Good­bye 4%, hello age di­vided by 20

USA TODAY US Edition - - MONEY - Robert Pow­ell Spe­cial to USA TO­DAY

Ex­perts say nest eggs are more frag­ile than in the good old days, but a new with­drawal rate can pro­long their life­span

How much can you safely with­draw from your re­tire­ment ac­count each year with­out run­ning out?

Well, in the good old days, you could with­draw 4% per year from your nest egg and it would last 30 years. Or at least that’s what fi­nan­cial plan­ner Bill Ben­gen fa­mously wrote some 22 years ago. But now, in a world where in­ter­est rates float around 0% and where in­vest­ment re­turns are likely to be low for some time to come, blindly with­draw­ing 4% per year would be a dis­as­ter for your nest egg and ul­ti­mately your stan­dard of liv­ing.

So how might you de­ter­mine a safe per­cent­age of sav­ings to spend in to­day’s world?

THE ‘FEEL-FREE’ RE­TIRE­MENT SPEND­ING STRAT­EGY. The lat­est in a long his­tory of re­search on the subject comes from Evan Inglis, a se­nior vice pres­i­dent at Nu­veen As­set Man­age­ment and a fel­low of the So­ci­ety of Ac­tu­ar­ies. Inglis’ rec­om­men­da­tion: Sim­ply di­vide your age by 20 (for cou­ples, use the younger spouse’s age).

So, for ex­am­ple, some­one who is 70 could safely spend 3.5% (70 di­vided by 20 equals 3.5) of their sav­ings, while some­one who is 80 could with­draw 4% (80 di­vided by 20 equals 4) and some­one 65 could with­draw 3.25%.

“That is the amount one can spend over and above the amount of So­cial Se­cu­rity, pen­sion, em­ploy­ment or other an­nu­ity-type in­come,” In­galls wrote in his pa­per. “I call this the ‘feel-free’ spend­ing level be­cause one can feel free to spend at this level with lit­tle worry about sig­nif­i­cantly de­plet­ing one’s sav­ings.”

What’s so great about this strat­egy? Ac­cord­ing to Inglis, it’s “an easy-to-de­ter­mine and re­mem­ber guide­line for those who do not have the time, ex­per­tise or in­cli­na­tion to do a lot of anal­y­sis.”

Other strate­gies, by con­trast, re­quire too much think­ing. For in­stance, the orig­i­nal 4% rule of thumb had you ad­just­ing the amount you with­drew each year for inflation. (Good luck with that.) And the in­come-re­place­ment ra­tio rule of thumb, where you try to re­place 70% to 80% of pre-re­tire­ment in­come from a va­ri­ety of sources, was an ex­er­cise in fu­til­ity as well.

THE 3% RULE. Truth be told, there’s an even eas­ier strat­egy to use to make sure you don’t out­live your as­sets. Sim­ply with­draw 3% year in and year out.

“Three per­cent could be viewed as a more con­ser­va­tive and sim­pler ver­sion of the well­known 4% rule,” Inglis wrote.

NOT ALL AGREE. Some ex­perts take is­sue with Inglis’ age-di­vided-by-20 strat­egy.

“I agree that the pro­posed guide­lines are a sim­ple and con­ser­va­tive rule of thumb,” says Dirk Cotton, a fi­nan­cial plan­ner and au­thor of the Re­tire­ment Café blog. “As with all rules of thumb, this one has is­sues.”

While 3% is prob­a­bly a good con­ser­va­tive start­ing point at age 65, age di­vided by 20 be­comes far too con­ser­va­tive in late re­tire­ment, Cotton says.

Moshe Milevsky, a York Univer­sity pro­fes­sor, sug­gests 5% is a more rea­son­able with­drawal for a man age 80 than 4% and that 10% is more rea­son­able than 4.5% at age 90.

“So (Inglis’) ap­proach is likely to re­sult in a lower stan­dard of liv­ing than might be achiev­able,” Cotton says.

Inglis doesn’t dis­agree that a higher with­drawal rate might be more ap­pro­pri­ate later in life. But he says his strat­egy bal­ances the need for sim­plic­ity with the need to be ac­cu­rate. Plus, he says, it’s un­likely that peo­ple will want to spend more as they age.

OTHER CON­SID­ER­A­TIONS. Of course, there are all sorts of things to con­sider be­fore you just adopt the age-di­vided-by-20 strat­egy. Here are some of the ques­tions Inglis sug­gests ask­ing when ap­ply­ing this rule (or other sim­i­lar rules):

Do you have long-term care insurance? If you do, you can spend a lit­tle more. If you don’t, you may want to re­duce your spend­ing a bit.

Will you lose a sig­nif­i­cant amount of an­nu­ity in­come when your spouse dies?

Will you pay sig­nif­i­cant in­come taxes?

What if in­ter­est rates go up? First of all, you can’t ex­pect that they will. You can prob­a­bly spend a lit­tle more if they do, but if rates go up by 2 per­cent­age points, you can’t in­crease your feel-free rate by 2% of your sav­ings. The best ad­vice is to stick to the di­vide-by-20 rule for the fore­see­able fu­ture.

Do you want to pass on a cer­tain amount to your kids or char­ity? Ad­just your spend­ing ac­cord­ingly.

Truth be told, there’s an even eas­ier strat­egy to use to make sure you don’t out­live your as­sets. Sim­ply with­draw 3% year in and year out.

Pow­ell is ed­i­tor of Re­tire­ment Weekly, con­trib­utes reg­u­larly to USA TO­DAY, The Wall Street Jour­nal and Mar­ketWatch. Got ques­tions about money? Email Bob at rpow­ell @allth­ings re­tire­ment.com. GETTY IM­AGES/ ISTOCKPHOTO

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