You’ve paid off your house – or realized that you never will.
You’ve budgeted money to pay for help at home, for Medicare premiums, for long term care – or realized that you will have to rely on charity and Medicaid.
You have an emergency fund.
You wonder how much you should budget for retirement: how much you can afford to spend for daily life and for the “extras.” Will you be eating steak or hamburgers? Going to the movies or watching Netflix? Taking a trip or taking a walk?
How do you decide?
The 4% rule, espoused by a columnist in a recent AARP publication, was discredited during the Great Recession and abandoned by its founder. Stress-testing a balanced portfolio of S&P 500 Index and intermediate U.S. government bonds with an inflation-adjusted annual 4% withdrawal fails 5-15% of the time. Do you want to have a 5-15% chance of running out of money before you run out of life? In accounting terms, that is a material risk.
Consider IRS Guidelines
Why not look at IRS guidelines for required minimum withdrawals from 401ks? If you are 70, the required minimum withdrawal is based on an assumption that you will live 27.4 years. The figure adjusts every year. The calculations are done to make sure that you never run out of money – not that you will always have “enough” but that you will never have none.
What if you calculated your Social Security the same way? You do not know what the chained cost of living adjustment will be, only that it will be less than actual inflation. You do not know how much your 401k will earn either – though it will almost certainly earn more. The average Social Security retirement benefit is $1,494/month (2018), $17,928/year. If at age 70 you assume, as the 401k calculations do, that you will live another 27.4 years, your Social Security “base” is $491,227. If you treat that like a 401k, how much would you withdraw in the first year? $17,307.
Save Not Spend
This means that if you receive the average Social Security retirement benefit at age 70 but want your money to last your IRS-guesstimated lifetime, you should save, not spend, $621 of it. The IRS chart can be used to determine how much of it you should save in subsequent years.
In addition, while your 401k and IRA are likely to at least keep pace with inflation in the long run (with dips as well as peaks), your Social Security “chained” COLA will not.
To keep pace with the ever-rising cost of living, you must withdraw ever more than your required minimum distributions. So unless they are very large, you cannot count on your 401k and IRA to fund your long term care as well as your daily expenses.
This may be why some pundits advise us to save during retirement. Living beneath your means now may mean indulging in less expensive habits and hobbies, but it beats being destitute in old age.
You may think that you will not live that long anyway. Eat, drink and be merry! But today one spouse or the other will live to be at least 90.
In retirement, as in business negotiations, it is better to leave some money on the table.
Elder law attorney, Terry Garrett, is a member of the National Academy of Elder Law Attorneys and is an Approved Guardianship Attorney. She assists people in elder law, estate and special needs planning, guardianship and settling estates. She graduated with honors from Cornell University. She was on the Dean’s List at Wharton Business School. She earned her J.D. at Columbia Law School, receiving the Parker Award and a Mellon Fellowship.