How Much Can Retirees Spend?

With the interest rates declining and turbulent market volatility, a lot of people are thinking about their retirement plan’s viability. Will they have enough to meet their spending goals once they retire?

The 4% rule then comes into the picture. For those who don’t know, it is a basic rule that serves as a guide for retirement spending. It’s by far the highest rate of withdrawal that’s ideal with market returns in the United States for those who are modifying their spending for inflation every year and eyeing a 30-year retirement. You need to know that the 4% rule is not applicable to everybody nowadays since retirees deal with the lowest interest rate setting ever. It’s also not applicable to those who don’t want to hold 50% stocks throughout their retirement years.

Dedicated Income Sources

Dedicated income sources include setting up a bond ladder by keeping individual bonds until it matures so you can use it to support your expenses once you retire. You can also buy a basic income annuity that will transform a single premium into what they refer to as a protected lifetime income.

Can Retirees Spend More?

The first possible way for retirees to spend more is through buffer assets. These are the assets that are made available beyond the financial portfolio where you can draw from following a market downturn. The returns on such assets should not be linked with the financial portfolio because the main objective of these assets is to support the spending if the portfolio is down. Policy loans that has a cash value of entire life insurance and opening a line of credit are the two primary buffer assets that you should consider.

You can also use a variable spending strategy as a way to spend more during retirement. Spending could begin higher, but only since there’s the willingness to cut back spending as needed. There are different variable spending strategies and the most famous ones are the Guyton and Klinger decision rules. This method focuses on inflation adjusted spending, however, the inflation adjustment will be skipped during the time when the portfolio undergoes a loss, and the spending will then be reduced further by 10% permanently at any time during the first 15 years of your retirement wherein the rate of withdrawal from the assets remaining has increased by more than 20 percent beyond the initial level because of a reducing portfolio balance.

There could be a lot of these 10% permanent spending cuts especially during a bad market. Spending could also rise by 10% if the portfolio increases enough so that the existing withdrawal rate is about 10% lower from where it all began.

Insurance and Investments

If a retiree has a spending goal with 2% spending growth during his retirement. With investments only, the retiree will have a 2.88% spending rate. If he puts 30% of their assets into a SPIA, it will have a withdrawal rate of 3.8%. Adding investments and annuity, their withdrawal rate will at 3.92% from 2.88%. Since these bonds are by far the least effective way to support the retirement spending, this kind of mixed strategy may work better for those conservative retirees.

Call Reverse Mortgage Specialist now if you want to learn more about retirement planning.

David Stacey
Reverse Mortgage Specialist
Columbia, SC 29205
(803) 592-6010
http://reversemortgagecolumbiasc.com/