Spend more during retirement? Seems so! | Financial BALC #76
What if you could spend more during retirement? It’s an exciting thought, for sure.
In a recent publication, three researchers from Texas Tech University examined William Bengen’s well-known 4% safe spending rule and found that some retirees, perhaps many, can live a lot bigger. By emphasizing a portfolio’s ability to withstand a 30- or 40-year retirement, we ignore the fact that at age 65 the probability of either spouse being alive at age 95 is only 18%. Researchers stressed that excessive caution means that we buy long-term security at the expense of giving up things we’d like to do today. (
The researchers put the investment results in the framework of our life expectancy: “If you withdrew at a greater rate, how soon would you be broke after age 65?” At a 4% withdrawal rate, a 65 year old couple is virtually certain to avoid going broke with a portfolio that ranges from 30% equities to 60% equities.
At a 6% withdrawal rate, the risk of going broke increased, but a typical balanced portfolio of 60% equities and 40% fixed income securities only reduced the percentage of years without wealth to 7.5% of expectancy. In other words, the couple could spend 50% more money for 92.5% of their remaining lives by accepting the risk of living in reduced circumstances for the remaining 7.5%.
The joint life expectancy of a 65 year old couple is about 25 years. At an 8% withdrawal rate, for example, the couple could enjoy 20 years of doubled spending at the expense of five years of being broke, starting at age 85. Since we tend to reduce spending as we age, the loss of wealth and income could be less of a hardship than it may seem.
The researchers caution that since women live longer than men, more of the risk burden would fall on women. But what if… we planned for that? The sky’s the limit,
You can read the full report of the study at the Journal of Financial Planning.
