When the discretionary spending amount jumps up to a higher amount at one or more times during a lifetime, this is often due to what is called a "cash constraint." (This is also called a borrowing or liquidity constraint.) Cash constraints arise when you have some combination of temporarily high fixed expenses or low income or little in the way of regular assets. Trying to spend in these temporary periods as much as you can in the future would require borrowing money.
Unless you adjust the 'Maximum Indebtedness' setting, our software won't put you into debt to smooth your living standard. Instead, it will reduce your spending level until you get out from under your cash constraints. More precisely, the program will find a smooth path of spending during your period of cash constraints and a higher smooth path after you are no longer cash constrained.
Note that the year before your discretionary spending rises, your regular assets will be zero. The reason is that during a period when you are cash constrained, our software uses any available assets to limit the discretionary spending reduction (relative to your future spending level) that you experience.
If you want to avoid a period of cash constraint, there are several approaches you can try:
- If the constraint appears in early retirement before Social Security begins (a classic case!) you could make special withdrawals from retirement accounts to provide extra income to permit a higher level of discretionary spending (albeit at the price of lower future spending). This will help smooth your living standard across early and later retirement. It may require some trial and error to determine how much to withdraw.
- Downsizing your home could free up assets for spending.
- You could take Social Security earlier, but this could lower your lifetime benefits.
- In the case of a couple, you could change the date of last withdrawal of retirement assets for one or the other or both to an earlier date, compressing the withdrawals into a shorter timeframe. This will raise annual withdrawal amounts during the shorter withdrawal period and help relieve your cash constraint.
- Working longer or adding a part-time job
If you do face one or more periods in which you are cash constrained, you'll have to decide which of these or other possible strategies is best. Some users ignore the cash constraint and view the future higher discretionary spending as a cushion or hedge against uncertainty.