Spend Without Worry in Retirement
The Irish poet and playwright Oscar Wilde once said that it’s better to have a permanent income than to be fascinating—a sentiment many retirees undoubtedly share. Unfortunately, the decline of traditional pensions in favor of 401(k) plans (and other defined contribution plans) has forced many retirees to figure out how to make a lump sum of money—sometimes a very large lump sum—last as long as they do.
A growing body of research suggests that many retirees have responded to this challenge by withdrawing far less than they can afford to spend based on the amount they’ve saved and their average life expectancy. Research by the Employee Benefit Research Institute found that people with $500,000 or more in savings at retirement spent down less than 12% of their assets over 20 years.
Michael Finke, a professor of retirement at the American College of Financial Services, says research he conducted found that 80% of retirees are uncomfortable watching their nest egg get smaller. “To an economist, that’s a mystery,” he says. “Why did you save in the first place?”
Forgoing meaningful activities isn’t without cost, says Glen Franklin, director of customer research for Jackson National Life Insurance. Although you don’t necessarily need to go on an around-the-world cruise, he says, hobbies, travel and other activities that involve family and friends—and often increase spending—have been shown to reduce your risk of cognitive decline. “You live longer if you have purpose in life, and purpose isn’t free,” he says.
Still, the fear of running out of money is powerful and could be exacerbated by the recent increase in the inflation rate. While many economists believe the recent spike in prices is temporary, anyone who lived through the 1970s knows how devastating inflation can be, especially if you’re living on a fixed income. In fact, according to a recent Kiplinger–Personal Capital poll of retirees and near-retirees, 77% are worried about the effects of inflation on their financial security.
Fortunately, you can take steps that will help you pursue your retirement dreams without jeopardizing your retirement security. And as a bonus, some of these strategies will help you stay ahead of inflation, too.
Bending the 4% Rule
If you’re retired or approaching retirement, you’ve probably heard of the 4% rule, which was developed by William Bengen, an MIT graduate in aeronautics and astronautics who later became, 401(k)s and other tax-deferred accounts, which is where most workers hold their retirement savings. For every year after that, increase the dollar amount of your annual withdrawal by the previous year’s inflation rate. For example, if you have a $1 million nest egg, you would withdraw $40,000 the first year of retirement. If inflation that year is 2%, in the second year of retirement you would boost your withdrawal to $40,800.
