Beyond the 4% Rule: Differing Approaches to Retirement Spending

One of the biggest questions facing retirees and those close to retirement is just how much to spend. Due to low interest rates, it’s getting harder for retirees to replace income from their jobs, and due to inflation, spending power can be diminished.

Fortunately, data suggest many retirees are already exercising high levels of financial prudence.

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“BlackRock research in conjunction with the Employee Benefit Research Institute (EBRI) reported something unexpected: retirees hardly touched their retirement savings,” says BlackRock. “On average across all wealth levels, most current retirees still had 80% of their pre-retirement savings remaining after almost two decades of retirement. However, looking beneath the averages, some retirees did spend down assets to critically low levels while on the other hand one third grew their assets over the course of retirement.”

Consider the Lay of the Land, Not Just the 4% Rule

In bygone eras of retirement and retirement planning, there were some hard and fast rules, including the 4% spending rule. However, that’s a blanket approach for a topic where one-size-fits-all doesn’t always fit.

It’s often said that many retirees are overly frugal, particularly early in retirement. That approach isn’t uncommon because while no one knows exactly what their lifespan will be, they do know what their financial resources currently look like.

“At retirement, 43% planned to consistently spend throughout retirement, however one in six planned to spend more right after retirement when healthy and an equal amount planned to purposely curtail spending early in retirement fearful of higher health care costs. After several years into retirement, the desire to spend consistently increased to 61%,” according to BlackRock.

In an effort to plug retirement income gaps, investors should consider factors such as family size, home equity, income levels, and more.

“Very few plan to systematically spend down assets. If assets do decrease, there is a clear desire to keep assets above a certain, minimum level. For many, saving and accumulation habits die hard and spending is hampered by deep-seated fear that they may experience a critical financial or medical shock or otherwise outlive their money,” adds BlackRock.

For more on income strategies, visit our Retirement Income Channel.