How to plan to spend your retirement savings

Instead of a fixed withdrawal rate, planners recommend a dynamic cash-flow approach

- Brian J. O'Connor

Many people are more worried about running out of money in retirement than dying, and many retirees could be on track to turn that fear into a stark reality.

For instance, nearly half of America's retirees do not take any systematic approach to withdrawing what totals many billions of dollars in retirement assets. Just 22 per cent of retirees follow any kind of plan.

"You can't just arrive at the age of 65 or 67 and say, 'Okay, now what am I going to do?'" said IRALogix chief executive Peter de Silva. "It's a process, not an event. It's coming. You've got to plan for this."

THE CLASSIC APPROACH If investors know anything about structuring retirement withdrawals — what financial planners call "decumulation" — it is the 4 per cent rule. This was posited in 1994 by financial planner Bill Bengen, who reviewed market returns dating to 1926.

Mr Bengen found that even during the worst three decades for stocks — October 1968 to 1998 — retirees withdrawing no more than 4 per cent of their balance in the first year of retirement and adjusting subsequent withdrawals for inflation would have money left after 30 years.

Like any theory, the 4 per cent rule has waxed and waned in popularity. Mr Bengen revisited his original research in 2012 and made the rule a bit more generous, increasing withdrawals to 4.5 per cent.

Since 2021, research firm Morningstar has calculated an optimum safe withdrawal rate for portfolios holding 20 per cent to 50 per cent equities. The goal: to have a 90 per cent chance of holding value after 30 years. The recommended rate in those studies ranged from 3.3 per cent in 2021 to 4 per cent in 2023, with a rate of 3.7 per cent recommended for 2024 and 2025.

THE BIG PICTURE Financial planners recommend a tailored approach to withdrawals that reflects real-world retirement returns and spending. Here are five key points to consider: