How Much Can I Spend?

One of the most important  and complex decisions is "how much can I safely withdraw from  my retirement portfolio each year without fear of running out of money?"

Its a simple question but generates a lot of debate by financial planners.  There seems to be several schools of thought:: a traditional method and some updated work. 



In 1994, William Bengen published a paper in the Journal of Financial Planning which has had the biggest impact on retirement income planning. Titled " Determining Withdrawal Rates using Historical Data", Bengen looked at actual stock market returns and retirement scenarios over the past 75 years.

He concluded that retirees who draw down no more than 4 percent of their portfolios every year stand a great chance their money will out live them.  Retirees who draw down 5 percent a year run a 30 percent chance of jeopardizing their nest egg and those who take 6-7 percent are taking a much greater risk.  His research take into account several worst-case scenarios of the past such as bear markets, periods of high inflation and down markets in the early years of an investors retirement. 

Bengen used a asset mix of 50-75 percent in stocks and suggested this should be a range for most retirement investors.

Morningstar Study On Retirement Withdrawal Rates

A 2006 study by Ibbotson Associates, an affiliate of Morningstar Inc., found that systematic withdrawals from retirement savings plans can be problematic if individuals withdraw more than 3% to 4% annually.    The study found that, based on historical rates of return of a balanced stock and bond mix, a 7% annual withdrawal rate lasts just nine years. At a 5% withdrawal rate, the money lasts about 22 years.  And individuals would have to reduce their withdrawal rates to 4% or less to make portfolios sustainable for at least 30 years.

Another Retirement Withdrawal Approach

In the June 2005 issue of of the Journal of Financial planning, Ty Bernicke, a certified financial planner gave another approach.

He pointed out that traditionally, financial planners factor in inflation to come up with annual retirement withdrawals that increase with each passing year. Under traditional planning methods, a married couple who retire at age 55 and spend roughly $60,000 a year would see their spending needs rise  to $145,635 a year by the time they reach age 85.  The reason for the rise:  an inflation rate assumption of 3 percent a year on top of expenditures that start out at 60,000 a year But these calculations don't take in to account a very important trend:  Retirees tend to spend less on most things as they get older.

A recent consumer expenditure survey released by the Labor Department's Bureau of Labor Statistics confirmed that in all categories (except health care) annual spending declined among older retirees.  Those in the 65-74 age group spent 27 percent less on such things as clothes, entertainment and food than retirees in the 55-64 age group.  And the 75 plus age group spent less than the 65-74 age group.

Health care costs are the only cost to rise as people age, according to Bernicke's data.  Everything else, including entertainment, housing cost, food and transportation falls resulting in an overall decline  in spending.


Looks like income planning is more art than science right now.  However, retirees today are living longer, retiring earlier, and have fewer guaranteed income sources available from the government and pension plans.

Still most financial planners make these suggestions:

  • Try to calculate your retirement "number."
  • Withdraw only 4 to 5 percent each year.
  • Maintain a long term strategy.
  • Have an emergency fund.
  • Consider an annuity.
  • Consider delaying Social Security