New twists to consider in retirement planning

A few retirement rules of thumb die hard, but keep in mind they may have new twists.

How much do I need? Many experts still recommend saving at least 10 times final pay, but some have boosted that number to more like 12 times to account for today’s lack of pensions and employer-sponsored health care.

In spending terms, experts often say accumulating 20 times a retiree’s projected annual spending in retirement will keep the nest egg feathered. Again, today’s estimates call for more like 25 years.

And then comes Ye Olde 4 Percent Rule, the granddaddy thumb that rules them all. Created by now-retired financial adviser William Bengen in the mid 1990s, the rule goes like this: In the first year of retirement, withdraw 4 percent of your savings (which are invested at least 50 percent in stocks). The next year, adjust that dollar amount by the current rate of inflation, regardless of what last year’s market returns looked like.

As Bengen himself warned, locking in a spending rate that grows every year by inflation could quite possibly steer retirees off the proverbial cliff if stocks or bonds suffer sustained sub-par results that fall outside the historical ranges he tested.

Some academic researchers, including Wade Pfau of the American College of Financial Services, responded to that concern by lowering the “safe” withdrawal rate to 3 percent, based on projections for lower capital markets returns in coming years.

But all that safety comes at the cost of seriously limiting retirees’ lifestyle in the name of providing a steady level of income that never needs to be adjusted.

So, some advisers began advocating a spending strategy that fluctuates depending on how markets perform. These so-called dynamic withdrawal strategies attempt to provide a relatively smooth spending plan, but may call for skipping the annual raise, for example, if markets slide.

Investment firm BlackRock recently launched an online tool that suggests a withdrawal rate based on just two simple inputs from users: age and portfolio size. The LifePath Spending Tool is being rolled out to the firm’s 401(k) plan clients first, with plans for public availability later.

The tool takes the inputs and assesses long-term market forecasts, life expectancy tables and other data to come up with a suggested spending rate for the coming year that has a substantially higher probability of sustaining income over a lifetime than do the rules of thumb, said Nick Nefouse, head of defined contribution investment and product strategy for BlackRock.

So what does it recommend as a spending rate right now? Here’s a shocker: About 4 percent.

Yep, the tool tells a 63-year-old retiree with $350,000 in savings to spend 4.1 percent, or $14,447, this year.

But here’s the difference: Next year, when that 64-year-old checks the tool, the recommended spending rate will be based on current economic forecasts and her remaining life expectancy, not on this year’s figure plus an arbitrary inflation rate.

Say the 63-year-old makes $65,000 a year and retires with the aforementioned 10 times final pay, or $650,000. The tool’s recommended portfolio withdrawal of $26,831, coupled with an annual Social Security benefit of $24,000, would get the retiree pretty close to replacing 80 percent of gross pay. Not bad.

A 75-year-old, with a shorter life expectancy, could safely withdraw 5.4 percent, or $18,849 on assets of $350,000, according to the tool. And an 80-year-old could take 6.2 percent, or $21,769.

That sounds like a pretty conservative spending rate considering the current life expectancy for an 80-year-old is only about nine years, but as investors have learned during the past decade, a lot can happen in that time.