An important thing to know about retirement spending is that no single formula works for everybody. Many people follow the 4% strategy, where your annual retirement expenses are 4% of your total savings—with adjustments for inflation as necessary. This is an established strategy that is fairly rigid, favoring a specific portfolio composition of about 60% stocks and 40% bonds, which may not accurately describe your assets. It’s a logical approach to retirement spending, but it has its flaws. For one, low interest rates over the past several years suggest that it’s probably better to spend 3%, for less risk of running out of savings. Again, this shows the value of having a reliable source of income—like an annuity—included in your retirement budget.
Retirement spending tends to be uneven over the course of retirement because most retirees are more active during the first 15 years of their retirement (traveling, dining out, taking classes), and less active during the later years. Having regular income from annuities allows you to spend more confidently in a way that fits your lifestyle. You should also look beyond the retirement spending formulas and have whole life insurance coverage to protect your family should something happen to you, and to protect you (via accessing the cash value of whole life insurance) from unexpected costs that fall outside of your spending strategy if the life insurance needs decrease in retirement.1 It’s difficult to predict when a sudden medical bill or expensive home repair will strike.
As retirement will ideally last 30 years or longer, you want to make retirement withdrawals in a way that maximizes the value of what you’ve saved during your career. Required minimum distributions, or RMDs, are the amounts you must withdraw on qualified assets each year once you turn 72 (those who turned 70½ before January 1, 2020, must continue taking RMDs under the rule that previously applied). The benefits of RMDs are that they may allow the percentage of wealth to increase each year with age, they encourage a balanced portfolio, and they respond to fluctuations in value because the dollar amount of your retirement withdrawal is based on the current market value of your portfolio. This can be an efficient piece of your retirement spending plan but it should still be supplemented with a source of consistent income and financial protection against unexpected medical costs—like health care expenses and extended care.
While it’s important to understand the various strategies for responsible retirement spending, no rule, table, or online calculator is a substitute for an ongoing, honest conversation with a financial professional who understands your unique situation and priorities.
1 This will reduce the death benefit and available cash surrender value.