Simply raising the spending rate from 4 to 6 percent means you can spend 50 percent more.
How would you like to double your retirement spending?
Well, Michael Finke is working on just that.
He thinks we may be able to live better in retirement than most professionals have thought for nearly two decades.
The Texas Tech University associate professor, along with two other researchers, Wade Pfau and Duncan Williams, has examined William Bengen’s well-known 4 percent safe-spending rule and found that some retirees, perhaps many, can spend a lot higher on the hog.
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Simply raising the spending rate to 6 percent means you can spend 50 percent more.
“By emphasizing a portfolio’s ability to withstand a 30- or 40-year retirement,” the researchers write in the March issue of the Journal of Financial Planning, “we ignore the fact that at age 65 the probability of either spouse being alive at age 95 is only 18 percent.”
It’s silly to have 95 percent confidence in your income when your chance of being alive is much smaller.
Excessive caution, he told me in a recent interview, means we buy long-term security at the expense of giving up many things we’d like to do today.
We leave estates that are larger than planned and feel remorse for experiences we’ve missed.
So the researchers reframed the dilemma.
Putting investment results in the framework of our life expectancies, they asked this question: If you withdrew at a greater rate, what percentage of your remaining years of life at age 65 would you be broke?
While most people would not want to risk going broke early in retirement, they might feel differently about going broke at 85 or 90 if it would change their life in the intervening years.
Recall that the joint life expectancy of a 65-year-old couple is about 25 years.
Since we tend to reduce spending as we age, the loss of wealth and income could be less of a hardship than it might seem.
The researchers caution that since women live longer than men, more of the risk burden would fall on women.
That may be an understatement.
In a 65-year-old couple, the first death is likely to occur at 15 years, leaving the surviving spouse another 10 years of life.
A thoughtless husband could suggest a 9 percent withdrawal rate, knowing they’d spend well while he was alive and the lean years would fall on his widow.
The researchers also considered another factor: assured income.
If retirees have a “floor” income for their lifetimes from a combination of Social Security, pension and life annuities, they can think about running out of wealth before death with less worry than if their only lifetime income is from Social Security.