Years ago, I had a conversation with an 80-something widow with several children. She was deeply afraid she was going to run out of savings soon. She wondered if she should take greater risks with her investments? Not a good idea, of course.
She mentioned she had set aside a considerable sum for her children. I asked if she would run out of savings if she didn’t leave so much to her children? She said no, but the inheritance was important to her. I suggested she gather her family and talk over her finances. I had a feeling her kids would say she should spend the money on herself and leave them less.
I recalled that conversation the other day reading a research report by Vanguard, “Sustainable withdrawal rates in retirement: The importance of customization.” After saying goodbye to colleagues for the last time, workers with retirement savings plans need to figure out how much money they can take out every year without running the risk of running out of savings. (You can’t outlive your Social Security payments.) Coming up with an answer is difficult. The math would be easy if you knew how much longer you were going to live. But will you live 15 years, 30 years, or even more in retirement?
Financial planners have developed several strategies that balance the need for spending savings while avoiding the trauma of running out of money. Best known is the 4% rule. In essence, you draw down 4% of your total assets every year (adjusted for inflation) and the odds of depleting assets over a 30-year period are small. A cottage industry has challenged the rule in various ways. The value in the 4% rule is you have to start somewhere. But you will want to adjust the figure not only to your household needs, but you might want to change the amounts over time as circumstances evolve.
The Vanguard study emphasizes how important bequests are to creating any withdrawal strategy. The more you would like to leave to heirs and charity the less you should plan on withdrawing. However, like my conversation from years ago, you can always reduce or expand your ambitions during retirement. The ability to pivot is critical in a career, and the same willingness to adjust remains invaluable in retirement.
Farrell is economics contributor to the Star Tribune, Minnesota Public Radio and American Public Media’s “Marketplace.”