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Are you trusting your future to a rule of thumb?

Darryl Rosen • Mar 05, 2023
You may know of the 4% rule - a planning philosophy that helps people know how much they can safely spend in retirement. 

Here is a brief explanation. 

The rule, which was created over 30 years ago, suggests that if you spend just 4% of your nest egg each year in retirement (adjusted for inflation), the money should last 30 years.

Some experts say it’s more like 3% now because bond returns were higher back when the rule was created. This post isn’t so much about what percentage you choose, but the effects of using a rule of thumb like this.

I see two problems:   

One: As we age, we spend less by nature as we slow down. The effect of this can be an overestimation of the overall cash you need in retirement. 

The Bureau of Labor Statistics tracks average consumer expenditures by age. You can see spending levels actually peak before retirement age and only fall from there as you get older. See image below.

Average spending between 65-74 and 75 Plus drops about 20%. This is off an even steeper decline from 55-64. The data bears this out. People spend less as they age.


Two: Assuming that our spending will be linear or equal throughout retirement will effectively reduce your quality of life early in retirement when you’re likely in better health. 


We know from our parents and watching others that people slow down over time. We naturally do less as health invariably throws a monkey wrench into our day to day lives.


Think about it this way.

Let’s say the Jones have a $ 500,000 nest egg. According to the 4% rule, they should spend 20K in year 1 as they begin retirement. The 4% rule doesn't factor in Social Security payments which would provide more income. 


Because we know the Jones are probably gonna spend less over time, what if we allocated an extra $10,000 each of the first 5 years so they could travel more.  


Would that improve their quality of life?


I believe it would, so here are the two questions I ask my clients. 


  • Would you spend more money if you could, and 
  • Do you want to trust your financial future to a “rule of thumb?”


Yes and no!


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