For nearly two decades, the 4% rule has served as a benchmark of how much retirees can safely afford to withdraw from their nest eggs initially, with annual increases for inflation, and be reasonably certain they would not outlive their savings over a 30-year retirement.
In 2016, the Society of Actuaries’ (SOA) Committee on Post-Retirement Needs and Risks awarded first prize to Evan Inglis, a senior vice president for Nuveen Asset Management, in a call for essays for his discussion about a simple strategy to determine how much can be safely spent in retirement.
Inglis calls his method the “feel free” spending level. The formula is simply a person’s age divided by 20. The resulting number is the percentage of savings a person can spend over and above any Social Security, pension or annuity-type income.
For example, a person who is age 70 can safely spend 3.5% of his or her savings (70 ÷ 20 = 3.5). A 60-year-old would be limited to 3% (60 ÷ 20 = 3.0), while an 80-year-old can spend 4% (80 ÷ 20 = 4.0).
The term “feel free” refers to the fact that a person spending at this level should have little worry about depleting their savings. Inglis believes this rule will not only provide enough money but will also allow a retiree’s portfolio to grow should historical returns be repeated. If returns are lower in the future, then the level of spending should still be enough to last a lifetime.
A modified version of the formula calculates the upper limit of what can be spent. Dividing one’s age by 10 gives the “no more” level of spending. Spending close to this level (e.g., 7% for someone who is age 70, or 70 ÷ 10) will cause savings to “almost certainly drop significantly over the years, especially after inflation is considered.” Inglis adds that “one should not plan to spend at that level,” with the exception of a special circumstance such as a large medical expense.
He added that common sense needs to be applied based on individual circumstances. Having a long-term care insurance policy can allow for a slightly higher spending rate. The potential loss of annuity income, such as a spouse’s pension or Social Security, will alter spending. If interest rates rise significantly, sticking with the divide-by-20 rule would make sense. An expected increase in future income (payments from a deferred annuity) or reduction in spending (e.g., paying off a mortgage) will require adjustments to future spending rates.
Source: “The ‘Feel Free’ Retirement Spending Strategy,” R. Evan Inglis, Society of Actuaries Diverse Risk: 2016 Call for Essays, April 2016.