Broker Check

Keeping Enough Egg in the Nest

February 04, 2022


A Smart Retirement Strategy Includes a Spending Plan

It was 1994 when William P. Bengen proposed, based on his research that included fifty years’ worth of data, that retirees should take no more than four percent per year from their retirement account to prevent outliving their investments. Benger’s paper was so well-received that the 4% Rule (sometimes referred to as the Bengen Rule) has become the standard for many financial-planning firms.

Future Spending Considerations

How much retirees can spend is a bit tricky to answer. People who no longer work do not want to outlive their nest eggs, but still want to maintain a certain quality of life; no one has ever seen a U-Haul hooked up to a hearse. A recent study showed that on average retirees (excluding those with limited means) were spending less than four percent per year. Reasons differ for the results:

  • The fear of future medical costs
  • Some want to leave money to heirs or a charity
  • A lifetime of saving and not spending is deeply embedded in one’s psyche
  • Many people are simply too afraid of outliving their money

People have worked hard all their lives and should enjoy the freedoms of no mortgage; a quiet home, as grown-up children have moved on; and no more five-thirty alarm clock bells. Retirees untethered to early life responsibilities want to travel, take classes, immerse themselves in new hobbies, etc. There are ways to help ensure enough spending money while living with the security that the well won’t one day run dry.

How Much Can Retirees Comfortably Spend Annually?

Bengen has since stated that his paper proclaiming four-percent annual withdrawals from retirement accounts was a starting point rather than a hard and fast rule. This makes sense; there is no one-size-fits-all strategy since needs are as varied as there are retirees. That is, everyone’s circumstances are different. Add to that investment performances and changes in the economic climate, and it is easy to see that planning for retirement is much more complex than checking off a box. Things like a retiree’s portfolio size, spending habits, and medical requirements are all important considerations. The bull market has allowed retirees to see their portfolios increase even higher than they ever expected. That, accompanied with low inflation, has allowed most retirees an increase in buying power. The 4% Rule on which many relied could have been increased to five percent or even more. However, recent price increases in items like food and energy will force more people to watch their pennies.  

Create a Retirement Spending Plan

Future retirees need to create a budget to see what their monetary requirements will be so that they can assure sufficient funds to both live and do the things they want to do. No professional has a crystal ball to count on, so setting a plan is not an exact science. But it is far better to be proactive than reactive. Financial planners create budgets all the time so they know the questions to ask, how to create plans, and have the specific software to provide different models from which clients can choose. This also becomes increasingly helpful for individuals who want to decide in what year to begin collecting Social Security.  

Salespeople have an adage: fail to plan, plan to fail. The same can be applied to anyone who wants to feel secure in retirement. Contacting a trusted financial planner now to create a strategy for the future is a smart plan.

Home | New South Wealth Management, LLC