By Jessica Hall

The Economy and Your Own Spending Should Determine How Much You Get Out of Your Retirement Investments, New Study Says

Some rules are meant to be broken.

The traditional – and sometimes controversial – 4% rule suggests that a retiree should be able to withdraw 4% of their savings and investments during their first year of retirement, then adjust the amount based on their updated balance each year. year thereafter. The theory is that this method gives people an excellent chance of not outliving their money.

This would mean that someone with $1 million in savings and investments who followed the 4% rule would be able to spend an inflation-adjusted $40,000 each year in retirement.

But some years, this rule simply no longer holds.

Morningstar suggests in a new research report that retirees looking for a safe starting withdrawal rate should not exceed 3.7%. This gives them a 90% chance of having some money left at the end of a 30-year retirement period.

Last year, Morningstar estimated the initial safe withdrawal rate to be 4%. In 2022, the recommended rate was 3.8%, and in 2021 it was 3.3%.

The decrease in withdrawal percentage from last year was largely due to rising stock market valuations and falling fixed income yields, leading to lower return assumptions for stocks, bonds and cash flow over the next 30 years, said Christine Benz, Morningstar’s director of personal services. finances and retirement planning.

The research follows a strong year for the U.S. stock market. Year to date, the S&P 500 SPX is up 27%, the Dow Jones Industrial Average DJIA is up 16%, the Nasdaq COMP is up 34% and the Russell 2000 RUT is up 34%. 16%. These returns have helped increase the number of “401(k) millionaires,” Fidelity reported.

While the 30-year inflation forecast fell to 2.32% from 2.42%, lower return expectations for stocks, bonds and cash more than offset the positive direction of inflation forecasts , Morningstar said in the report.

“Starting at 3.7% and over a 30-year horizon of, say, age 65 to age 95, this would provide remaining assets that you can use if you live longer or want to leave money to your heirs,” Benz told MarketWatch.

The 4% rule originally comes from a 1994 study by financial planner William Bengen in the Journal of Financial Planning. This rule should, however, be adjusted when markets outperform or underperform, Benz said.

“The best practice is to have flexible spending strategies. Spending can increase when the market outlook is good and decrease when the market outlook is weaker,” Benz said. “This would help prevent retirees from overspending in weak times, while still giving them a raise when markets strengthen.”

In addition to a flexible withdrawal strategy, retirees should also try to maximize their Social Security benefits by delaying the age at which they file for benefits in order to get the maximum monthly benefit, Benz said.

Retirees are eligible for Social Security starting at age 62, but benefits increase each year they wait, with 67 being the full retirement age for those born in 1960 or later, and the maximum benefit arriving at 70 for those who wait to ask.

Read: Waiting until age 70 to claim Social Security earns you a lot more money. Here’s why so few people do it.

Benz also added that retirees don’t spend the same amount every year, so withdrawal rates shouldn’t be rigid.

“People don’t spend that way. When you look at actual spending, spending tends to decline over the retirement life cycle. It may start out strong, but it declines steadily over time,” Benz said .

In this year’s study, Morningstar assumed a steady decline in inflation-adjusted household spending of 2% per year throughout retirement.

Projections for spending and owning enough assets to last 30 years, however, do not include long-term care costs. Health care costs could weigh heavily on any retirement plan.

“The costs of long-term care later in life are the unknown — the elephant in the room,” Benz said. “The problem with long-term care is that half (of people) will need it and half will not.”

To be safe, Benz recommends setting aside a long-term care fund and keeping it separate from usable assets.

“It gives you peace of mind. If you don’t use it, it can go to the heirs,” Benz said.

A 65-year-old retiring this year can expect to spend an average of $165,000 on health care and medical expenses during retirement, an increase of almost 5% from last year. according to Fidelity Investments.

For some retirees, spending money after a lifetime of savings can be uncomfortable. But worrying about spending rates is a happy problem, because not all retirees have savings to fall back on, Benz said.

The average 401(k) balance for baby boomers is $250,900, while the median balance is $67,000, according to Fidelity Investments.

Among Social Security beneficiaries age 65 and older, 12% of men and 15% of women rely on Social Security for 90% or more of their income, according to the Social Security Administration.

Social Security provides an annual cost-of-living adjustment to help benefits keep pace with inflation, but for many retirees, that’s not enough, according to the Senior Citizens League, an advocacy group.

The group expects Social Security’s COLA to be 2.5% in 2026, the same as in 2025. But seniors are still struggling to keep up with high prices, the Senior Citizens League said.

“While it’s great to see inflation calming, that doesn’t mean seniors’ economic challenges are over. Years of inadequate COLAs have left older Americans behind,” said Shannon Benton, executive director of the Senior Citizens League.

Read: Egg prices are soaring – so are beef prices – and causing an inflationary shock for supermarket shoppers

In a recent survey of 3,249 older Americans by the Senior Citizens League, 69% of respondents said they fear that persistently high prices will increase their spending and cause them to deplete their retirement savings and their other assets.

“We have two extremes in the country. There’s a segment that’s pretty undersaved in terms of retirement. And there’s the segment that’s thinking about how to spend their money,” Benz said.

-Jessica Room

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  14/12/24 0516ET
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