How Retirees Can Spend Enough, but Not Too Much By RON LIEBER Published: August 28, 2009 http://www.nytimes.com/2009/08/29/your-money/individual-retirement-account-iras/29money.html
When you retire, you’ll probably want to visit your grandchildren more than once each year. Perhaps you’ll aim to give money each month to charity or your religious congregation.
The amount you have saved will clearly matter a great deal in whether you can do these things. But so will your portfolio withdrawal rate — the percentage of your assets that you take out each year to pay your expenses. You want it to be high enough to afford fun and generosity but low enough that you have little risk of running out of money.
Until a few years ago, the standard advice was that 4 percent or 4.5 percent was about the best you could do. So if you had $500,000 in savings, 4 percent would give you about $20,000 in your first year of retirement to augment Social Security and any other income. Then, you could give yourself a raise each year based on inflation. At 3 percent inflation, you’d end up with $20,600 in the second year of retirement and so on from there.
More recently, however, several studies have suggested that withdrawing 5 percent or even 6 percent was possible — and still prudent.
Here’s one big reason to be suspicious about applying that same 4.5 percent withdrawal rate to all people, no matter when they retire: Should a person who had the bad luck to retire in March 2009, at the stock market’s recent bottom, spend 4.5 percent of, say, $350,000, or could they spend a bit more? After all, people who retired a year or two earlier with the same portfolio, before the bulk of the stock market’s decline, might have started with 4.5 percent of $550,000 (and taken inflation-adjusted raises each year from that initial amount until they died).
It didn’t seem right to Michael E. Kitces, a financial planner and director of research at Pinnacle Advisory Group in Columbia, Md. He said he was uncomfortable with all the decisions made based on “the day you happen to come into my office and the balance on that day.”