few retirement rules of thumb die hard, but keep in mind
they may have new twists.
much do I need? Many experts still recommend saving at
least 10 times final pay, but some have boosted that
number to more like 12 times to account for today’s
lack of pensions and employer-sponsored health care.
spending terms, experts often say accumulating 20 times
a retiree’s projected annual spending in retirement
will keep the nest egg feathered. Again, today’s
estimates call for more like 25 years.
then comes Ye Olde 4 Percent Rule, the granddaddy thumb
that rules them all. Created by now-retired financial
adviser William Bengen in the mid-1990s, the rule goes
like this: In the first year of retirement, withdraw 4
percent of your savings (which are invested at least 50
percent in stocks). The next year, adjust that dollar
amount by the current rate of inflation, regardless of
what last year’s market returns looked like.
Bengen himself warned, locking in a spending rate that
grows every year by inflation could quite possibly steer
retirees off the proverbial cliff if stocks or bonds
suffer sustained sub-par results that fall outside the
historical ranges he tested.
academic researchers, including Wade Pfau of the
American College of Financial Services, responded to
that concern by lowering the "safe" withdrawal
rate to 3 percent, based on projections for lower
capital markets returns in coming years.
all that safety comes at the cost of seriously limiting
retirees’ lifestyle in the name of providing a steady
level of income that never needs to be adjusted.
some advisers began advocating a spending strategy that
fluctuates depending on how markets perform. These
so-called dynamic withdrawal strategies attempt to
provide a relatively smooth spending plan, but may call
for skipping the annual raise, for example, if markets
firm BlackRock recently launched an online tool that
suggests a withdrawal rate based on just two simple
inputs from users: age and portfolio size. The LifePath
Spending Tool is being rolled out to the firm’s 401k
plan clients first, with plans for public availability
tool takes the inputs and assesses long-term market
forecasts, life expectancy tables and other data to come
up with a suggested spending rate for the coming year
that has a substantially higher probability of
sustaining income over a lifetime than do the rules of
thumb, said Nick Nefouse, head of defined contribution
investment and product strategy for BlackRock.
what does it recommend as a spending rate right now?
Here’s a shocker: About 4 percent.
the tool tells a 63-year-old retiree with $350,000 in
savings to spend 4.1 percent, or $14,447, this year.
here’s the difference: Next year, when that
64-year-old checks the tool, the recommended spending
rate will be based on current economic forecasts and her
remaining life expectancy, not on this year’s figure
plus an arbitrary inflation rate.
the 63-year-old makes $65,000 a year and retires with
the aforementioned 10 times final pay, or $650,000. The
tool’s recommended portfolio withdrawal of $26,831,
coupled with an annual Social Security benefit of
$24,000, would get the retiree pretty close to replacing
80 percent of gross pay. Not bad.
75-year-old, with a shorter life expectancy, could
safely withdraw 5.4 percent, or $18,849 on assets of
$350,000, according to the tool. And an 80-year-old
could take 6.2 percent, or $21,769.
sounds like a pretty conservative spending rate
considering the current life expectancy for an
80-year-old is only about nine years, but as investors
have learned over the last decade, a lot can happen in