Revamped Rule
A longstanding personal finance rule of thumb set the starting percentage of assets a retiree could safely take from a portfolio at 4%. In subsequent years, that amount would be adjusted for inflation.
In reality, spending in retirement doesn’t follow a straight line. Generally, spending is higher in earlier retirement years and drops as people move into their mid-70s and 80s, putting aside what can be high end-of-life costs.
Many financial advisers recommend using dynamic approaches that involve pulling more or less from savings depending on whether a portfolio had a good or bad year.
As well, most retirees don’t increase their spending in line with inflation, and dialing back cost-of-living adjustments can make a big difference.
“If you don’t take the full inflation adjustment each year, you can get a higher payday early on,” said Benz. When Morningstar looked at what a safe starting rate would be if a retiree took out one percentage point less than inflation, it boosted the starting rate to 4.3%.
This article was provided by Bloomberg News.