What is the trickiest part of being a financial planner? Is it outsmarting the markets? Knowing the “best” investments to recommend to clients? Figuring out someone’s lost crypto-wallet password?
None of the above! At least not for me. The hardest part of financial planning is helping people determine that just-right amount of retirement spending. That fine line of spending to have as much fun as possible without running out of funds before the end of the plan date (aka death).
What is this alchemy that planners use to land on the “right” spending amount? Well, there are a few tools.
In the beginning (well, the 1990’s, which was certainly the beginning for my career), there was Dr. William Bengen’s 4% Rule.
Dr. Bengen studied past stock and bond returns. He found that, if retirees took 4% of their savings in the first year of retirement and then bumped that dollar amount up each year for inflation, their money had a high chance of lasting about 30 years in most historical market scenarios. The logic is simple: keep withdrawals modest enough that investment growth can offset spending, while still giving a steady, predictable income.
So, this works for people who are 65 and plan to live to 95. If you want to retire earlier, you need to use a smaller withdrawal rate in order for your assets to last longer.
But that was the 90’s. What about today? Well, even Dr. Bengen changes his mind, uses new research, and introduces alternate methodologies.
So, in his latest book, A Richer Retirement, you’ll see that his new withdrawal rate for a 65-year-old retiree has gone up to 4.7%. And he considers that a worst-case scenario. Yay.
Of course, other resources will have their take on this. Morningstar’s recommended withdrawal rate in 2025 was 3.7%. Why the difference? Probably a gloomier outlook on stock market returns by Morningstar. Who is right? Time will tell.
As a planner, I don’t actually use the 4% (or 4.7% or 3.7%) withdrawal rate for soon-to-be retirees. It’s too general.
I like to front-load retirement expenses in the early (healthy) years to mimic how retirees usually live. So, early withdrawal rates might be higher than 4% and then drop naturally because of the “go-go; slow-go; no-go” cycles of spending.
However, I DO use the 4% withdrawal rate for my younger clients in determining how much they should save for their ideal retirement.
- Desired spending less Estimated Social Security = Income needed from Investments
- Income needed from investments divided by .04 = Desired Retirement Nest Egg
From there, we can determine how much a 30- or 40-year old needs to save each year to arrive at their hoped-for retirement lifestyle.
As I said, there are other methods for calculating how much to spend in retirement. Michael Woloch, CFP® explains the “Modified Required Minimum Distributions (RMD) SWR Safe Withdrawal Method” here.
My point, and I promise to get there, is that general rules of thumb are helpful when calculating for goals far in the future.
As you get near retirement, it’s better to engage a financial advisor who uses software to input all the lumps and bumps of your retirement spending (mortgage, kids college, early retirement travel, part-time work, Social Security timing) to create a concrete spending plan that will support your desired lifestyle in early retirement and give you the money you need for a comfortable older age.
