The Me-First Rule of Retirement Spending

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Spending your hard-earned cash in retirement can be a scary proposition. Without a paycheck coming in, it’s easy to worry about running out of money. Add volatility in the stock market at any given time, and this is what nightmares are made of for retirees.

But fears of overspending in retirement don't have to keep you up at night. There are methods you can adopt to protect your money from those nightmare scenarios. One popular way: the "me-first" rule of retirement spending, sometimes called the "flooring" rule (as in, you set a spending floor and put your own needs first).

It’s a savings-drawdown strategy that ensures all of your essentials are always covered in retirement. The bucket list trip to Italy — that’s on you.

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“With the exception of the very wealthy, flooring helps everyone,” says Nick Nefouse, global head of retirement solutions and head of LifePath at BlackRock. “It gives you peace of mind when the market goes down 20%.”

If you like the idea of a steady monthly income or are hesitant to spend due to the inherent uncertainty of the stock market, the me-first or flooring method of spending may be for you. Here’s how this retirement rule works.

The 'me-first' rule (aka 'flooring') basics

The goal of this retirement spending method is to give you peace of mind knowing your essential needs will always be covered.

The idea is to create a secure, guaranteed base of income that covers your monthly essentials, which typically include housing, health care, insurance, transportation, food, toiletries and apparel. “This is not for travel and Netflix,” says Nancy Gates, lead educator and financial coach at Boldin.

By creating a secure, guaranteed stream of income, you'll know how much money is coming in each month. If stocks drop, you'll be less likely to overreact emotionally and make costly investment mistakes.

“You get consistent, guaranteed income that covers the sleep at night, head on the pillow factor,” says Gates. “It also allows retirees to budget and manage their monthly expenses and reduces stress over the uncertainty of market fluctuations.”

Creating the guaranteed income

For the flooring, or me-first method to work, you need enough guaranteed income to cover those essential expenses. Any remaining funds are invested for medium-to long-term retirement spending needs.

Part of that guaranteed income will come from Social Security. The rest could be derived from a pension, annuity, or bond ladder strategy, says Steve Parrish, professor of practice in retirement planning at The American College of Financial Services.

Money from a 401(k) can be rolled over, deposited in a savings or brokerage account, or annualized — BlackRock offers this option through its LifePath Paycheck product.

Parrish says popular annuity options include immediate income annuities and deferred income annuities, which you purchase, usually for a lump sum, and the money is paid out monthly over a fixed period.

“I have a QLAC that, when I turn 75, kicks in monthly income for me,” says Parrish, noting retirees can also use a bond ladder strategy to create a source of guaranteed income. With that strategy, bonds mature at different years to provide the retiree with guaranteed income, he says.

When shopping for annuities, it's important to conduct thorough research and/or seek help from a trusted financial adviser. There are a plethora of annuities on the market, and once you are locked in, you can’t get your money back without paying steep penalties.

Is me first or flooring always the best approach?

While there are many positives to the flooring method — peace of mind, steady and reliable income, and protection — there are downsides too.

Investment fees are one. Outside of Social Security and a pension, you have to create a guaranteed income stream, and if you are purchasing an annuity to do that, you could end up paying a lot in fees. Such fees include administrative costs and commissions, which can be difficult to identify and will ultimately affect your annuity payouts.

Additionally, annuities can be complex, with a multitude of products and, at times, overzealous salespeople. You have to be careful that you don’t overpay or get locked into an annuity that isn’t right for you.

Then there's the growth factor, or lack thereof. You won’t get rich with the guaranteed portion of your income. You get a cost-of-living increase with Social Security, but that’s not the case with a bond ladder strategy or an annuity (unless you pay for it).

“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,” says Parrish. “What happens if you get into a really inflationary period. You’ll have a decline in your standard of living.”

Tips for success

If you still like the idea of having a floor, first determine your essential budget. Include every expense you're on the hook for. Then determine how much Social Security and any pensions cover.

The remainder gets annuitized either directly from your 401(k), if your plan allows it, via the purchase of an annuity or by creating a bond ladder portfolio. A financial adviser can help you determine a strategy that meets your unique circumstances.

“You are basically flooring your essential expenses in retirement,” says Parrish. “Let's make sure you're safe first, and that's what flooring does.”

Donna Fuscaldo is the retirement writer at Kiplinger.com. A writer and editor focused on retirement savings, planning, travel and lifestyle, Donna brings over two decades of experience working with publications including AARP, The Wall Street Journal, Forbes, Investopedia and HerMoney.