Many Americans harbor anxieties about their financial future. A recent study by Allianz revealed that 64%, nearly two in three Americans, are more concerned about outliving their savings than death itself. Compounding this worry, 62% admit they are not saving as much as they would prefer for retirement.

The 4% Rule: A Starting Point

For years, the 4% rule has been a popular guideline for retirement spending. According to Schwab, this rule suggests retirees withdraw 4% of their total investment portfolio in the first year of retirement. In subsequent years, this dollar amount is adjusted for inflation. The goal: to maintain a high probability of not depleting savings during a 30-year retirement.

Though, financial experts are increasingly cautioning against blindly adhering to this rule. Rob Williams, managing director of financial planning at Schwab Center for Financial Research, argues that the 4% rule is not a global solution.

It’s a rigid rule. So, it assumes that you increase that dollar amount… each year with inflation for a 30-year retirement and never make any adjustments.

Rob Williams, Schwab Center for financial Research

Williams emphasizes that the 4% rule assumes retirees want a very high probability of not running out of money, but it doesn’t account for individual circumstances or the potential for flexibility.

Personalizing Your Retirement Spending Rate

So, how can individuals determine a more personalized spending rate for retirement? Williams suggests considering these key factors:

• Time Horizon: Is a 30-year retirement realistic for you? If you are already in your 70s, you might be able to spend a bit more.
• Confidence vs. Legacy: How important is it to you to leave money behind versus ensuring you don’t run out of funds? A higher desire for certainty might necessitate spending less and investing more conservatively.
• Flexibility: Can you adjust your spending based on market conditions or unexpected expenses?

Can you divide your expenses into your essential expenses and then some discretionary expenses? And most investors and retirees naturally are going to cut back on some of their discretionary spending, say, in a down market. And if you do that,that can really help your savings last.

Rob Williams, Schwab Center for Financial Research

The Math Behind a Personalized Approach

Let’s consider a hypothetical scenario: a 30-year time horizon with a conservative investment allocation (60-70% bonds, the rest in stocks). According to Schwab’s research, an initial spending rate of 4.1% in the first year, adjusted for inflation in subsequent years, would provide a 90% probability of lasting through retirement.

Williams stresses that this is just a starting point. By personalizing the plan, remaining flexible, and utilizing modern retirement income planning tools, retirees can frequently enough achieve better outcomes.