The ‘Me-First’ Rule That Could Keep You From Running Out of Money in Retirement

Most people look forward to retirement, but having enough money to finance those years is a critical component of how pleasurable the time will be. Many retirement planning strategies can help ensure that your golden years are comfortable, and they depend on your personal goals and circumstances. The “Me-First” approach is one of them. Is it right for you?

What’s the ‘Me-First’ Rule?

The “Me-First” strategy prioritizes must-pay living expenses. Think food and the roof over your head. Healthcare and insurance make 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 part with cash for discretionary spending. The income you can reasonably count on should total enough to cover these expenses when you get to those years or if you’re already in them. The total of this income is often referred to as your “floor.”

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

“Retirees can invest and spend more flexibly with the remaining assets once the floor is established, knowing that their essentials are secure,” said Emmanuel S. Desmolieres, a financial services professional at New York Life Insurance Co. “I often guide clients through retirement spending strategies, and the ‘Me-First’ rule, sometimes called the flooring approach, is a practical framework for ensuring lifetime income.”

How to Calculate Your Floor

The “Me-First” rule begins with accurately calculating or anticipating both your guaranteed income and your retirement expenses, depending upon whether you’re planning for retirement or you’re already there. Then it’s basically a matter of simple math, but you’ll want to keep a few things in mind.

Only include mandatory, must-pay expenses: the costs of anything that you can’t reasonably live without day-to-day. Determine how much that adds up to per month, then multiply the number by 12 to pin down how much you’ll need per year. Now do the same with your consistent, reliable income sources.

Ideally, your income total will exceed your must-pay expenses, but your goal is that the two totals should at least match. You might consider other moneymaking opportunities with the difference if you’re lucky enough to have income that exceeds your expenses.

“Retirees can invest and spend more flexibly with the remaining assets once the floor is established, knowing that their essentials are secure,” Desmolieres said.

Make sure to review your choices regularly, like once per year. If you’re currently retired and not comfortably making ends meet, what else have you been spending on that’s not incorporated in your list of mandatory expenses? What are you currently spending on if you’re not yet retired that you could be investing or saving instead? “Keep discretionary investments separate for growth and lifestyle choices,” Desmolieres said.

The Pros and Cons of Putting Yourself First

No strategy is foolproof, and you’ll almost certainly experience a few hiccups along the way. The “Me-First” rule comes with advantages and downsides.

Advantages 

The “Me-First” approach will likely work well if security is highly important to you. It takes a significant amount of worry out of the retirement-budgeting process. You’ll have a pretty good idea of whether you can take that vacation or visit your kids over the holidays without skipping a mortgage payment.

Disadvantages

“Using annuities or bonds for the floor may reduce liquidity and growth potential,” Desmolieres said. “And the plan can feel too conservative for retirees with higher risk tolerance or strong investment preferences.”

Then there’s inflation,. The cost of living will increase by the time you retire. You might want to calculate this factor into your anticipated retirement budget or leave leeway for increases in your current budget if you’ve already stopped working.

‘Me-First’ Alternatives

Planning for or paying your expenses in retirement doesn’t have to happen on a single, predetermined path. You can add in other strategies or make a switch if “Me-Firsting” doesn’t feel quite right for you t. Here are a couple strategies to consider:

• The 4% Rule: Start by adding up all of your investments. In your first year of retirement, withdraw 4% of the total. Every year after that, withdraw the same amount, adjusted for inflation.
• The Bucket Strategy: Sort your retirement savings into separate buckets (categories) based on time frames: short-term, mid-term, and long-term. Tuck each of your savings vehicles and investments into the bucket most suitable for funding your needs during that time. You might place bonds and certificates of deposit (CDs) into the short-term bucket because you can easily access cash from them. Your 401(k) would fall into the long-term category.

The Bottom Line

The “Me-First” rule might suit you best if you’re disciplined. You might consider downsizing or embracing a side gig for a little extra income. It’s always a good idea to check in with a financial advisor before launching any retirement spending plan. Make sure your plan is something you can live with comfortably.