25 to 30 percent below your target, keep a cash buffer, and adjust the floor every five years or so. Lucas: You got it. And the beauty is, it's a strategy you can start using tomorrow. No complex software, no fancy formulas. Just a clear-eyed look at what you truly need. Luna: I'm definitely going to incorporate this into my own plan. Thanks for bringing it up, Lucas. Lucas: Anytime. After all, that's what we're here for—helping each other get to that cabin by the lake, one smart decision at a time.