When it comes to retirement spending, everyone wants a simple rule for how much of their savings they can safely spend every year.  For some, the goal is simply to not run out of money before they run out of breaths.  For others, the goal is to not spend below some amount they wish to leave as an inheritance.  Regardless of the goal, people approaching retirement seek the simple answer to what is the safe spending rate.

While the demand for answers has existed for a long time, the first published research in financial planning journals on retirement spending is only thirty-one years old.  In 1984, Bill Bengen studied historical returns and determined that retirees should be able to withdraw 4% of their savings, adjusted annually for inflation, without fear of depleting their savings.  This became known as the “4% Rule” in the financial planning community.

Few will argue against a 4% spending rate being safe, but thirty years after Bengen’s seminal research, the debate now centers on whether this rate is optimal.  Studies published in the last five years suggest that the 4% rate is most likely too conservative.  In fact, in more than two-thirds of the time periods analyzed, a retiree who has 60% invested in stocks and 40% invested in bonds will nearly triple their wealth from the start of their retirement if they only withdraw 4% per year.  All retirees want to avoid outliving their money, but few would choose to impoverish themselves in order to leave a significant inheritance to their heirs.

Our recommendation is to use a flexible withdrawal rate in conjunction with a well-diversified investment portfolio.  This approach allows for higher withdrawal rates in most years and only slight adjustments during recessionary periods when the cost of goods and services also is likely declining.  The inputs used in determining the initial withdrawal rate include the person’s health, family longevity, investment risk tolerance, and access to other income sources such as Social Security, pensions, and annuities.

We are proud that none of our clients who are in retirement are currently at risk of outliving their wealth despite the fact that most of our retiree clients are spending over 5% of their investment portfolios on an annual basis.  Using diversified investment portfolios and reviewing spending on an annual basis allow for the greatest flexibility in spending and the least amount of financial stress in retirement.

This update is intended for the use of Oak Wealth Advisors LLC clients.  This update should not be viewed as personalized investment or financial planning advice from Oak Wealth Advisors LLC. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to their individual situation, they are encouraged to consult Oak Wealth Advisors LLC.  Past performance does not guarantee future results and all investments should be scrutinized before being implemented in a portfolio.