Age-Sensitive Safe Withdrawal Rate Strategy? Age Divided By 20

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Should a person who retires at age 70 withdraw the same amount of money from their portfolio as someone who is age 40? You’re talking about a retirement period that is likely twice as long as the other. In an article titled The “Feel Free” Retirement Spending Strategy [pdf], Evan Inglis of Nuveen Asset Management and a fellow of the Society of Actuaries proposed a safe withdrawal strategy that adjusts for age.

To determine a safe percentage of savings to spend, just divide your age by 20 (for couples, use the younger spouse’s age). For someone who is 70 years old, it’s safe to spend 3.5 percent (70/20 = 3.5) of their savings. That is the amount one can spend over and above the amount of Social Security, pension, employment or other annuity-type income. 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.

You can think of this is as a lower bound. He also proposes an upper bound:

At the other end of the spectrum, divide your age by 10 to get what I call the “no more” level of spending. If one regularly spends a percentage of their savings that is close to their age divided by 10 (e.g., at age 70, 70/10 = 7.0 percent) then their available spending will almost certainly drop significantly over the years, especially after inflation is considered.

Therefore, the lower and upper bounds for a person retiring at 70 would be 3.5% and 7%. The lower and upper bounds for a person retiring at 40 would be 2% and 4%.

Note that he also admits that spending 3% of your assets each year is an even simpler rule of thumb:

Even though there are lots of things to think about, for the vast majority of people, very simple guidelines will be most useful. My simple answer to the questions “How much can I spend?” or “Do we have money enough saved?” is that if someone plans to spend less than 3 percent of their assets in a year (over and above any Social Security or other pension, annuity or employment income), then they have enough money saved and they aren’t spending too much. This is a fairly conservative estimate, but people tell me they want to be conservative with their retirement spending. They would rather feel safe than spend a lot of money, and I think that is very appropriate in our current economic environment.

Another idea to add to your knowledge banks. Basically, if you are young you have to be sensitive about permanently damaging your portfolio early on with the double-whammy of negative returns and high spending.

Others will say that you should spend more when you’re young, as you’ll be able to enjoy it more. That may be true if you have long-term care insurance. I know lots of people who are still quite active and traveling at 70. I’m also at that age where I have checked out some of those “nice” assisted-living facilities for my parents, and they cost serious bucks.

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  1. I find all these “principle plundering” strategies almost absurd. The answer is to match your lifestyle, geographic location and expenses to your revenues and not try to compensate for a shortfall by destroying your income producing base. If you want to use the US Government as your role model, good luck with that, you’ll end up bankrupt with $60 Trillion in debt and contingent liabilities.
    The answer is to choose a location where you are economically viable at your retirement income level and never touch your principle. If its the US with assistance from Medicare and Social Security that’s fine. But if its not, then find a place in Asia, South America or parts of Europe that is. Life is filled with compromises, that often seem to increase in scale as you age.

  2. Speaking of long term care insurance, have you purchased any for yourselves or is that something you expect your savings/earnings to cover? I’ve been evaluating a policy but in general the LTC area doesn’t seem to be considered as reliable an insurance as the more standard car / life / home insurances.

    • I haven’t bought LTC. I haven’t done deep research, but I’m always reading about how they are hiking up premiums on an existing plan. What’s up with that? I will probably revisit the landscape when I am 60.

  3. Italiangirl says

    Don’t RMD requirements make you take more than 3%? For example, when I’m 70.5 this plan is to only take 3.5% or thereabouts. Is it suggested that I reinvest if I have to take more than that?
    Robert is correct. We need to enjoy ourselves and look at what we want out of the last 30-35 years of our lives and adjust locations or other things accordingly.

    • True that RMDs can be more than the amount of age/20. ONce you get into your late 70’s then you’ll be pulling out more than the / 20 strategy.

      However the strategy as written is actually described as a “spending strategy” rather than a withdrawal rate strategy.

  4. The Frugal Millionaire says

    I would politely and respectfully disagree with Robert on a few points. The goal here is not to die rich. I did not work multiple jobs in my twenties, or every available minute of overtime in my thirties to live my retirement years as a pauper, or to make my (very few) heirs wealthy. My wife and I withdraw a very conservative 1 1/2 to 2% of our principle annually and were able to purchase a beautiful one-year old car last year for cash, and recently returned from a marvelous 12 day tour of the American Southwest, which will be this years major expense.
    Nobody wants to spend their later years in poverty, but I do believe that with proper planning and sufficient reserves, there is nothing wrong with enjoying some small part of the fruits of your labors. I hardly consider that “plundering”.

  5. I think the idea is to have a safe withdrawal rate that won’t face a risk of running out of money.
    If thats the idea then this rule of thumb would work. It seems very conservative to me but thats not really a bad thing.

  6. Many years ago I read an article in Money magazine that made with the humorous contention that in the perfect financial plan the check to the undertaker bounces. I would not go that far, but I agree with Frugal Millionaire’s sentiments. Although there is some intuitive appeal to me in amassing enough in investment balances to live off the interest and dividends, I think there is a point to ponder in why you saved all that money in the first place. I do not have any direct heirs, and although I’m okay with leaving some assets to favorite charities or other family members — I don’t really think I want to exit this world with a big pot of money untouched. I hope to enjoy it while I can.

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