CHICAGO – How much should clients spend down in their portfolios in retirement? There was a time when the 4% rule was widely accepted, which means the rule of thumb that $4,000 could be spent annually for each $100,000 in a portfolio. That $4,000 would be increased annually to match inflation.

As I see it – and speaking optimistically – 3.5% may be the most clients can spend safely, presuming a portfolio of about half stocks and half bonds. That's because bonds yields are so low and many expect equity returns below historic levels.

At the annual Morningstar Investment Conference, the research giant’s director of personal finance, Christine Benz, led a panel with Cornerstone Wealth Advisors’ Jonathan Guyton and David Blanchett, head of research at Morningstar Investment Management. Blanchett underscored that expectations of returns are now lower than historic rates. That's due, in part, to historically low bond rates.

In monetary terms, Blanchett said for a 50-50 portfolio, that means what was once a 93% success rate of not outliving your money is now only a 56% success rate, presuming a spend down rate of 4%.

Guyton asserted that the static real withdrawal rate is flawed because non-health care expenditures decline over time in retirement, since travel and other expensive hobbies decline in later years. He suggested considering dynamic withdrawal policies, such as cutting expenditures when portfolios decline.


My take is not to count on expenditures dropping over retirement. I fear Medicare is in far worse shape than Social Security and means-testing is possible in the future. Also, don't forget about the possibility of expensive long-term care if you've self-funded.

My own modeling shows a 3.5% safe spend rate may be reasonable only if one is playing a perfect game. A 2.6% safe spend rate is probably right for a typical investor who gives away 1% in fees and another 1% through poor market timing.

I tell clients I'd prefer they come back to me in a few years saying they had too much money, rather than saying they are running out of money. The former is an easier problem to solve.

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