People are living longer than ever. A person who reaches 65 today can expect to live, on average, another 19.3 years – over 5 years longer than in 1965. The first person to reach 150 years of age is likely alive today. Meanwhile incredible medical advances through biotechnology are extending both the quantity and quality of life. Though a better, longer life sounds great, how does one financially prepare for their own “death shortage”?
The financial services industry touts its 4% rule for those concerned with running out of money over a long retirement. It recommends keeping withdraws at about 4% per year from portfolio assets, based on 1994 study by Bill Bengen in the Journal of Financial Planning. Using actual historical data the author determined that, assuming a broadly diversified portfolio, in a worst case scenario in which low returns and high inflation dominated, 4% provided the retiree with a high probability of their money lasting at least 30 years,.
For many, however, 4% seems very tight. Is such austerity necessary for ensuring solvency in retirement? Ned’s Notes would make the following points:
- Social Security will likely pay out substantially as promised, though “means testing” or other conservation methods may eventually be phased in.
- Tuition, mortgage and car payments are often curtailed substantially in retirement. Most will have a smaller monthly “nut” than they did while working.
- The calculations leading to the 4% rule of thumb assumed market downturns in the early years of retirement. If one does not have the misfortune of retiring into a bear market (and does not create one by overspending), a higher withdrawal rate is entirely possible.
Price Waterhouse Coopers reports that retirement spending does not persist at a consistent level. People consume at a higher rate early (travelling, etc.) and later (medical and related), and less in their middle years. Consider structuring your finances in a way that matches up with this pattern.
Ned’s Notes Takeaway: It is possible to enjoy a long retirement without living off bologna. The 4% spending level should be considered a guideline, not a rule.
