In his September 29 article for US News, Why You Won’t Run Out of Money in Retirement, David Ning outlines several safeguards that he believes “will prevent you from spending your savings too quickly.” He indicates that you “aren’t likely to completely run out of money in retirement,” and therefore you shouldn’t “let the fear of outliving your savings prevent you from enjoying retirement.” One of the safeguards recommended by Mr. Ning is to withdraw only 3% or 4% of accumulated savings each year.
I agree with Mr. Ning that retirees shouldn’t let the fear of outliving their savings prevent them from enjoying retirement. On the other hand, simply taking steps to make sure that you don’t spend your savings too quickly (by using a conservative 3% or 4% withdrawal rate) is only part of the equation for enjoying retirement. Another critical part of this equation is spending enough each year to maintain a certain standard of living, including spending on non-essential items. Therefore, what retirees really need is a Goldilocks-type solution that involves not only not spending too much but also not spending too little. Unfortunately, since no one knows, for certain, things like how long you will live, what your investments will earn, what future inflation will be, etc., there can be no such Goldilocks solution.
The Actuarial Approach discussed in this website attempts to help retirees find the appropriate balance between spending too much and spending too little. If you use our recommended assumptions to develop some or all of your annual spending budget and invest your accumulated savings reasonably well, you will likely end up with more assets than you desire upon your death (even though withdrawal rates for retirees with no pension/annuity income and no amounts to be left to heirs under the Actuarial Approach will exceed 6% at ages above 75, compared with the 3% or 4% withdrawal rate suggested by Mr. Ning.)
More effective safeguards to balancing not spending too much and not spending too little (as well as achieving ancillary goals such as: (i) having relatively predictable and stable inflation adjusted income from year to year, (ii) having spending flexibility to meet unforeseen expenses, (iii) maximizing the general level of spendable income and (iv) not leaving too much unspent upon death) include using the Actuarial Approach to develop separate spending budgets for essential expenses, non-essential expenses, long-term care/other end of life expenses, and unexpected expenses with appropriate investment strategies for the funds dedicated to these separate spending budgets as discussed in recent posts.