Make retirement savings last
After raising six children and working nearly 25 years at Blue Cross Blue Shield of Michigan, Elroy Grandy says he spent his first few years in retirement spending a bit too much.
“Isn't retirement something to really celebrate?” says Grandy, 65, who did graphic design work and took an early retirement buyout in 2009.
Grandy has a pension, Social Security coverage and retirement savings. But he and his wife, Kathleen, realized that they were withdrawing too much of their savings in the first few years. The Wyandotte, Mich., couple initially treated themselves to eating out more often than they would have in the past. He remembers going to an art fair and splurging on some artwork early on, too. If that went on, he said, the savings wouldn't last.
It's possible the celebration can run a bit too long, as some baby boomers soon discover. Saving for retirement is one thing; learning how to make that retirement nest egg last 25 years to 30 years or even 40 years is another.
Once you save all that money for retirement, the big question for many baby boomers is what, really, can I afford to spend each year? How much money you need in retirement can depend on whether you have any pension or when you begin collecting Social Security.
Some consider a safe withdrawal rate to be 4 percent each year from a portfolio. But that 4 percent rule is becoming more of a subject of debate in an environment of low-interest rates and high stock market volatility.
“People should not misinterpret it. It's not any kind of guarantee,” said Wade Pfau, professor of retirement income at the American College outside Philadelphia.
Pfau warned that the 4 percent is based on the assumption of a fairly aggressive portfolio, which includes stocks. The 4 percent rule would have worked during a 30-year time beginning in 1966, which included a time of high interest rates.
“No one knows what a safe rate will be because returns will depend on future events — which haven't happened and are therefore unknowable,” said Marilyn Capelli Dimitroff, director of wealth management and principal at Planning Alternatives in Bloomfield Hills, Mich.
“Every situation is personal and not cookie cutter.”
A key question: Is the retiree paying much attention to how much he or she is spending? Say a retiree sets up a system to spend 4 percent but then the retiree pays cash for a car, takes out extra money to pay taxes on a cottage, or takes $15,000 or more to pay for a wedding.
“It's amazing that those withdrawals don't add into the mental calculation,” said James P. Studinger, owner of JPStudinger Group, a wealth-management firm in Troy, Mich.
Maybe the $50,000 in cash accounts at the beginning of a year drops to $25,000 or less at year end.
“So even though they took out a modest amount from an IRA, in reality they are spending much more than that,” Studinger said.
Doug Fisher, senior vice president of Fidelity Investments, said some research is showing that a significant number of retirees are withdrawing at a rate that's higher than 4 percent of their portfolios each year. If so, many could be at greater risk of running out of savings.
Fisher says the 4 percent rule is a guideline that can help even start a conversation about how much money could be available in retirement. Fidelity offers a calculator and is working with some employers to provide more guidance on retirement readiness.
Three factors can dictate how much retirees spend each year in retirement: their time-horizon, their tolerance for risk and how much of a guarantee they want that their money will last through their lifetimes, according to Colleen Jaconetti, senior investment analyst for the Vanguard Investment Strategy Group.
Someone who is going to need money for 40 years or more, she said, is at greater risk if they want to withdraw 4 percent or more in a year in retirement. But someone who retired later and needs the money for 10 years might be able to withdraw closer to 8 percent or 10 percent in a year.
Vanguard, she said, focuses on telling retirees to steer clear of thinking there is one correct withdrawal rate for everyone. The 4 percent rate takes into account a 50-50 mix of stocks and bonds; a 30-year time horizon and an 85 percent success rate that the money would last through retirement, she said.
Vanguard has a calculator online that can help retirees determine how much to spend in retirement.
One mistake retirees can make, Jaconetti said, is to let their income from dividends and interest dictate their spending. If so, there could be a greater temptation to shift from a balanced portfolio and take on high-risk investments, such as high-yield bonds. Retirees might be better off tapping into some capital appreciation in given years, instead of taking on more risk.
Baby boomer retirees and those four or five years from retirement need to calculate how they're going to generate a paycheck in retirement. But they need to review what they're spending and what adjustments they can make early in the game.
Grandy and his wife put a tighter control on their spending, recognizing that his mother is in her 90s now. The impulse spending had to stop for that money to last. Now, he's making extra spending money as an artist, doing work in clay and creating laser paper sculptures. The couple focuses on doing things with their nine grandchildren, soon to be 10, instead of lavishing them with gifts, too.
“We don't know how long we're going to live,” Grandy said. “We don't know how long we're going to need our money. Who knows the future of anything?”
Susan Tompor is the personal finance columnist for the Detroit Free Press. She can be reached at firstname.lastname@example.org.
Show commenting policy
TribLive commenting policy
You are solely responsible for your comments and by using TribLive.com you agree to our Terms of Service.
We moderate comments. Our goal is to provide substantive commentary for a general readership. By screening submissions, we provide a space where readers can share intelligent and informed commentary that enhances the quality of our news and information.
While most comments will be posted if they are on-topic and not abusive, moderating decisions are subjective. We will make them as carefully and consistently as we can. Because of the volume of reader comments, we cannot review individual moderation decisions with readers.
We value thoughtful comments representing a range of views that make their point quickly and politely. We make an effort to protect discussions from repeated comments either by the same reader or different readers.
We follow the same standards for taste as the daily newspaper. A few things we won't tolerate: personal attacks, obscenity, vulgarity, profanity (including expletives and letters followed by dashes), commercial promotion, impersonations, incoherence, proselytizing and SHOUTING. Don't include URLs to Web sites.
We do not edit comments. They are either approved or deleted. We reserve the right to edit a comment that is quoted or excerpted in an article. In this case, we may fix spelling and punctuation.
We welcome strong opinions and criticism of our work, but we don't want comments to become bogged down with discussions of our policies and we will moderate accordingly.
We appreciate it when readers and people quoted in articles or blog posts point out errors of fact or emphasis and will investigate all assertions. But these suggestions should be sent via e-mail. To avoid distracting other readers, we won't publish comments that suggest a correction. Instead, corrections will be made in a blog post or in an article.
- Pa. unemployment rate rises to 5.8 percent
- Range Resources to pay $4.15M fine, close old gas drilling impoundments
- Chevron gets first OK from Pa. sustainable drilling group
- Bayer to spin off plastics unit as separate company; employment to remain stable
- Five things you should know about Alibaba’s leadership
- Post-IPO, Alibaba plans global expansion
- Home construction plunges more than 14% in August
- 5 Facebook settings to change now
- Brighter economy drives up holiday hiring plans
- Net worth in U.S. reaches record high
- Mylan CEO Bresch sets sights on growth