“The 4% rule doesn’t need revision insomuch as it serves as a useful guideline,” says John E. Roessler, senior financial planner at Kovitz, a wealth management firm in Chicago. It is, he says, a sustainable rate even if you retire at “the worst moment.”
Roessler calls it “a very conservative withdrawal rate” and, therefore, appropriate for today’s volatile market.
Retirement Spending Is Clients’ Top Concern
For clients, understanding how much they can safely spend in retirement without going broke is the top reason they seek professional financial guidance, according to a recent survey by the American College of Financial Services’ Granum Center for Financial Security.
Unlike our working years, retirement is “more about preserving assets than growing them,” says Christopher Briscoe, vice president and wealth advisor at Girard, a Univest Wealth Division, in King of Prussia, Pa. “You want to find an allocation that helps you achieve your goals without taking on unnecessary risk.”
Advisors need to provide clients with a reality check, taking into account all their retirement income sources—401(k)s and other retirement accounts, Social Security, possibly real estate—as well as reasonable expense estimates.
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.”