A Simple Rule for Spending Down Retirement Savings

A new rule put forth by a fellow of the Society of Actuaries allows a comfortable, reasonable level of spending without retirees doing a lot of analysis and planning.

By Rebecca Moore | June 29, 2016
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Evan Inglis, a fellow of the Society of Actuaries, and senior vice president in the Institutional Solutions group at Nuveen Asset Management, based in Chicago, says a 3% spending rule, rather than the traditional 4% rule, recognizes the lower level of returns we are likely to experience in coming years due to low interest rates and other factors such as demographic trends.

However, after advising different people and thinking about his own retirement, Inglis tells PLANSPONSOR he realized that as people got older, the ability to spend without worrying about depleting savings increases. So, in an essay written for the Society of Actuaries, he puts forth the “feel-free” spending rule—simply divide the retiree’s age by 20. For someone who is 70 years old, it’s safe to spend 3.5% (70/20 = 3.5) of her savings.

The rule would also work for someone, for example, at age 50 to see if they have enough savings to afford to retire.

“The ‘feel-free’ rule is simple and adaptable to a wide range of situations,” Inglis says. “People can adapt it to their comfort level or levels of return.” A table in his essay shows how with “feel-free” spending, retirees will be comfortable with earnings expected in different portfolio allocation scenarios, but the rate of spending is not so much lower than earnings that people are constraining their spending too much.

“The idea is that this level of spending should be appropriate for a wide range of portfolios, from 40% to 70% in equities. People can take more risk and get a higher level of return, but because they are taking more risk, they want to be conservative in spending relative to return. If they have a conservative portfolio, earnings are more predictable, so they can spend closer to the level of earnings they are anticipating,” he says.

Inglis notes that the impact of volatility will lower the level of earnings, so those with higher-risk portfolios may have to adjust their spending down. People should also consider investment management costs in deciding whether they need to bring their spending down.

NEXT: A range of spending levels