How to determine what a suitable level of spending in retirement is a difficult question to answer. Solving this problem involves making assumptions about life expectancy, investment returns and risk tolerances. The industry skins this cat a number of ways – some simple and some complex.
The simplest of them all is the 4% rule. If you spend 4% of your annual income in retirement, generally speaking given most folk’s life expectancies, then you should have sufficient funds until retirement. Practitioners sometimes state the reciprocal of this rule. If in retirement, one has either income or capital to fund 25 years of retirement (1/4%), then one is more likely than not able to fund a comfortable retirement. This gets you to a life of 90 years given a standard retirement age of 65.
While this method leaves a little longevity risk unaddressed, it is still a pretty good rule of thumb and is one we use at KilterHowling, at least conversationally. To improve upon this rule in practice, one would hopefully have the discipline to rein in spending in the good years, most likely with a cap on spending. In most scenarios, this adds to the likelihood of a successful retirement.
Life is messy, as my mother tells me, and a simple 4% rule might not be enough. For all of our financial planning clients, we take goals-based approach to solving for retirement success. This involves understanding all aspects of a client’s assets, from investable assets to inheritance to land holdings. Coupling the timing and risk/return expectation of these assets with the lifetime financial goals, we can get to a more sophisticated probability of success.
Very importantly, we can do what-if analysis for clients that helps them to see the hidden risk in their financial outcome. Of course we can address whether or not a certain level of retirement spending is too high (or could be higher)? But the tools we use are robust and begs other questions too. What if I must retire early? What if I live well past my actuarial life expectancy? What if inflation is higher than most expect? What if my health care costs are exorbitant?
Moreover, our tools are flexible enough to allow clients to do much of this work themselves by logging in at their leisure or as thoughts and worry make it necessary. At KilterHowling, long gone are the days when financial planning meant a forty page book and a three hour meeting to go over it. To us and our clients, financial planning is efficient, interactive, and iterative.
When you need to update your financial picture, you need not wait for us to answer the phone or schedule a meeting – although we are more than happy to do so. You simply log-in, make changes, and see the updated probability of success.
The question of retirement spending is a complex one. “What is your number?” as the saying goes in some of the literature. An involved and iterative financial planning process helps find that answer. At KilterHowling, we implement that plan with a portfolio that has the right balance between Capital Preservation and Global Growth to match your personal financial situation.