The rule also doesn ’ t account for unexpected expenses , she says , such as healthcare emergencies , troubled grandchildren or “ bucket-list trips .”
The 4 % Stalwarts
Yet others stand by the old standard . Indeed , research conducted by Bengen , Michael Kitces and others found that the rule held up for people who retired at just the wrong time and confronted a potential sequence-of-returns shortfall .
Put simply , the sequence-of-returns challenge occurs when someone retires at the start of a bear market for stocks and bonds or a bout of inflation . All three conditions prevailed in the late 1960s , which began an extended decade of high inflation and weak equity returns that combined to ravage Americans ’ wealth . Multiple studies show the 4 % rule still worked .
“ The 4 % rule doesn ’ t need revision insomuch as it serves as a useful guideline ,” says John E . Roessler , senior financial planner at Kovitz , a wealth management firm in Chicago . It is , he says , a sustainable rate even if you retire at “ the worst moment .”
Roessler calls it “ a very conservative withdrawal rate ” and , therefore , appropriate for today ’ s volatile market .
Retirement Spending Is Clients ’ Top Concern
For clients , understanding how much they can safely spend in retirement without going broke is the top reason they seek professional financial guidance , according to a recent survey by the American College of Financial Services ’ Granum Center for Financial Security .
Unlike our working years , retirement is “ more about preserving assets than growing them ,” says Christopher Briscoe , vice president and wealth advisor at Girard , a Univest Wealth Division , in King of Prussia , Pa . “ You want to find an allocation that helps you achieve your goals without taking on unnecessary risk .”
Advisors need to provide clients with a reality check , taking into account all their retirement income sources — 401 ( k ) s and other retirement accounts , Social Security , possibly real estate — as well as reasonable expense estimates .
Age Matters
One key metric is how long the money needs to last . A 50-year-old retiree can reasonably expect to need funds longer than a 70-year-old retiree .
“ Always calibrate the withdrawal estimate to the individual situation ,” says David Blanchett , head of retirement research at PGIM , the Newark , N . J . -based asset management arm of Prudential Financial . He suggests adding five years to the retiree ’ s life expectancy , just in case .
But beyond that basic withdrawal rate , he says , flexibility is “ really important . If you don ’ t have any flexibility around spending , then the initial withdrawal rate has to be low .”
Ultimately , says Blanchett , “ The more flexible you can be , the more you can spend .”
Flexibility , Within Limits
A degree of flexibility certainly seems wise . Clayton Quamme , partner and financial advisor at AP Wealth Management in Augusta , Ga ., points out that retirees tend to spend more in the early years of retirement as they travel and otherwise enjoy their new freedom . They spend less in the middle stage and then more again later as medical expenses increase .
“ If you understand this , you can effectively plan your retirement to maximize each phase and not run out of money ,” he says .
To manage such changes wisely , he suggests setting “ guardrails ” to minimize risks . “ Each client ’ s guardrails will be different ,” says Quamme , “ based on their mix of retirement income sources and the flexibility in their expenses .”
Other Sources Of Retirement Income
Retirement income can come from any number of sources , of course . Mallon FitzPatrick , managing director and principal at Robertson Stephens Wealth
Management in New York , recommends combining withdrawals from taxable accounts , tax-deferred accounts such as IRAs , and nontaxable accounts such as Roth IRAs “ to keep taxable income in the lower tax brackets ,” he says .
Many retirees , he adds , continue working part time , too , for as long as they can . Others rent space in their homes for extra income .
Home Equity Home equity is another potential source of funds in retirement — if managed carefully .
“ I am not a proponent of borrowing against home equity in retirement to satisfy living expenses , but in many cases , when clients sell their homes and relocate , they downsize ,” says Michael Green , senior wealth advisor and vice president of Parsippany Private Client Services in Parsippany , N . J ., part of the West Hartford , Conn . -based GYL Financial Synergies . “ This frees up funds that [ clients ] often overlook .”
For short-term cash flow shortfalls , clients might choose viable alternatives , such as taking out a reverse mortgage or claiming the cash value of a life insurance policy . Wade Pfau , a professor of retirement income at the American College of Financial Services in King of Prussia , Pa ., and author of the Retirement Planning Guidebook , calls these “ buffer assets that can serve as temporary spending resources to give an investment portfolio more opportunity to recover after a market downturn .”
But such resources must be used strategically , particularly reverse mortgages . Many retirees don ’ t like the idea of hocking their homes . “ The last thing you want is to be booted out of your home ,” says Charles Lewis Sizemore of Sizemore Capital Management in Dallas .
Annuities Annuities can also provide income stability , but again , one must be cautious . “ I generally dislike the inevitable loss of control you have when you buy
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