US boomers are using 2 top secret strategies to spend more in retirement — and it’s earning them fat monthly cash flow while nest eggs stay protected. Are you still using the ‘old’ 4% rule?

The bucket strategy

Unlike the simple 4% rule, Vanguard’s bucket strategy recommends splitting your assets into different categories depending on when you expect to spend the money.

For instance, you could create an “ultra-short-term” bucket that includes your checking account and emergency savings that can be tapped into for monthly living expenses. Another medium-term bucket could be set aside in relatively safe fixed income securities to meet spending needs — such as a home renovation — for the next two to three years.

You can also use specialized tax-advantaged accounts, such as a Health Savings Account, to create a separate bucket for medical expenses. Finally, you can deploy the rest of your assets into long-term investments such as stocks or real estate to compound over time.

By splitting your assets into different categories, you can adjust the risk-return profile on each so that they match the timeline of the expected expense. You can also customize these to meet your specific spending needs and lifestyle — for example, if you know you’re facing major health concerns in the near-term, you can divert more of your wealth into that category.

Simply put, this approach is more nuanced than the conventional 4% rule. That means it requires more planning — and perhaps the assistance of a financial advisor — to ensure you don’t deplete your savings in retirement.

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The dynamic spending strategy

Another alternative to the 4% rule is the dynamic spending plan. Instead of simply assuming you will spend 4% of your assets every year in retirement, this strategy involves setting an annual budget based on how much your assets have earned over the previous year, how much inflation you expect, and what you want to spend money on in the year ahead.

So, if your portfolio jumped 8% in value last year and inflation was at 2%, you can set a budget to spend 6% or less this year. You may also need to set a floor for annual spending if the stock market returns 0% or less in any given year. For instance, you could set a flat $40,000 budget for any down years in the stock market.

In other words, you’re not relying on an average estimate of stock market returns over several previous decades. Instead, you’re setting a clear target for how much you want to spend every year based on the real returns and inflation you’ve experienced over the past twelve months.

The advantage of this strategy is that it adapts to the economy and your personal circumstances in real-time. If the stock market had an exceptional year, you can spend more. If inflation was higher than expected, you can spend less.

The upside is that your chances of running out of money in retirement are significantly lowered. Another upside is that this strategy allows you to create a customized financial target, which means you can potentially retire even if you have less than the $1.26 million that most Americans believe they’ll need for financial freedom, according to Northwestern Mutual.

The downside is that this strategy doesn’t give you long-term visibility and needs effort and assessment on an annual basis. Again, hiring a financial advisor or using online tools to automate some of this process could help to make this a successful strategy for you.