How Much of Your Money Can You Spend in Retirement?

BY STEVE DINNEN

Four percent. That seems to be the long-held rule of thumb for how much of your money you can spend each year once you retire. But is it dead-on accurate? Will honoring it ensure that you don’t end up moving in with your grandchildren once you’ve burned through all your assets?

Experts have thought about this and have devised all manner of guidelines to help you not outlive your resources. Zolt’s Glide Path Spending Rule, for instance. Or Kitche’s Ratcheting Rule. Or Bengen’s Dollar Floor and Ceiling Withdrawal. All are calculations meant to inform your decision on how much to spend every year. They make assumptions about your spending (though not your habits), the rate of expected return on your remaining investment portfolio, and inflation, and come up with answers that may not address the question with pinpoint accuracy.

“The real-life situations of our clients are never static like the assumptions in the studies,” said Laura West, a certified financial planner at West Financial Services in Des Moines. For example, she said, “people have variable spending needs such as buying an RV one year to travel the country and the cost of care for aging parents the next year. And younger retirees may still be supporting adult children through college.” 

The 4 percent guidance may, then, not be best suited to situations when people expect to have variable spending patterns from year to year, West said.

Further, drawing down 4 percent of your assets every year, when stock market gains of investment portfolios are expected to temper, might be too optimistic, said Christine Korte, a certified financial planner in West Des Moines with Ameriprise Financial Services Inc.

“People’s situations change,” Korte said. “Inflation goes up, tax laws change. … Four percent is pretty well gone.”

At present, Korte thinks a more realistic goal is for retirees to spend no more than 3.5 percent of their assets every year.

Developing a plan is useful—certainly better than not developing one. Both West and Korte cautioned that any sort of plan or budget should be revisited annually. Inflation alone should merit that. Certainly we remain in the midst of a period of benign inflation. Over time it historically has risen 3 percent a year. That may seem harmless, but that means that a dollar today is worth just 50 cents in 24 years. Would that you live that long in retirement and, with some planning, have all the 50 cent pieces you’ll ever need.