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I think this is an extremely complicated issue so I plan on making several comments about different aspects of this topic.
First, anyone saving for retirement, approaching retirement or in retirement, needs to have a good idea of what they can spend and how long their money will last. Also economic conditions continue to change. Everyone needs to understand how to adapt their retirement spending predictions based on long term trends.
Because this is such an important topic, you would think the good advice and a solid understanding would be widely available. That is not the case. I have asked numerous advisors how to go about handling this issue and I have never gotten anything close to a useful response. The worse advisors want to sell you annuities so your income will be predictable. Many financial institutions also provide calculators on their websites. Many of the calculators seem to be designed to be way overly conservative and are pushing the investor to invest more and support the business interests of the institution. Usually the method of calculation is also hidden in the background and not at all clear.
I think the lack of good information, adds emphasis to the importance of this topic.
which goes back to what I keep saying. finding advisors who know how to play the 2nd half of the game , the spending down stage is like looking for a needle in a haystack.
most are really only well skilled in the accumulation stage.
which goes back to what I keep saying. finding advisors who know how to play the 2nd half of the game , the spending down stage is like looking for a needle in a haystack.
most are really only well skilled in the accumulation stage.
I agree with you about financial advisors.
Every week we get invites to seminars with free lunch or dinner.
Are we stupid?
Most of them want to sell you products for commissions.
I'd rather spend the money myself.
Spending is actually hard.
The 4% rule is the most wide spread approach to trying to answer the questions of how much for how long. There are variations to the rule, but basically for someone retiring about age 65 who wants to have income until about age 95, they can withdraw from their savings at the rate of about 4% per year. The variants of the 4% rule also compensate for inflation. There are various ways of adjusting for inflation. Over past decades, inflation has averaged about 3.5%. I simple 4% rule would allow you to withdraw and extra 3.5% every year. For example if the 4% rule allows a $10,000 income on year one, that would increase to $10,350, then $10712, then $11087, etc. You can theoretically generate a table which shows you how much you have to spend each year until about age 95 when your incomes drops to 0. There are other variants to adjust for inflation, including recalculating each year based on the past year or a floating average from the recent past.
Regardless of the exact details, it is important to have some understanding of the reliability of these 4% rules. The "proof" comes from a couple of different methods of analysis. The first method is to analyze what happened in the past. Relatively sophisticated calculations are needed. Basically the calculators look at investment gains and inflation over 30 year time periods beginning at different starting points in the past. Investment gains can be related to stock and bond allocations. Different starting points and different allocations yield considerably different results. However, regardless of these factors the 4% rule seems highly reliable. Another method of validating the 4% rule is to use a simple calculator. Factor in an average gain of about 6.5% and an average inflation of 3.5% and see what happens each year. This approach also validates the 4% rule. In fact both approaches indicate that a 5% inflation-adjusted withdrawal rate is more reasonable and highly likely to provide a full income for 30 years. Some people believe that you could actually start with a 6% inflation-adjusted withdrawal rate and cut back expenses in later years when you become less active. Unfortunately what happens during the first few years of retirement has tremendous weight for the future. If you start with low investment yields, and/or high inflation and/or excessive amounts of early withdrawal, you will be headed for high risk of running out of money. Some advisors believe we are approaching a time of low investment gains. Bond yields will be low and the stock market with stop performing. They warn that if that happens it might be wise to withdraw at a 3% inflation-adjusted rate.
If the 4% rule seems difficult to understand, other calculators are typically way beyond the use or understanding of most of us. Some come from the "talking heads" who are looking for attention and really have minimal knowledge or scientific basis. Other withdrawal calculators and schemes come from very knowledgeable academicians. Regardless of the source of these schemes, there is almost nothing that can be done to validate them. Can we look into the future and predict inflation rates, gains on investment, business cycles, major world wars, disasters and other events? For all we know a meteor will wipe us out before we reach the end of our lifespan. No, to validate these schemes, we need to look to the past. How far in the past? Do we want to include financial conditions in the 1800's, during the robber baron years, through the roaring twenties and the great depression? Do we want to look only after we got off the gold standard, do we want to include World War I and/or II? The Vietnam era? Do we want to include the boom after WWII? How about the 70's gas crisis? Etc? Etc? Etc?
I think it should be clear that major political and sometimes random events have shaped the past. I think it should also be clear that much of our economy has changed dramatically and the future will not reflect the past. These sort of changes would include government intervention, abandoning the gold standard. We have also had major, major changes in society. Changes have included globalization, rise of some 3rd world countries, electronics and computers, mega farming, mega ranching, mega food processing and distribution. We are in the midst of a revolution in retailing. Small retailers either find a unique, special niche or go out of business. I could go on and on and on. To me it is clear that OUR WORLD IS NOTHING LIKE THE PAST AND NEVER WILL BE. So we can barely justify an apparently fool proof, conservative 4% rule. Developing and/or validating more sophisticated rules based on past performance is a fool's errand.
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