Running Out Of Money
When my career started almost 30 years ago, it was common for people to think that if they earned 10 percent a year, spending 7 percent was reasonable. I can’t recall the last time someone made that suggestion.
The public has become a little more educated about markets and retirement planning. So much so that I often encounter people who know about the “4 percent rule.” Some read so much they have even told me that they heard 4 percent is no longer good and 3 percent-3.5 percent is better.
Well, of course, 3 percent is safer than 4 percent but that has always been true. If 4 percent of a client’s portfolio is enough to cover all their costs as a retiree, I think it is quite reasonable to tell them they are in great shape.
First, no one I have ever met, or even heard about, starts retirement by spending $X and inflates that every year in perfect lock step with inflation—the pattern modelled in most studies.
I’m certain there are people that increase real spending over their retirement, but that’s the exception not the rule. Research like David Blanchett’s retirement “smile” seems to back this up. Real spending tends to decrease, not rise. As people age, they do less and spend less.
Second, most households won’t need to sustain withdrawals for 30 years, the standard time frame in these studies. Educated Americans with money can reasonably assume an above average life expectancy but that still doesn’t equate to a 30-year retirement for most.
Third, considering 4 percent as “safe,” does not mean 4.1 percent or more is dangerous. A recent missive from Michael Kitces noted that using the 4 percent rule going back to 1871, ending balances exceeded beginning balances even after 30 years of inflation adjusted withdrawals in 90 percent of cases. In fact, it was just as prevalent for there to be 6 times the starting balance after 30 years as there was to be less than the starting value.
For clients that could theoretically use the 4 percent rule as their plan, it will be very difficult for them to run out of money. To deplete their savings, markets would have to behave worse than they ever have in our recorded financial history, the clients have to beat the odds with their longevity, and they must spend money in lock step with a rigid pattern that likely exceeds their needs.
Clients that are too conservative with their withdrawals are much more likely to leave a lot of assets behind than they are to run out of money. Do they really want to restrict their present to get that future?