Nearly two-thirds of Americans say they are more worried about running out of money in retirement than dying, and many retirees could be on track to turn that fear into a stark reality.
About half of America’s retirees don’t take any systematic approach to withdrawing their many billions of dollars in retirement assets, according to an October survey from IRALogix, a retirement technology firm. Just 22 percent of retirees follow any kind of plan.
“You can’t just arrive at age 65 or 67 and say, ‘OK, now what am I going to do?’ It’s a process, not an event,” said Peter de Silva, chief executive of IRALogix. “It’s coming. You’ve got to plan for this.”
Working from a plan becomes crucial if stock prices plummet in the early years of your retirement, when taking withdrawals during just a few years of down markets can put you at risk of running out of money. Data from the Bureau of Labor Statistics shows that people 65 and older consistently leave the work force when stocks go up, and rejoin it when markets drop, while a 2024 T. Rowe Price report noted that about 10 percent of retirement-age Americans say they have to work for financial reasons.
“Even those that have a plan don’t adhere to it, so it’s a plan in name only,” said Kelly LaVigne, vice president of consumer insights at Allianz Life. “You’re going into 30 to 35 years of giving yourself a paycheck and you don’t have any idea whether you’re going to make it.”
The classic approach
If investors know anything about structuring retirement withdrawals — what financial planners call “decumulation” — it’s the 4 percent rule. This was posited in 1994 by a financial planner, Bill Bengen, who reviewed market returns dating back to 1926. Mr. Bengen found that even during the worst three decades for stocks — from October 1968 to 1998 — a retiree withdrawing no more than 4 percent of his or her balance in the first year of retirement and adjusting subsequent withdrawals for inflation would have money left after 30 years.
Like any theory, the 4 percent rule has waxed and waned in popularity. Mr. Bengen himself revisited his original research in 2012 and made the rule a bit more generous, increasing withdrawals to 4.5 percent. Since 2021, the research firm Morningstar has calculated an optimum safe withdrawal rate for portfolios holding 20 percent to 50 percent equities. The goal: to have a 90 percent chance of holding value after 30 years. The recommended rate in those studies ranged from 3.3 percent in 2021 to 4 percent in 2023, with a rate of 3.7 percent recommended for 2024 and this year.
Other finance experts say withdrawal rates of 4 percent or less present a danger apart from running out of money: the risk that fearful retirees will scrimp, spending less than they can afford during what should be their leisure years.
“It’s important to note the 4 percent rule covers the worst-case scenario of outliving your capital,” said Ben Carlson, director of institutional asset management at Ritholtz Wealth Management. “It’s a decent starting point, but needs to be right-sized for individual circumstances.”
Look at the big picture
Mr. Carlson and others recommend a tailored approach to withdrawals that reflects real-world retirement returns and spending. Here are five key points to consider:
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Many retirees don’t need to replace their entire working income because they no longer need to save (or save as much) for their retirement.
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Your withdrawal rate won’t be consistent. During retirement, spending is higher in the early years and declines after age 80. “Spending generally peaks for households in their 50s, so you don’t have to create an income stream equal to your pre-retirement salary,” Mr. Carlson said.
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Any withdrawal plan should be based on your desired retirement lifestyle and goals, including whether you’ll work during retirement and whether you want to leave money for heirs or a charitable legacy. “Be realistic about what you can afford and whether downsizing or restructuring your spending will be necessary,” Mr. LaVigne said.
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Withdrawal plans also need to account for inflation, taxes, down markets, the loss of a spouse, mandatory withdrawals and emergency spending.
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Another wrinkle is that after decades of focusing on accumulating assets, some retirees are afraid to spend their savings. A withdrawal plan can give them freedom to do that.
Start with expenses
Planners break retirement into three phases: the go-go years, when new retirees establish their retirement lifestyle, travel and indulge long-neglected hobbies and family time; slow-go years, when aging can start to limit retirement activities; and the no-go years, which come around age 80, when retirees settle into an established home and routine. That’s why planners say the idea that living expenses and retirement spending should, or even can, be maintained at a flat, inflation-adjusted level makes the 4 percent rule unworkable.
“A client once told me, ‘Every day is Saturday in retirement,’ so it’s expensive,” said Lisa Featherngill, national director of wealth planning for Comerica Wealth Management.
Another crucial factor early in retirement is that withdrawals may need to be reduced or postponed during prolonged periods of stock losses to avoid “sequence of returns risk,” which can create dangerous cash shortfalls later in retirement. Instead of a fixed rate, planners recommend a dynamic cash-flow approach to withdrawals that adjusts to meet your needs, age and market conditions. This way, retirees are free to spend more when their investments do well, as long as they’re willing to cut back when markets fall.
First, you should define your goals for retirement, Mr. de Silva of IRALogix said. Do you want to work part time, volunteer, travel, take up a new hobby or leave a legacy for heirs or charity? Another question is whether you want to downsize and simplify your life.
“Start by asking, ‘What are my end goals?’ and take that off the top,” Mr. de Silva said.
Once their initial retirement lifestyle is mapped out, retirees should determine their total fixed and required day-to-day living expenses, such as groceries and gas, housing and utilities, and insurance payments, taxes and health care. Then look at what reliable sources of income can cover those costs, such as pensions and Social Security benefits. To fill any gaps, retirees will need to decide whether they want to work, take withdrawals from retirement accounts or consider other options, such as setting up simple annuities, tapping home equity through a reverse mortgage, or downsizing and selling their property.
“Back that up with guaranteed income from a stable, secure source that’s going to increase over your lifetime, because those expenses are going to go up,” Mr. LaVigne of Allianz Life said. “Social Security is guaranteed income that’s going to increase over time. It’s probably not going to keep pace with inflation, but at least it’s a hedge.”
Some annuities can help
Simple annuities are insurance products that guarantee a series of fixed payments in return for cash contributions, either over time (deferred) or from a lump-sum payment (immediate). While other types of annuities can be expensive, overly complicated and unsuitable for retirees, a simple one can stabilize a portion of retirement income.
These plain-vanilla products don’t adjust for inflation, so retirees must decide whether to cover the increased cost of living from another income source or to reduce their spending. An inflation rider can be included when the annuity is purchased, but it will reduce your payment in the first few years. Or you could buy in at a time of higher interest rates, when a deferred annuity can build up increased value before payments begin.
“I hated annuities for about 32 years, and, you know, I ended up buying two of them,” Ms. Featherngill said. “When interest rates went up in the last couple of years, I saw that I could lock the rate in and take some of the risk out of my portfolio.”
Ms. Featherngill also suggests managing the ups and downs of the market by taking withdrawals for the next year’s living expenses on a regular schedule and moving the money into stable, protected accounts, such as high-yield savings and money market accounts. This approach avoids making a big, last-minute withdrawal when markets may be down.
With the basic costs of living covered to some extent — and an adequate emergency fund — retirees can minimize withdrawals when stocks drop, if necessary, and have the leeway for larger withdrawals in good years. They can gradually convert taxable individual retirement accounts to tax-free Roth I.R.A.s to provide income later in retirement, and take other steps to shrink the tax bite on their retirement money, including the Internal Revenue Service’s required minimum distribution.
You may need a professional
Retirees with relatively simple finances, such as those with I.R.A.s, savings accounts and Social Security income, may be able to manage their own withdrawal plan. But to paraphrase one proverb, “Man plans, the markets laugh,” so many retirees should consider getting help. While it sounds self-serving, financial planners stress that do-it-yourselfers can become overwhelmed by volatile markets, an economy always in flux and constant tweaks to tax rules. Professionals use expensive, complex software to calculate withdrawal rates, a resource the average retiree doesn’t have.
“You can try to do this on a spreadsheet if you’re some kind of Excel genius,” Mr. LaVigne said, “but it’s still not going to put in all the parameters that need to be considered.”
For retirees who don’t want to hand over their retirement money to full-time financial managers, who typically charge 1 percent of the account value per year, a fee-only planner can be an option. These advisers, who work strictly on an hourly or project basis, can review your financial situation every few years and recommend a plan, leaving you to manage the transactions on your own.
“Americans by and large don’t have financial plans,” Mr. de Silva said. “So people arrive at retirement and think they have $1 million and tell themselves, ‘I should be able to make the next 25 years.’ Really? Let’s do the math.”
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