How much can you spend in retirement without depleting your assets? Not long ago, individual retirement accounts (IRAs) required minimum distributions (RMDs) began at age 70 ½ for most people. But as part of the original 2019 SECURE Act, that age was pushed back to 72. Well, for those who turned 72 after 2022, it’s delayed again; first to age 73, and then in 2033, it will be delayed again to age 75. In just a few short years, it went from 70 to 72, from 72 to 73, and ultimately it will go to 75.
There are two big unknowns about retirement spending. The first big unknown is that no one knows how long one will live in retirement. The second big unknown is that no one knows what the returns of the market and the returns of a portfolio will be throughout retirement. To answer the first question, take a look at the graph below:
There are three bars for each age. The first one is for a female, the second for a male, and then the third is for a married male/female couple with the odds that at least one member will live to that age. Notice the age 90 and 95-year sections of the chart. It’s important to note that there is approximately a 50% chance that at least one member of the couple will live into their 90s; higher than most people think. There is a one in five chance that at least one will live to age 95. In terms of how long to plan for retirement, we would say you want to plan until at least 90, maybe age 95, for your retirement. This is mainly due to the remarkable advances we’ve seen in medicine over the last several years.
The second unknown is what the portfolio will return. The way academics have tried to tackle this question is by looking at what’s called safe withdrawal rates. A safe withdrawal rate is looking for an amount a retiree can pull from their portfolio. This is often referred to as the Trinity Study. Essentially, the Trinity study looked back through time at the worst possible year to retire from a return point of view and looked at what was the most a retiree could withdraw in the worst year to retire. The worst year for retirement was around 1965 when the most a retiree could pull from their portfolio was about 4% without depleting it—this is known as the 4% rule of thumb.
A way of looking at this is if you had a $1 million portfolio and at retirement, you could withdraw $40,000 in year one and then adjust that each year for inflation. It is not a static $40,000 every year. it adjusts for inflation each year. And there you have the 4% rule, a reasonably safe amount that you can withdraw from your portfolio and still be okay in retirement.
With that said, we know that withdrawal rates for retirees aren’t static over time. There are essentially three phases of retirement. The first phase through age 75 is the more active section of retirement where more travel is happening and a lot more discretionary expenses. Spending will tend to be higher in the earlier years of retirement than later. The second phase is from age 76 through 85 and is a transition phase with less travel and more health issues. The last stage is where spending starts to tick back up again due to health expenses.
When we create your financial strategy, we take all of this information and your personal circumstances into account. We understand that spending will fluctuate throughout retirement. On the return side of the equation, we look beyond historical returns and project your potential investment future returns based on your comprehensive financial situation. If you have any questions about what we have covered here, please reach out to us or click the link below to start your strategy.
