It’s time to rethink how to make your money last in retirement

Unless you’re lucky enough to have a defined-benefit pension on top of Social Security when you retire — which most US private-sector workers will not — figuring out how to make your money last in retirement can be nerve-wracking.

Unless you’re lucky enough to have a defined-benefit pension on top of Social Security when you retire — which most US private-sector workers will not — figuring out how to make your money last in retirement can be nerve-wracking. That’s because you can’t predict any of the big variables that will affect your savings and investments. For instance, how long you’ll live, how long your health will hold up, how the markets will fare or how high inflation will be. That makes it harder to know how much income you can safely draw from your portfolio every year and not outlive your money. The most commonly recommended rule of thumb is the so-called 4% rule, which means you spend 4% of your portfolio every year, on an inflation-adjusted basis. So if you retire with $1 million, you take $40,000 the first year and then the next year you take out a little more based on inflation. If inflation is at 3%, you’d withdraw $41,200. Then the next year, if inflation is 2%, you take out $42,024 and so on. The rule is derived from the research of now-retired financial adviser William Bengen, who based his 1994 work on a simple 50-50 portfolio of US large cap stocks and intermediate-term Treasuries, and assumed a person lives in retirement for 30 years. He has since revised his withdrawal rate suggestions to between 4.5% and 4.7% based partly on an increase in the diversity of investments in the model portfolio. While the 4% rule is a helpful guideline to consider, it shouldn’t be taken as gospel. How much you spend in retirement should be based on your goals, needs and net worth, as much as your desire to not outlive your nest egg.