Age Matters
One key metric is how long the money needs to last. A 50-year-old retiree can reasonably expect to need funds longer than a 70-year-old retiree.
“Always calibrate the withdrawal estimate to the individual situation,” says David Blanchett, head of retirement research at PGIM, the Newark, N.J.-based asset management arm of Prudential Financial. He suggests adding five years to the retiree’s life expectancy, just in case.
But beyond that basic withdrawal rate, he says, flexibility is “really important. If you don’t have any flexibility around spending, then the initial withdrawal rate has to be low.”
Ultimately, says Blanchett, “The more flexible you can be, the more you can spend.”
Flexibility, Within Limits
A degree of flexibility certainly seems wise. Clayton Quamme, partner and financial advisor at AP Wealth Management in Augusta, Ga., points out that retirees tend to spend more in the early years of retirement as they travel and otherwise enjoy their new freedom. They spend less in the middle stage and then more again later as medical expenses increase.
“If you understand this, you can effectively plan your retirement to maximize each phase and not run out of money,” he says.
To manage such changes wisely, he suggests setting “guardrails” to minimize risks. “Each client’s guardrails will be different,” says Quamme, “based on their mix of retirement income sources and the flexibility in their expenses.”
Other Sources Of Retirement Income
Retirement income can come from any number of sources, of course. Mallon FitzPatrick, managing director and principal at Robertson Stephens Wealth Management in New York, recommends combining withdrawals from taxable accounts, tax-deferred accounts such as IRAs, and nontaxable accounts such as Roth IRAs “to keep taxable income in the lower tax brackets,” he says.
Many retirees, he adds, continue working part time, too, for as long as they can. Others rent space in their homes for extra income.
Home Equity
Home equity is another potential source of funds in retirement—if managed carefully.
“I am not a proponent of borrowing against home equity in retirement to satisfy living expenses, but in many cases, when clients sell their homes and relocate, they downsize,” says Michael Green, senior wealth advisor and vice president of Parsippany Private Client Services in Parsippany, N.J., part of the West Hartford, Conn.-based GYL Financial Synergies. “This frees up funds that [clients] often overlook.”
For short-term cash flow shortfalls, clients might choose viable alternatives, such as taking out a reverse mortgage or claiming the cash value of a life insurance policy. Wade Pfau, a professor of retirement income at the American College of Financial Services in King of Prussia, Pa., and author of the Retirement Planning Guidebook, calls these “buffer assets that can serve as temporary spending resources to give an investment portfolio more opportunity to recover after a market downturn.”
But such resources must be used strategically, particularly reverse mortgages. The concept of hocking one’s home elicits aversion among many retirees. “The last thing you want is to be booted out of your home,” says Charles Lewis Sizemore of Sizemore Capital Management in Dallas.
Annuities
Annuities can also provide income stability, but again, one must be cautious. “I generally dislike the inevitable loss of control you have when you buy an annuity,” says Sizemore, “but there are times when the additional income above the yield on a bond portfolio makes them worth considering.”
Theodore E. Saade, managing senior partner at Signature Estate & Investment Advisors in Los Angeles, might agree. “As fiduciaries, it’s essential to present such products to clients where appropriate,” he says, adding, “The annuity industry continues to evolve and has come out with offerings” that are often appropriate.
The Unknowns
It’s also a good idea to be mindful of how far a dollar will or will not go. “Considering how inflation will affect [client] spending, especially in later years of retirement, is an integral part of easing a client’s concerns,” says Ken Van Leeuwen, CEO and founder of Van Leeuwen and Co. in Princeton, N.J.
Given so many unknowns, perhaps the very idea of a “withdrawal rule” is nonsensical. “It’s hard to make a one-size-fits-all rule,” says Justin Dime, associate wealth advisor at Bordeaux Wealth Advisors in Menlo Park, Calif. “You need to be creative and flexible, depending on the situation.”