How Much Can I Spend in Retirement?

What the 4% Rule Gets Right and What It Misses for Public Employees

You’ve put in the years. You’ve shown up for your community - whether in a firehouse, patrol car, or city office. Now retirement is getting close (or maybe already here), and the big question bubbling up is simple, but not easy:

“How much can I actually spend each year without running out of money?”

If you’re a public safety professional or government worker, the answer isn’t always the same as what you’ll read in the typical financial advice columns. Why? Because your retirement usually looks different: pensions, Social Security, and maybe a 457(b) or other savings all play into the mix.

Let’s talk about the “famous” 4% rule and why it’s not the full story for you.

The 4% Rule: A Quick Refresher

Back in 1994, financial planner Bill Bengen ran the numbers and landed on a neat formula: retirees could safely pull 4% of their portfolio the first year, then adjust that number for inflation every year after, and still expect their money to last 30 years.

Sounds simple, right? Almost like one of those one-size-fits-all T-shirts, it’s fine for some, but not exactly tailored.

Here’s the catch: that rule was designed for people relying only on their investments. No pension. No steady monthly check. Just their 401(k) or IRA to get by.

That’s not most public employees.

Even Dave Ramsey has pointed out:

“The 4% rule doesn’t give you a license to go wild. It’s a guideline, but your actual spending should match your income streams, your goals, and your reality”.

Why Public Sector Retirees Need a Different Playbook

If you’ve got a pension, you’ve already got what so many private-sector workers dream about: a guaranteed income stream. For many of the folks I meet with, that pension alone can cover the basics such as, groceries, gas, mortgage, healthcare premiums.

So what about the 457(b) or other savings? Think of that as your “fun fund.”  I sometimes joke and call it “gambling money” – Vegas optional – but truthfully, it’s more like fun money.

It’s the dollars you get to spend on the good stuff: travel, spoiling the grandkids, a bucket-list trip, or even just a cushion for peace of mind.

Here’s an example: A retired firefighter I worked with had a pension that covered all his essentials. When we looked at his 457(b), he laughed and said it wasn’t for groceries - it was for finally taking the anniversary trip to Italy he and his wife had put off for years. That’s a completely different reality than someone who depends entirely on investment withdrawals to pay the light bill.

As I like to remind people:

“The goal isn’t to follow a formula - it’s to build a plan that fits your life, your health, and your values.”

A Tax Break Many Retirees Miss

Here’s something worth highlighting (because not enough folks know it): if you’re a retired firefighter, police officer, or EMT, the IRS allows you to use up to $3,000 each year from your 457(b) to pay health insurance premiums - tax-free .

That’s under the Public Safety Officer tax exclusion (IRC Section 402(l)). Traditionally, the premiums had to be paid directly to your insurance provider.

But thanks to the SECURE Act 2.0 (effective in 2023), there’s now another option: retirees can have the money reimbursed to them for out-of-pocket healthcare expenses. The catch? The onus is on you to keep the receipts and documentation in case the IRS ever comes asking.

One retiree put it perfectly when they told me:

“I don’t want to have to worry about those details, so I’d rather the check just be sent directly for my healthcare premium and enjoy my retirement without extra paperwork.”

Real-Life Retirement Spending: Not a Straight Line

The 4% rule assumes you’ll spend the same amount (adjusted for inflation) every year of retirement. But if you’ve ever talked with a retiree - or just thought about your own plans - you know that’s not how life works.

Here’s the rhythm I see most often:

• 60s & early 70s → More travel, more adventures, more home projects. You’re finally free - why not enjoy it?

• 80s → A slower pace, fewer big trips, but still steady spending.

• Later years → Healthcare costs can rise, but not always evenly. Sometimes it’s a big jump, sometimes it’s manageable.

  
  

And then, of course, life has its curveballs. One family I worked with thought they were heading into a “low-spending year,” but then their daughter announced a wedding. Suddenly, their budget had to stretch to cover a venue, photos, and (yes) that open bar. That’s real life. And it’s why strict formulas don’t always work.

That’s why I always say:

“Retirement income planning isn’t a one-time event, it’s an ongoing process that needs flexibility.”

So What’s the Better Approach?

Instead of clinging to 4% like gospel, try thinking in terms of flexibility and priorities:

• ✅ Baseline Budgeting – Cover essentials with guaranteed income (pension + Social Security).

• ✅ Bucket Strategy – Keep short-term money safe, mid-term money stable, and long-term money growing.

• ✅ Dynamic Withdrawals – Spend more in good years, tighten the belt in down years.

• ✅ Use Tax Advantages – Take advantage of that $3,000 PSO exclusion (and, now, the reimbursement option under SECURE 2.0).

• ✅ Annual Checkups – Review and adjust as life (and the market) changes.

  
  

Final Thought

The 4% rule is a good tool but it wasn’t built with pensions in mind. And if there’s one thing I’ve learned from working with firefighters, police officers, and public employees, it’s that no two retirements look alike.

You’ve earned this stage of life. The point isn’t to squeeze yourself into a formula - it’s to build a plan that lets you live with confidence, flexibility, and joy.

Or as one retiree once told me after we mapped out his income plan:

“I don’t want to just make it through retirement. I want to enjoy it.”

Couldn’t have said it better myself.

You deserve a strategy that reflects all of that.

If you’re a public safety professional or government employee wondering how to turn your savings into sustainable income - you don’t have to figure it out alone.

Let’s create a plan that works for your life, supports your goals, and gives you the confidence to enjoy the retirement you’ve earned.

📅 Schedule a free consultation here

💬 Or reach out directly - I'd love to walk through your numbers and help you build a flexible plan.

I look forward to talking with you! - Shannon

Sources

1. Bengen, W.P. (1994). Determining Withdrawal Rates Using Historical Data. Journal of Financial Planning.

2. Internal Revenue Service (IRS). Public Safety Officers: Pension Protection Act of 2006 – IRC Section 402(l). IRS.gov

3. U.S. Congress. SECURE 2.0 Act of 2022, Section 331. Congress.gov

4. Ramsey Solutions. How Much Should You Withdraw From Retirement Accounts? RamseySolutions.com