Editor’s Note: In today’s essay, Contributing Editor Aaron Task reveals why conventional wisdom about spending in retirement is misguided.
In fact, many newly retired people experience what’s known as a “spending surge” in their first few years after leaving the work world behind. And many of them aren’t prepared.
But here at Wealthy Retirement, we know how imperative it is to get a clear picture of how much you’ll need to live comfortably in retirement. That’s why we developed our Retirement Readiness Calculator.
This tool is free and takes less than five minutes to use. Take a moment today and give it a shot – and don’t let early retirement spending surges catch you by surprise.
– Mable Buchanan, Assistant Managing Editor
If you’re retired, or planning for it, you’ve probably heard of the 4% rule. It has been a key part of retirement planning since the 1990s.
The big idea: Withdrawing a maximum of 4% of retirement assets per year guarantees most people will not outlive their money.
The 4% rule assumed people would not be retired for more than 33 years, and it was based on a study of stock and bond returns from 1926 to 1976.
The “beauty” of the system was that the 4% number meant people could keep up with inflation without eating into their principal. Most of that 4% was produced by dividends and Treasury coupons.
Now, you’re probably already seeing some issues with this rule:
Inflation, at least officially, is a lot lower today than it was from 1926 to 1976. However, so are bond yields. (These lower yields lead many people to question whether the 4% rule still works.)
For a variety of reasons, dividends are lower today than they were during the period that was studied in order to create the 4% rule. The dividend yield of the S&P 500 is currently 1.8%. The long-term average is 4.3%.
Thirty-three years is a long time for most retirees, but today, people are living even longer. The number of people over age 85 is projected to triple by 2050, according to the AARP Public Policy Institute.
More importantly, perhaps, the 4% rule was designed to provide a consistent stream of income in retirement. But the reality is that most people’s retirement spending is neither consistent nor steady.
J.P. Morgan Asset Management analyzed the spending patterns of more than 5 million U.S. retirees.
This landmark study found the conventional wisdom about “constant spending” in retirement is wrong.
In fact, there’s “a high degree of retirement spending volatility.” Typically, this takes the form of a “spending surge” right before and immediately after retirement.
This “surge” is often the result of the expenses involved with moving, such as getting a house ready for sale and the
Source:: Investment You