Saving for retirement can be a long-fought journey, but once you reach that milestone, a new challenge arises: how to plan your spending. Retirement Daily Editor and Publisher Robert Powell joins Yahoo Finance's Wealth! to discuss spending strategies for when one finally retires.

Powell notes that an individual's retirement spending should be based on "how well-funded you are when you enter retirement." However, he points out that regardless of whether an individual is underfunded or overfunded upon entering retirement, retirees often tend to be more conservative with their spending in the initial few years due to uncertainty about their longevity, referring to this period as "the go-go years."

Powell recommends two spending approaches to alleviate retirement uncertainty: "the bucket approach," which involves allocating one to five years' worth of expenses into "safe accounts," with the second bucket invested in more volatile assets, and the third bucket allocated to stocks; and the second strategy entails matching "guaranteed sources of income against essential expenses" and utilizing your 401(k) for discretionary expenses.

For more expert insight and the latest market action, click here to watch this full episode of Wealth!

Editor's note: This article was written by Angel Smith

Video Transcript

- Retirement-- you spend a majority of your life working hard, setting an early alarm for work, yielding a work face on, and saving money for that moment when you no longer have to do any of that. One question-- how do you plan to spend your hard earned money and saved money?

So here to break this down for us, Robert Powell, Retirement Daily editor and publisher. I mean, Robert, I can't wait until I no longer have to yeet myself out of bed early hours of the day. But it's all in a good goal here that we're setting. How often though does this happen where people are planning for retirement, they're saving for retirement, and then they finally retire, start spending, and realize, uh-oh, all right, there's not enough here?

ROBERT POWELL: Yeah. So let me start by saying if we knew our date of death, we could create the perfect retirement spending plan. But unfortunately, Brad, we don't know when we'll die. So we have to not wing it, we have to be more thoughtful than that. But I like to think about how you spend your money in retirement as a function of how well-funded you are when you entered retirement.

So for folks who are overfunded, to use that term, for folks who have more than enough income to meet their expected expenses throughout retirement, I would say they don't have to worry about spending in retirement. For other folks who might be constrained or underfunded, they have to be a little bit more frugal with their money.

But one thing I would say, Brad, about spending, whether you're overfunded or underfunded, is this-- most people, because they don't know how long they're going to live, tend to underspend in their early years of retirement during what some people refer to as the go-go years. And so I would say, obviously, you need a plan, you need a budget, you need to plan for unexpected expenses, et cetera, et cetera.

But whether you're overfunded, constrained, or underfunded, think about spending money in the early years of retirement because as you age, it's unlikely that you'll be able to spend money on those same things like travel or grandchildren, et cetera, the pleasures of life that you've worked so hard to attain.

- Robert, if we all knew our date of death, then we would probably be living life much more differently here. But at the end of the day, thinking about retirement and some of the do's and don'ts and how perhaps people can plan for the expenses that are controllable variables versus those that are uncontrollable.

ROBERT POWELL: Yeah. So let me talk about, I think, two spending plans that I think can help take some of the uncertainty out of retirement planning, or retirement income planning. A popular approach is something called the bucket approach where what you do is set aside one to five years worth of expenses in safe accounts that provide safety of principle. And those would fund your living expenses over the course of one to five years.

And the second bucket, you might invest in a mix of stocks and bonds, a little more volatile than say CDs or treasury bonds or bills. On the other hand, it's designed to provide you with some inflation protection. And that money, you would use to fund your expenses 5 to 10 years from retirement.

And then in the third bucket, I might put 100% of my money into stocks, which will then be used to fund expenses 10 plus years into retirement. That's one approach, Brad.

Another approach is something called the four box strategy where what you're trying to do is match your guaranteed sources of income against your essential expenses, whether that's housing, transportation, health care, food, et cetera, et cetera. And then use your risky assets or your income from your assets and your 401(k), IRA, and other accounts that are earmarked for retirement for your discretionary expenses-- your trip around the world, your trip to Disney World with the grandkids, et cetera, et cetera.

And if there's a gap between your guaranteed sources of income and your essential expenses, you might take some of that income in one form or another. Convert some of that money into an income annuity so that you create another guaranteed source of income or, if you're overfunded, you can certainly just use the income from the assets to fund and bridge that gap.

What I would say, Brad, is when you think about spending in retirement, I would focus less on what some people refer to as the 4% rule where what you might have is a mix of stocks and bonds and you're withdrawing 4% per year on an inflation adjusted basis. That tends to expose you to a couple of things. One is sequence of return risk, which can be problematic, especially if you're drawing down money in the early years of retirement and the market is down. That could create some problems later in life when you're trying to maintain your desired standard of living. And I would say it's not how humans work necessarily.

In retirement, expenses tend to be lumpy. Some years, you might have to buy a new roof. Some years, you may take a big trip. Some years, you might need to replace the heating system in your house. And so the 4% rule doesn't really accommodate the possibility of human nature and the whims of what goes on in retirement, the lumpiness of it all.