Frequently we see advice from “experts” regarding how much of your nest egg you should withdraw each year. For example, a recent Motley Fool article, “Forget the 4% Rule: Here’s a Better Way to Approach Your Savings” tells us that the 4% Rule may not actually be all that bad as a rough guide but you need to be flexible in its application. Like most rules of thumb (Rot) approaches, the 4% Rule (or even a more flexible version of the 4% Rule) is a methodology used to “tap” one’s retirement savings and is generally not part of a strategic plan to meet a retiree’s financial objectives in retirement. Since the typical Rot approach doesn’t even consider a retiree’s specific circumstances or specific financial goals, it is unlikely to have a high probability of successfully achieving such goals.
In his most recent blogposts on May 17th and May 27th, Dirk Cotton encourages retirees and their financial advisors to use strategic planning processes similar to those used in business to develop retirement plans for individual retiree households. As part of his recommended process, Dirk advocates that the retiree household adopt a mission statement, whose purpose is “to identify their strategic objectives [or goals], or those things that, at retirement's end, they would need to have achieved in order to consider their retirement to have been successful.” According to Dirk, “The challenge of retirement planning is to find a strategy (and there may be several) that meets the desires of our mission statement but also falls within the limits imposed on us by the economy and our household’s resources.” I encourage you to read Dirk’s recent posts.
The Actuarial Approach advocated in this website can help financial advisors and retirees refine their strategic goals by indicating which goals are financially “possible” [fall within the limits imposed by household resources]. For example, a household may desire to leave a significant legacy to heirs but they may have insufficient assets at this time to fund expected future essential expenses. The “Budget by Expense” tab of the Actuarial Budget Calculator can help the household plan how they will spend their assets (if all current assumptions about the future are realized) enabling them to determine which strategic goals are most important to them. The calculator can also help the household make decisions about how much risk to assume for certain types of future expenses, how their home equity should be spent, etc. The Actuarial Approach also provides a reasonable measure of whether the household is progressing satisfactorily toward the achievement of the goals selected (or to revise goals in the future). Unless your goal is to simply not run out of your savings, adoption of a Rot approach is not likely to be as successful at achieving your strategic goals.