Drawdown strategies may have to be redesigned in light of the low-return climate.
That's according to a paper by R. Evan Inglis, a fellow of the Society of Actuaries who is in the Institutional Solutions group at Nuveen Asset Management. Inglis wrote that, contrary to the historical benchmark of a 4 percent drawdown, the current economic climate dictates that should be more like 3 percent.
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One contributing factor is that investment returns "are likely to be low for some time to come," with this spurring retirees to spend more conservatively. But to make sure they continue to have a "comfortable lifetime income," Inglis suggested several rules to follow — as well as a metric to determine a "safe" percentage of savings to spend.
How to come up with that safe percentage? Divide your age by 20. (For couples, that calculation should be done on the younger person's age.)
That means that, while in general retirees can spend 3 percent of their assets in a year (over and above Social Security, pension or annuity income), older retirees might be able to spend more, since a shorter remaining lifespan lowers the potential to run out of money.
A 70-year-old, therefore, can safely spend 3.5 percent.
People who aren't content with that level of spending are invited to approach the question from the opposite direction and divide their ages by 10.
That will give them a "no more" figure, since if a 70-year-old spends 7 percent of his savings each year he will seriously deplete the balance, especially considering inflation. So that person should spend "no more" than 7 percent, and that only for a special circumstance such as a medical emergency, lest they run out of cash.
But, lest this sound too simple, there are other considerations. Long-term care insurance might buy a retiree additional spending freedom, but without it seniors might want to consider cutting their outflow.
If the death of a spouse brings with it a termination of income, that will affect the "safe" spending figure — as will significant income taxes.
Even if interest rates rise, that doesn't mean one's retirement spending should rise right along with it. A small increase might be okay, but a 200-basis-point increase in interest rates shouldn't result in a 2 percent increase in spending.
And if you're planning on passing along an estate, you'll want to take that into consideration as well when deciding how much you can safely spend during retirement.
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